Allow me to present a simple, free to grab three-month chart on your favorite and mine, gasoline prices. Look at this diagram. What catches your eye?
Here are the things that jump off the page to me, with a bit of an unfair competitive advantage in having read every single macro report (per the usual) in the past month...
- The average U.S. household (demo: $100,000 combined annual income) was ill-prepared for July's spike in gas prices. My mom and her friends can't easily sell a share in their home to capture rebounding values (still below 2007 levels), and have no idea of the ins and outs of their 401k (so that is dead money), to help pay a $40 increase in the monthly fuel bill. Woopsie Mr. Wonky Economist. So the consequence of that is reduced consumption in discretionary areas, such as was evidenced at Cheesecake Factory (CAKE), Brinker's (EAT), and yes Family Dollar (FDO) where not every piece of foreign sourced merchandise is priced at $1.
- Personal income, as conveyed by our pals at the BEA, rose a hearty 0.3% in June, setting up the consumer poorly for navigating July's gas tab (as seen in the above diagram).
- Average workweek fell in July according to the employment report; overtime didn't cushion the increased outlays for dinosaur fuel.
- Assessment of future conditions, broadly, weakened in July as pointed out in the Conference Board confidence reading.
The end result of this analysis? That notoriously lagged impact of gas price creep on consumption patterns of humans has arrived, right in time for the back to school shopping season. Be careful in believing the glass will be half full forever in the markets. It simply is not as easy as seeing strong ISM manufacturing/non-manufacturing readings and thinking all the households that comprise an economy are poised to flourish and spur surprising corporate earnings.
No cause for panic yet as I articulated to clients on Tuesday, but watch how the market digests these dark, incoming clouds in a slow newscycle.
4 Randoms to Watch
- A downgrade of IBM (IBM) this early on in 3Q13 leaves me wondering if we are moving towards a host of other similar rating chops to multinationals in coming weeks, in spite of the perceived stabilization of the EU and dollar at a six-week low.
- Consumer staples logged some relative outperformance week to date; too early to tell if this is a rotation into defensive positioning as we peer into September.
- Retailers that brought in back to school merchandise, namely Target (TGT) and Wal-Mart (WMT), in the hopes of luring in consumers now have egg on their face. Thank you American Eagle (AEO) for reaffirming my suspicion on 3Q13 retail sector guidance.
- You can keep Coach (COH) as an investment. I believe it will take close to a year before new execs begin to drive improved results. As that process is happening, Michael Kors will likely continue to steal market share and Tory Burch will have publicly generated funds to further put a dagger into Coach's heart. Basically, to become bullish on Coach, you will have to see something at the store level that stands to reverse the horrid 11 quarter same-store sale trend on display below.