Corner of Wall & Main: Mean Streets

 | Aug 13, 2014 | 5:00 PM EDT
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We are well into the fifth year of post-financial crisis recovery and yet Main Street continues to struggle with rising prices, tight paychecks and job opportunities that don't fit their backgrounds or give them a sufficient full-time position. According to the NFIB's small business optimism survey in July, the number of respondents reporting that there are "few or no qualified applicants" for jobs continues to rise, now at 42%.

This is consistent with the latest Bureau of Labor Statistics Job Openings and Labor Turnover Summary, or JOLTS report, which is a Hawkins favorite. The report claims that job openings increased again in July to 4.67 million (vs. expectations of 4.6 million) from 4.635 million in May. The hire rate improved slightly, up 0.1%, to 3.5%, while separation rate and quits rate were unchanged at 3.3% and 1.8%, respectively.

So there are jobs out there, just not ones you can get. As for your paycheck, according to a report by the United States Conference of Mayors, workers are currently earning an average of 23% less from today's jobs than from the one's they had post-crisis. Then there is an unusually elevated percent working part-time for economic reasons, according to a St. Louis Fed report.

You'd be right to think that this has us concerned about the consumer as we head into the consumer spending heaving second half of the year. But wait, there's more.

As if the data above aren't painful enough, prices for basics such as milk and proteins keep going up. Dean Foods (DF) just reported a wider-than-expected quarterly loss, citing rising milk costs and sluggish consumer demand. Raw milks costs have increased 31% in second quarter 2014 over second quarter 2013 and 6% over the prior quarter to an all-time high. We've seen this impact in the form of higher cheese costs that have plagued Papa John's (PZZA), Domino's (DPZ) and others, as well as reduced cereal demand that has weighed on Post Holdings (POST) and the like. Versace continues to like McCormick & Company (MKC) as well as ConAgra (CAG) shares as a play on increased eating at home as consumers look to save where they can.

Given how tough things remain for Main Street, today's lackluster report on July's retail sales shouldn't have been a surprise. Economists expected an increase of 0.2% compared to 0.3% gain in June, but overall sales were instead flat, with core sales excluding autos up 0.4% vs. June's 0.6%. July's reading is the weakest since January, which was in the depths of a horrid winter, and marks three consecutive flubs for the report. As Macy's' (M) quarterly results showed earlier today, it's not a pretty setup for retail earnings that will start to hit the tape in the coming days.

If all this has yet to impress, take a look at the housing situation in the country. The terrors of the subprime have left a mark, with current housing units per capita at about half of their 20-year average of 0.61% and dramatically below the pre-crisis peak of 0.93%. Residential construction as a percent of GDP is at its lowest level since World War II, which has pushed up demand for rental properties and is decreasing supply and pushing up prices. That may be good news for existing homeowners who want to rent their homes out, but it's tough news for a fragile recovery when rental prices are rising 1% faster per year than wages.

Meanwhile, a recent report on employment costs got the market's attention as it provided yet another data point that the Fed ought to be concerned about inflationary pressures.

Employment costs recently rose by the largest amount since second quarter 2008, sparking fears over the Fed raising rates sooner, which, along with international tensions, pushed the S&P 500 down almost 3% a few weeks back. In hindsight, the Golidlocks-like July employment report coupled with the tepid housing market and the sluggish, cash-strapped consumer likely means that the Fed will hold off until mid-2015 to boost interest rates.

At least all the geopolitical tensions haven't put upward pressure on fuel prices, which is helping the average pocketbook and may deliver a better-than-expected back-to-school shopping season.

As an investor, we've seen a shift in crude transportation increasingly occurring via rail. In 2013, there were 415,000 carloads of crude transported vs. 9,500 in 2008. New regulations were recently passed to upgrade the safety of railcars transporting flammable liquids, which means that all railcars utilized to transport oil need to be either replaced or retrofitted over the next two years.

So, we are seeing increasing demand for oil transport via railcar, and if U.S. industrial production continues to strengthen, that demand may increase even more. For those who are too nervous to place bets on the cash-strapped consumer, companies such as American Railcar Industries (ARII), Greenbrier Companies (GBX) and Trinity Industries (TRN) may provide a way to exploit crude transportation trends and a strengthening industrial production sector.

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