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What Google Searches Are Telling Us About Consumer Sentiment

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What Google Searches Are Telling Us About Consumer Sentiment

Sentiment is strong.

Household spending should remain strong through the first half (1H) of 2017, thanks to positive feelings about job security and household finances, based on Google Searches.

But people are still worried about the economy.

The Trump Effect

The University of Michigan’s Consumer Sentiment and the Conference Board’s Consumer Confidence Indices all point to a sharp positive jump following Trump’s election.

But there is no equivalent shift showing up in the Google searches.

Instead, it’s more steady-as-you go.

That’s actually better: if the Indices were correct, then consumer sentiment (and spending) rests on Trump’s ability to deliver.

Instead, if consumers are ignoring the Trump factor, then spending will continue regardless of Trump’s success or failure.

Conversely, if the Consumer Sentiment and Consumer Confidence Indices are correct that Trump has unleashed a burst of consumer spending, then any failure by Trump will lead to a consumer spending pullback.

I believe that the Trump factor is wildly overstated and that consumer spending is more rooted in the basic American consumer habits: spend 100% of what you earn.  And earnings continue to rise, so spending does as well.  

When it comes to positive economic sentiment and Trump’s presidency, it’s easy to mistake coincidence with causation. It’s like a football season that starts with easy games but as the season progresses, we get to see the real performance.  Similarly, Trump is benefitting from events unrelated to him.

That is, the stock market rally was unleashed once interest rates and oil prices moved up.  Business spending was bound to come back once the election was over and companies had to restock.  Third, the minimum wage hike in January boosted incomes and spending.

But as these waves recede (oil rally is done, for example), sentiment could turn down.

JOB SECURITY & PERSONAL FINANCES

Job security is high but it may have peaked..

On the one hand, searches for Salary Raise are at an all-time high.

Unemployment searches are at cyclical lows. On the other hand, both signals have remained flat for almost a year with no signs of improvement.

Meanwhile, the more important signal is the steadily falling interest in Changing Jobs.

For most workers, changing jobs is the most important means of boosting wages. Interest in changing jobs remains high but it’s on a down-slope. That may be pointing to rising concern that jobs aren’t out there.

Consumer spending should remain strong. In addition to the generally strong JobSecurity sentiment, sentiment around household finances looks strong.

HOUSEHOLD WEALTH

All signs point to strong consumer financial sentiment.

Bankruptcy searches are at all-time lows.  And people feel like they have some wealth and assets, based on the interest in investing and in gold.

ECONOMY

What makes this especially encouraging is that people are not blind to underlying shifts in the economic fabric.

Instead, the rising searches for “Interest rates”, “Inflation” and “Recession” serve to indicate that people are fully aware that the economy has headwinds.  Perhaps that will prevent a return to the mad excesses that preceded the previous recession.

KEY TAKEAWAY: So far, the coast looks clear simply according to Google searches. Searches for unemployment are low. Salary raises are high. And changing jobs is trending down.

But that doesn’t mean we’re out of the woods just yet. Google searches show people are worried about the state of the economy – as indicated by the upward trend in searches for “recession”

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

Vice Index: Retail Spending Pace Is Beginning To Peak

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Retail Spending Pace is Peaking

Vice Index points to steady consumer spending… But it is going to slow in the next few months.

The nominal spending level continues to expand (more people are entering the workforce and wages are growing). But it’s growing at a slower pace. This month will see a favorable year-over-year (yr/yr) growth rate but that’s because last year was so low. Going forward the pace is set to slow.

On a month-over-month (m/m) basis, Retail spending (ex Autos & Gas) is pointing to a slightly lower 0.2% average growth for 1Q17 (slightly below previous expected pace of 0.2%~0.3%).

Update From Last Month’s Report

The Vice Index may be too optimistic though.

The VI typically leads retail spending (ex Autos & Gas) by four months. But, like all leading indicators, it loses some accuracy when there are sudden external economic shocks… like a surge in oil prices or higher interest rates.

As I pointed out last month, the VI “does not include the surge in oil prices. December data will give better insight.

Vice Index says retail spending peaks in January and then flattens.

But disposable income may slow sooner.

Meanwhile, consumer spending is already shifting away from luxury (an early indicator of slower consumer spending).”

The December retail data confirmed my suspicion: higher prices at the pump are squeezing out discretionary spending. Gasoline spending rose $0.7B and Food Services dropped $0.5B.

Current: Vice Index Points Slightly Slower Pace In Spending

The Vice Index pace of spending has pulled back.

This is also consistent with the slower wage growth and disposable income.

Unless wage growth picks up again, retail spending will continue to slow.

Slower consumer spending is not something companies want at a time when their margins are getting squeezed by higher input costs and higher healthcare subsidies.

(Many companies absorb the bulk of the healthcare insurance inflation).

The higher minimum wages will take some of the sting out of higher gas prices… But not much.

The stock market has priced in a lot of earnings growth, and that’s hard to see going forward.

Companies face a lot of margin squeeze: higher labor costs thanks to minimum wage hikes, higher capital costs thanks to interest rate hikes, higher input costs thanks to increases in commodity prices, and higher healthcare costs (most companies subsidize the bulk of insurance rate hikes).

Whatever Trump promises to deliver, it better come soon or these stock prices will pull back. The market has priced in most of Trump’s promises as if they’re coming sooner than later.

Meanwhile, Cannabis legalization is a BIG win for State coffers.

See both of the charts below.

Colorado Cannabis Tax Revenue Keeps Rising

  1. Annual Tax revenues hit $185 million (M)
  2. Up 3x in 2 years
  3. Retail prices still falling (thanks to market forces)

In 2016, Cannabis sales generated $185M in Colorado state tax revenues.

To put that in perspective, Colorado’s Annual State Budget runs $13B, of which $4B is generated via sales taxes. Cannabis sales boosted the total tax revenue base 1.5% and added 5% to total sales tax revenues.

The economic benefits are even higher when you include income from pot tourism, salaries, and sales tax on accessories. Meanwhile, the municipalities get in on the action as well with their own local sales taxes.

That’s $185M in tax revenue from a very green, very under-developed revenue stream.  By way of comparison, after 70+ years, gambling generates $800M in annual tax revenues for Nevada.

Plus the gambling tourism business generates another $1.2B in tax revenues for Nevada  from the hotel/casino industry. Everything gets taxed: from drinks to slot machines (a single slot machine license costs $125 per year.)

In the case of cannabis, Government has turned a cost center into a revenue generator.

Instead of dumping money into fighting a losing battle, Colorado and other states have turned the problem into a strong source of much needed revenue.

This won’t be the last vice to be turned into a positive social benefit.

KEY TAKEAWAYVice data says consumer spending is good, not great. If the market wants great, that could be a problem

As an investor in the stock market, think about taking some profits.  

I say that because I remain skeptical of this rally and not because I have a perfect crystal ball.  

After all, with a goal of capital preservation, I exited the market in the Summer. I didn’t lose money when it slid over the Summer and Fall, but neither did I get to play in this big run-up.

But I ask myself – where does the market go from here?

The P/E is super rich because the price has surged while earnings have yet to follow… And that’s 5 months into the rally.  

So one concern I have is that we might have a pullback on disappointment. Again, the market needs great results to justify the current lofty levels. Good just won’t cut it.

Confirmation of rightness or wrongness comes next month when earnings season kicks off.   

Forget the optimistic surveys – the market will finally see if wallets have really been opened.

The other reason to cash out some winnings is because that’s what the big boys are doing. The market has been pulling back as fund managers rotate positions to lock in their gains.  

After all, there is a lot of risk the next few weeks: interest rates could move up. Trump fiscal policies may or may not get announced. And there is no significant earnings news.

No harm in heading to the sidelines and watching the next season unfurl. For fund managers, it’s been a great first quarter and the year has just started.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

Demand for Semiconductors: Industrial Activity Less Active Than Perceived

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Like the reflation which we discussed last week (specifically oil reflation), semiconductor reflation is all about inventory and supply management.

The first half (1H) of 2016  was characterized by inventory drawdowns. This was the natural outcome of the global economic downshift that hit in 2015.

But the cutback pendulum swung too far and inventories became too lean.

The 2H was driven by restocking as well as an extra boost from the new smartphones (mainly the iPhone 7).

Tight supply coupled with suddenly strong demand led to higher prices and billings.

As the chart above shows, silicon wafer (the building block for semiconductors) demand jumped as a result.  More stuff was getting ordered and produced.

Demand Already Mean Reverting Lower

What happens next?  Macroeconomic data for March to start showing slightly less growth.

If the flurry of activity in 2H was primarily a response to pent-up demand, then that demand has been met and activity will start to slow again. In fact, signs of that slower growth are already showing up in the latest Japanese wafer production data: Silicon wafer production has begun to ease.

Silicon is the universal common denominator for all goods production.  And in that production cycle, silicon demand is early: silicon sales today reflects durable goods demand in late Q1.

This should lead to slower demand growth later in the first quarter. Growth will still be there on a year-over-year (yr/yr) basis… but a bit slower than the latest rate.

And it may slow even further heading into Q2.  You see, recent growth was boosted by 3 mini-waves that are now ending.

  1. End of iPhone;
  2. End of restocking wave;
  3. End of Chinese New Year calendar distortion.

Each of these combined to boost global economic activity, and the tide is now shifting.

Most people don’t understand the economic impact of smartphones.  Here’s one example from Taiwan.  Because 30% of Taiwan’s exports are tied to smartphones, it’s a reliable gauge for the iPhone wave.

You’ll notice the export surge that begins in Q3 before starting to fade after the holidays in December.

But it won’t show up in the macro data releases until March.

Early Chinese Lunar New Year Pulled In Demand.

Chinese industrial activity is seasonal and kicks into 5th gear in the months before the Lunar New Year.

For example, steel production ramps up  two months prior to the holiday as producers rush to finish and ship orders.

Iron ore imports to China surged into January… but are beginning to ease.

That’s indicative of the overall trend: the surge and then fade.

For Now… You’ll See Stronger Prices

As with oil, the outcome of supply reductions has led to firmer prices and higher billings.

But unit demand is not growing much. A little, but not much.

The result is margin pressure at a time when topline growth is a challenge.

For example, in their recent earnings release, Apple announced flat top-line (ie revenue) growth after adjusting for an extra week in their fiscal quarter this year. They had no unit growth. And that’s at a time when semiconductor prices are rising.  (Apple products are essentially repackaged semiconductors.)

Apple is now squeezing semiconductor vendors (specifically TSMC and Samsung) to cut prices. And they are seeking price relief through lawsuits like the $1B one against Qualcomm.  

And Apple isn’t alone – prices are going up everywhere.

Implications For U.S. Economy

Top-line growth will be tepid.

According to Factset, with 92% of S&P 500 companies reporting earnings, revenue growth y/y is 5%. Strip out Utilities and it’s closer to 3%. Net out inflation, and companies are essentially seeing no real top-line growth. It’s not enough to boost hiring and capital investment.

In fact, only 52% of S&P companies beat revenues, but 66% beat earnings-per-share (EPS). Holding back hiring and wage hikes has been central to their earnings momentum.

Consider the words of U. S. Steel CEO Mario Longhi on their recent earnings call:

“Despite lower average realized prices and shipments in 2016, our results are better as we continued to improve our product mix and cost structure.”

Can companies pass along price hikes? Two things to note in Longhi’s extended comments.

First, US Steel expects shipments to be flat in 2017 but at better prices.

Second – cost management.

It’s the same theme: firmer prices but weak volume growth.

On the one hand, firmer prices will relieve margin pressure and that means layoffs are off the table. (That’s a big difference from a few months ago when pessimism was more rampant and layoffs (ahem – reorganizations) were on the table.)  

But there’s no reason to hire: demand is essentially flat.

And this assumes that companies can have their cake and eat it too.

They want to raise prices while simultaneously pushing back on their own suppliers’ costs.

In reality, inflation is a pandora’s box.  It is coming from multiple directions: healthcare, energy, supplies.  And interest rates are moving up.  Altogether, it’s eating away at margins.

And companies pass along higher costs while holding back on salaries, then consumers will be forced to cutback.  

This is stagflation at work: prices are rising, growth is flat.  And consumers don’t do well under stagflation.

KEY TAKEAWAY:  Recent growth has had many drivers, but most of them are fading.

Left behind is inflation – and it’s eating away at the discretionary spending for companies and households alike.

For companies, the solution is to pass along the higher costs.

For consumers, the solution is to ask for bigger raises and to cut back spending on discretionary items.

If I’m correct that a big chunk of the growth is fading, then so are the inflationary pressures.  Not all – oil inflation will be around for most of the year.  But the margin pressure may be peaking.

For stock investors, we may have witnessed the last good earnings season.  Margin pressure in the face of minimal revenue growth will lead to a lot of downward guidance.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

 

Looking Inside The Market’s Interpretation of Inflation vs. Reflation

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We’ve seen a lot of headlines regarding the stock market surging over the past few months (up 11% since the election).

That’s not the only thing jumping: oil prices are up 15% the last few months (and 80% year-over-year).  Steel prices have jumped 325% since last summer.

Headlines are referring to this form of inflation as “reflation”, as if it’s a positive thing.  

Is it though?  Understanding the difference between reflation and inflation will help us with the markets.

The concept behind reflation is that it is ultimately a ‘good’ type of inflation where prices return to ‘normal’.  

Economists talk about reflation as a good thing but only when it comes from an uptick in demand and greater economic activity. For example, gasoline prices were unusually low when they were at $40. But are now reasonably priced at $50.

Whenever someone uses the term ‘reflation’, they mean a return to normalcy. Specifically, economic activity has stimulated a return of demand and a more appropriate higher level of prices.

But reflation – the way headlines are calling it – is not happening here. The term doesn’t fit: global demand and economic activity are both slowing.

In point of fact, we are seeing price hikes because demand is actually missing. In response, suppliers are ratcheting back supplies.  

US Steel (NYSE: X), for example, said on their recent earnings call that its steel volume shipments will be at – or possibly below – last year’s levels.  Yet prices are rising nevertheless thanks to cutbacks in production by global producers.

And that’s my primary concern when I hear most people and economists discuss the “positive” impact of reflation.

  1.      Private sector adjustment: prices have jumped fast and the private sector has to adjust.
  2.     Inflation via supply-constraints not via demand

This is a miniature OPEC oil shock underway.  

Not a shock in the sense of a surprise. Everyone knew it was coming.

But a shock in the sense of an unprepared economy.  

It may be good for the energy and materials sector. But it’s a horrible drag on the rest of the economy.

You can see its effects if you look at the December retail spending data.  

First, retail spending (excluding cars and gasoline) was flat to November.  

Secondly, the higher gasoline costs are squeezing out other spending: gasoline spending rose $700M and spending on Food Services shrank $500M.  

The economic costs are clear: this ‘reflation’ is bad and having a negative – not positive – impact.

When the economy is growing and the outcome is inflation, the rise in prices is easily managed by an offsetting rise in incomes.  

For businesses, greater sales lets them absorb the higher cost of doing business. For households, strong wage growth offsets things like higher prices at the pump.

But when inflation is rising faster than the rate of economic growth, that’s stagflation. This is what we’re seeing today: CPI grew 3.1% last month, and economic growth is barely 2%.

In 2016, falling incomes hit businesses and consumers alike. But thanks to falling prices of gasoline and other commodities, everyone was fine.

Now, we have inflation but no offsetting rise in incomes. It’s not just inflation, but big inflation.

Private Sector Pains: Consumers Blindsided By Inflation

Overnight, U.S. businesses face inflation (Producer Price Index – PPI) that went from 0% to 1.6%… and rising.

Consumer inflation is even worse: Core Price Index (CPI) hit 2.1%.  And, again, it’s the suddenness that makes for the shock. Consumer sentiment metrics showed that households continue to expect a deflationary environment. They are completely unprepared for what is coming.

I called this out back in November in my November report on consumer sentiment as reflected in Google searches.

Businesses Spending: The Big Unknown

At this point, some people might raise other, older data that point to greater business activity. Some might point to when business inventory surged in November.

But that’s against a general trend where they are trying to tame the problem of excessively high Inventory-to-Sales.

Was the fourth quarter of 2016 (Q4) activity a blip (inventory re-stocking) or something with more traction?

If we look at semiconductor activity, we see the same trends: a jump in prices and sales activity.

 

But dig a bit deeper and you’ll see familiar reasons: supply constraints and short-term inventory restocking.

(We will see an extra boost in December’s figures from the early Chinese New Year – it comes in January – and the race to make and ship product by mid-January.)

KEY TAKEAWAY – Stagflation is rising inflation but sluggish growth.  

We have inflation. Economic activity may be accelerating…Or not.

It’s still too early to know how much is brief re-stocking and how much is sustained economic activity. We won’t know until March.

The big deciding factor is consumer spending. The nominal level has stayed high, but the form is changing fast and not in positive ways.  Add in higher inflation and actual pullback could happen.

That take the wind out of business growth.

 

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

Vice Index: January 2017

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Vice Index: January 2017

Expect to see steady consumer spending.

The year-over-year (yr/yr) growth is accelerating  thanks to rising consumer sentiment and favorable comps.

Regular Moneyball readers know we look at the Vice Index to gauge how the economy is really doing along with consumer sentiment.

Moneyball’s Vice data tracks luxury spending by millions of Americans. It considers the millions of transactions by Americans each day.

The Vice Index tracks US consumer spending on alcohol, marijuana, prostitution and gambling.

Vices are a special form of discretionary spending that is highly sensitive to near- term economic conditions:

In other words, indulging in vices is not a casual event. Consumers have to have significant money burning a hole in their pocket and not have concerns about future demands on their cash.

Rather than follow these outdated models most use, the Vice Index is a much better looking glass into the heart of the American consumer.

EVERY American (across all socioeconomic and demographic groups) participates.

And right now… things are steady.

On a month-over-month (m/m) basis, retail (ex Autos & Gas) indicates 0.2%~0.3% average growth into Q1 2017.

But this is all based on lower interest rates – expect a down shift in spending on big ticket items like cars.

With regards to retail, vice spending typically leads basic retail spending by 4 months.

That advance visibility comes from the nature of luxury spending (it’s the 1st thing to be affected by changes in household finances). It’s also the difference in payment methodology (vices are paid today whereas retail spending payments get pushed out into the future because they are largely credit card based).

From last month’s report:

“Cracks (if any) will Appear February 2017

4Q spending is safe: US consumers are very event driven in their spending habits and they budgeted for 4Q. Vacations were purchased months ago. And Halloween, Thanksgiving and Holiday gift giving budgets were similarly earmarked a while ago.

1Q spending at risk: Consumers are not expecting inflation and their spending behavior has already shifted. The impact on the broader economy has only begun but it is already evident in the Leisure economy.

February is the key month: February is when people are back from vacations and the bills are due. This February they can expect to face the impact of higher fuel prices rippling through the economy. For example, higher heating bills.”

However, the Vice Index may be too positive.

The Vice Index says retail spending peaks in January and then flattens at a relatively high level.

But disposable income has taken a recent hit: interest rates and inflation are both up.

Meanwhile, consumer spending is already shifting away from luxury (an early indicator of slower consumer spending).

What The Vice Index Is Saying Right Now

So far, the Vice Index has been quite accurate.

It predicted a slowdown in retail spending (yr/yr) in the third quarter (Q3) of 2016.

Then is predicted a rebound (yr/yr) in Q4 2016. That’s exactly what happened. Retail accelerated from Q3’s average rate of 2.6% yr/yr to 4.2% and 3.8% in October & November (respectively).

For Q1 2017, Vice Index points to strong yr/yr growth. But that means mild m/m growth.

Remember, Vice spending leads retail spending by 4 months. But the Vice Index data that points to Q1 spending does not include the surge in oil prices. December data will give better insight.

Another Take On Retail Spending: Disposable Income

Disposable income is driving retail spending.

Disposable income is coming under pressure. First, wage growth is slowing. Minimum wage hikes will add some boost, but the general trend is down: from 5% in 2015 to 3.5% in 2017.

Second, costs are on the rise. Interest rates are up and will only continue to rise. And sharply higher fuel prices will inflate costs everywhere. That’s billions of dollars that are no longer budgeted for retail (excluding autos and gas).

That trade-off is already happening.

Gas spending rose in December and spending on Food Services fell an equal amount (we wrote about that here.)  

Consumers are backing off consumer products and services – if you have these stocks, get out.

Luxury Spending Continues To Drop

Diamond prices continue to trend down, especially in the key size most purchased by middle class consumers (0.5 – 1.0 carat).

Swiss watch exports (units) to the US Jan-Nov were down -11% yr/yr… and down – 18% in November.

Retail spending will remain steady, but the quality of that spending has already begun to shift.

Gambling Reflects Household

Cash Flow And Consumer Sentiment

Here’s how cash flow and consumer sentiment go hand-in-hand within gambling.

The ordinary gambler must have extra money in their pocket in order to gamble.

This means they are confident about their finances. After all, the willingness to risk money today implies that one feels positive about finances today and tomorrow.

Insight From Local Casinos – Not Las Vegas:

A trip to Las Vegas requires effort, advance planning, and significant funds for airfare, hotels, taxis and dining.

Conversely, local casinos cater to drive-up gambling: impulsive, spontaneous, and low effort. It is much less costly in terms of time and money.

Even better, local casinos tend to be in blue collar areas: Detroit, Atlantic City, New Orleans, and so on. Vegas, on the other hand, is an international destination that includes both tourists and convention attendees.

Bottom line: Local casinos provide invaluable insight into Middle America’s near-term discretionary spending.

Casino revenues are slowing. Gambling is falling too.

This is not good!

Start with Vegas. Vegas is divided between the Strip and Downtown. The Strip tends to cater to middle and upper income visitors. Downtown caters to more lower income visitors.

Vegas Strip revenue: -3.5%

Vegas Strip revenue (ex Baccarat): 1.7%

Downtown gambling revenue: -5% y/y

(Strip out Baccarat because that game is favored by Chinese visitors and there are fewer visitors; the Chinese government has been cracking down on capital outflow and VIP excursions and that’s cutting into Chinese gambling at all casinos around the world.)

The trend is clear: gambling revenues are flat or contracting.

The Vice Index says this isn’t a short-term hiccup… it’s a trend.

KEY TAKEAWAY: Lower income households are getting hit by higher energy prices and it’s squeezing out other forms of consumption:

Contraction in retail and discretionary spending began with the rise in oil prices.

Higher energy prices are regressive and affect lower income consumers more.

Also noteworthy: the gambling trends reflect slower spending growth.

Be wary of all this other “euphoric” sentiment. The everyday American consumer is starting to close his wallet.

 

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

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