In my weekend column, "Female Consumers Keep Us From Recession," I discussed the impact of female consumption on the economy in general and on the stocks of companies with a primarily female consumer base.
I concluded that column with the statement, "I think it's probable that most of these companies will be bankrupted as public companies."
In this column, I'll pick up from that point and offer an alternative investment strategy.
All the companies listed in that column, with the exception of Starbucks (SBUX), and Whole Foods Market (WFM), are being negatively impacted by technological advances affecting their distribution models, shrinking demand due to lack of economic growth, and by an aging population. (Starbucks is part of TheStreet's Action Alerts PLUS portfolio.)
All three of these trends are providing an increasing drag on the business models and thus investment potential for all of them. Allocating capital toward them on the assumption that these trends are transitory and largely exhausted is nonsensical.
These companies cater to the shrinking proportion of the consumer base with discretionary income, access to debt and desire for their products.
Discretionary income is shrinking because the cost of necessities that must be funded with disposable income has been increasing faster than incomes, especially health care expenditures and student loan debt servicing.
Debt access is shrinking because incomes are already collateralized to the servicing of the increasing costs of necessities and the increased use of debt as consumer loan rates have declined in the past seven years.
The aging of the consumer base provides a demographic drag for companies because, on average, after the age of 54 personal consumption expenditures (PCE) plunge.
These three issues, coupled with the technological shift these companies face, represents an existential crisis for all of them as public companies.
As simple and perhaps as obvious as these observations are, investors have not yet acted on them, as is most evident in the relative performance of the Consumer Discretionary Select Sector SPDR Fund (XLY) vs. that of the Consumer Staples Select Sector SPDR Fund (XLP).
In general, XLY invests in the stocks of companies serving "wants," while XLP invests in "needs"-based stocks.
In the last five years, the XLY "wants" stocks have outperformed the XLP "needs" stocks, with a 95% appreciation vs. a 73% appreciation.
For the past 24 months, however, that relationship has been shifting in favor of the "needs" stocks and away from the "wants" stocks, as I wrote about in the November 2014 column, "Defensive Investing Also Has Risks."
The result is that although the "wants" stocks are facing an existential crisis, the "needs" stocks, although traditionally considered defensive positions for capital protection, are also overpriced.
Unless something external to the private economy, namely monetary or fiscal intervention, is provided soon, the four trends outlined above will accelerate, causing the "wants" stocks to underperform the "needs" stocks, but with both likely declining.
The possibility of pre-emptive monetary or fiscal intervention that shunts that process is very low, and it is thus prudent for investors to take an unorthodox kind of defensive position with their equity holdings.
Three immediate options for doing so are the timber real estate investment trusts (REITs): Rayonier (RYN), Weyerhaeuser (WY) and Potlatch (PCH).
I would not usually recommend this strategy as a defensive play for capital protection in a slowing economy. However, as there are so few true value plays available, I think it is appropriate to consider it now.
The fundamental reason is that, although the performance of these REITs is typically tied to the construction and housing industries, they also own hard assets, their forests.
Because of the underperformance of the housing industry of the past few years, these stocks have suffered along with the homebuilders.
Rayonier, Weyerhaeuser and Potlatch are off by 37%, 10% and 33%, respectively, over the past two years.
I think it is probable that just as investors have been migrating toward gold this year, they will begin to seek the principal protection of hard asset ownership offered by the timber REITs.
This is a tricky proposition, though, as it will involve a fundamental shift in the goals of the principal owners of these issues, from those seeking income to those seeking hard asset protection.
As all three are paying dividends that are in excess of earnings, and a rebound in the housing market does not look likely this year, it is probable all three will make a dividend cut.
Such an event could lead to a rout out of these issues by income seekers, as occurred at Kinder Morgan (KMI) and Seadrill Partners (SDLP) in the energy space, and in so doing provide an excellent entry point for capital protection seekers.
I'm not advocating taking a position for such yet, but am watching these issues very closely.