When is a blow out not a blow out?
When it is related to housing or autos, that's when.
While everyone else seems to be focused on tariffs, trade and Turkey, waiting for our internationally oriented companies to see their earnings collapse, I am much more worried about spending patterns at home. They may not impact the averages very much, but boy oh boy, despite incredibly strong employment, are they getting evident and you can't ask for a more direct contrast of that evidence than what we see today with Home Depot (HD) versus Tapestry (TPR) .
You may not know Tapestry because part of it is the old Coach. I can't wait to speak to the CEO of Coach, Victor Luiz, later on Mad Money because he has created, as he calls it, a house of brands, including Kate Spade and Stuart Weitzman, and that house was king of the market today, the biggest gainer in the S&P 500.
Tapestry reported a pretty good quarter, a slight top line bear and a solid bottom line beat but perhaps most important some really bullish guidance.
Home Depot, on the other hand, reported a top and bottom line beat of outsized proportions, but guidance that left some people puzzled and others just downright concerned given that the Despot is about as good as it gets in retail.
You boil it down and you say, I get it, people are spending more on clothes then they are on homes, and the latter's proving very problematic because while it represents just 10% of our economy, it punches well above is weight.
Now I am loath to be anecdotal here. On the one hand you have handbags and accessories doing well, that's the takeaway of Tapestry. The quarter wasn't as huge a trouncing as last week's number from Michael Kors (KORS) , a similar accessory juggernaut. That said though, when you put Kors together with Tapestry you come away recognizing that the consumer is truly spending a lot on clothes. The rise of Macy's (M) to its 52 week high, and the incredibly good numbers from Ralph Lauren (RL) , PVH (PVH) and V.F. (VFC) of late verify the apparel trend. Apparel sellers Burlington (BURL) and TJX (TJX) are among the hottest stocks in the market. So is Kohl's (KSS) . That one's almost too hot. Oh, and let's not forget Amazon (AMZN) .
But when you consider Home Depot's guidance and you put it together with another, much smaller company, Redfin (RDFN) , which is a real estate sales company that reported last week, you begin to wonder has housing spend hit a wall despite plentiful job growth as well as some amazing small business optimism figures we got today, 107.9 for July, just .1 percent below the record 1983 reading? Is this all there is? Have houses gotten too expensive? Have wages not improved enough? Are rates too high?
Many times, on the Home Depot conference call, analysts seemed very skeptical of the true nature of the blowout and subsequent direction for the future. They congratulated management for making up for what was a weak spring, but they peppered the team with endless questions about housing affordability.
Carol Tome, one of my absolute favorite CFOs, talked about housing affordability in a way that reassured me, but judging by the reaction to the stock, a big uptick and then a turndown, others weren't so reassured. Here's what she said: "Right now the Affordability Index for the country is 144. And if you look at the historical average it's 127. So, in the past we said, "well, if it gets to 127 that could be a watchout for us."
Largely, she says, don't be as concerned as you might normally be. She urged people to recognize that only 4% of our housing units are turning over this year, which means 96% of homeowners aren't thinking of higher rates.
Tome makes the case that we should think about Home Depot more as a play on the increasing value of a home. Here's how she explains it: "We have a housing shortage in this country. We have only 4.1 months of supply against a normal month of supply more like six months of supply. And with a housing shortage home prices have appreciated. With home appreciation homeowners have more equity values have increased over 120% since 2011, about $73,000 per homeowner in terms of equity. So as homeowners view their home as an investment and not an expense, they spend more. "
Now I am not one to ever disagree with Tome. We have had her on the show. She's gospel. But let's flip her logic to understand what may be happening in the economy. If housing's gotten that expensive, then, holy cow, you aren't going to get a big boost from this part of the economy. Now, layer on what we heard from Redfin, a real estate services company which was incredibly downbeat on its call last Thursday. As Glenn Kelman, Redfin's CEO, said on the call, "In the past three out of four weeks we saw a significant slowdown. We still have growth year over year, but its much lower growth than we are accustomed to." He goes on to say that things are overall still better but, "What's different is that you hear real estate agents saying I put a home on that normally would have sold in a week and its still on the market a month layer. I expected to get 8 competing offers I got one and it was below the asking price. He goes on to day "More and more there are homes that we thought would sell that don't" and he called out the once red-hot Seattle and San Francisco markets as being just too expensive. That dovetails with what we see from the big homeowners' stocks, Lennar (LEN) down 19%, Toll (TOL) off 28%, Horton (DHI) down 13%, Pulte (PHM) down 16% and KB Home (KBH) , with a lot of California, plummeting 26%. What's the clincher? Kelman says "the younger generation of would be homeowners is bewildered, many are living in their parents' basement. Until the market becomes more balanced they will take longer and be harder for these folks to find a home."
Okay now let's put it altogether. The millennials, who are, more and more, inheriting the earth, feel priced out of housing. But they are still spending. They are buying apparel. We know from Apple (AAPL) they are buying equipment. We know they like experiences, and owning a home is not an experience.
Now let's go back to that biggest gainers list from today. What's the second after Tapestry? Advance Auto Parts (AAP) , an automotive aftermarket parts seller. Last week we did a piece about how the stock of CarMax (KMX) is trouncing that of AutoNation (AN) , plus 13% versus minus 10%. We know the auto stocks have been horrendous with Ford (F) down 23 and GM (GM) down 11%. Now it is true that these are big international companies. But we have to conclude two things: the millennials are using Uber and Lyft more rather than buying a car. They are sharing scooters, too. Perhaps, new cars, like new homes have gotten too expensive for millennials. And current car owners are more likely to fix their cars rather than get new ones.
Now there's no real crisis here. I think that money's still being spent, it's just being spent a different way. There are different winners that we are all trying to assess. But it is jarring to think that the stocks of both autos and housing, traditional winners in a full employment environment, aren't working here. My conclusion? You watch Turkey? Me, I am making sure that the world's economy is still strong, that technology spending remains high and that retail, ex housing can still generate the numbers that makes me feel confident in staying bullish through the usual, over exaggerated international parade of woes.