The Daily Dose: So What Are People Buying?

 | Sep 03, 2014 | 10:00 AM EDT  | Comments
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There tend to be reasons behind anything that might happen in this world. Dog eats child's homework? Should have put up the gate. A company issues an earnings warning, blowing up an investor's portfolio? That investor should have read the last earnings-call transcript a little more closely.

It's the same idea for U.S. retail sales. In my view, these numbers have been weaker than they should be this year, given the accelerating improvement in the job market. The numbers are also being bumped up slightly higher by the continued strong gains in online channels: Some months, the year-over-year increases in online revenue have been more than 7x the headline retail-sales figure.

In any case, if we dig around for reasons for the weakness, we see there is one component of retail sales that has been rocking -- and that is the auto market. The demand has been so robust, in fact, that I firmly believe it's pulling dollars from the registers of apparel retailers, grocery store retailers and restaurants. Hey, new car payments ain't cheap.

Here is worthwhile background on the industry as we are set to receive the latest auto-sales numbers.

  • The auto market is on track for a record sales year. July sales of 16.4 million were just shy of the blistering 16.9 million pace reached in June.
  • Attractive interest rates are luring in people, and so are incentives. In 2014, U.S. automakers have offered the highest amount of incentives compared with their Japanese counterparts.
  • Lease penetration has increased 12.6% year to date. The number of cars leased from Ford (F) and Toyota (TM), for example, gained 18% in 2014 as of July.

Amid all this, compact car sales have risen 5% year to date -- and I believe that has been siphoning money from discount retailers. After all, a mom seeking reliable transportation, trading up for a new Toyota Corolla, is likely to make a few cutbacks in monthly household budget.

Also sucking in people are new technologies and automobile designs. I think many stock analysts are overlooking what Apple (AAPL) may be about to do in the auto industry. Already, we are seeing signs of dashboard info-tainment innovation from the company and rival Google (GOOGL).

Moreover, luxury-car sales volume increased 5% in July from the start of the year. More affordable prices on luxury names have attracted the youth -- which, yes, may be preventing money from going into the registers of apparel retailers. Sorry, J. Crew, this millennial needs a new whip.

Meanwhile, over in the auto industry itself, the sales strength is not really being depicted in the stock-price multiples of the major players. All of these automakers sport price-to-earnings ratios below that of the S&P 500 as investors have clamored to load up on the sexy growth story that is Tesla (TSLA) (whose shares are up 88% year to date). Only until recently have shares of beleaguered General Motors (GM) commanded a P/E ratio above that of the S&P 500. Other names have continued to experience limited multiple expansion.

Bloomberg automakers chart – p/e ratio

There is one place where the auto-sales strength is being nicely reflected, however: rail carloads, as confirmed by bullish comments on the auto market from Alcoa (AA) at the start of second-quarter earnings season.

North American Total Originated Rail Units -- Weekly Volume

bloomberg

In that vein: Want to try and get on TV as the Next Great Stock Price Predictor? Then pay careful attention to rail carloads. Right now, these figures indicate that businesses and consumers are beginning to fear potentially higher interest rates on U.S. Treasuries in 2015 and heightened geopolitical risks overseas.

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