Just what we need: A stressed consumer


Author Cam Hui

Posted: 02 Mar 2013

Just as the market has to worry about Italy and the prospect of sequestration, I am seeing signs that the consumer is becoming increasingly stressed and consumer spending is slowing.

Signs of consumer balance sheet deterioration
First, CNBC reports that coupon clipping is surging, which is a bad sign for the strength of consumer’s balance sheet:

Consumers are clipping coupons at a rate not seen since before the 2007 recession, and that’s a troubling sign, according to Coupons.com CEO Steven Boal.

The website tracks how often people view and print coupons and their redemption rate. Right now, Coupon.com’s Internet Coupon Index, as it’s called, shows a spike in coupon offers and demand.

This pattern is almost identical to the one that played out right before the last major economic downturn. The higher the index value, the more consumers are under economic pressure, Boal told CNBC.com.

Gallup’s consumer spending survey is falling
In addition, Gallup maintains a daily estimate of consumer spending and it has been trending down for most of February. While this data series is noisy, the downtrend in the 14-day moving average is troubling.

For a contrary opinion…
I had been watching for effects of the payroll tax increase on consumer spending. These data points suggest a consumer that is increasingly under stress. To be fair (and to be aware of the reasoning for the other side of the trade), New Deal Democrat at the Bonddad Blog was sanguine in his weekly analysis of consumer spending data:

Consumer spending

  • ICSC +2.7% w/w +1.8% YoY
  • Johnson Redbook +3.1%YoY
  • Gallup daily consumer spending 14 day average at $82 up $14 YoY !

Gallup has been very positive for 3 months, although a little less so in the last week or two.  The ICSC varied between +1.5% and +4.5% YoY in 2012.  This week was again close to the bottom end of that range for the ICSC. The JR report could just be a one week anomaly, we’ll see.  Even in the worst case, it still looks like consumer spending has not collapsed due to the  tax withholding increase.  It’s worth noting that WalMart is not included in either ICSC or Johnson Redbook.

Risk control is key here
Nevertheless, I remain highly concerned about the ability of the American consumer to significantly contribute to growth in the near term given the data points that I mentioned. Should sequestration hit, the results could be even uglier.

Given these risks and the underperformance of cyclical and consumer discretionary stocks (see my previous post Will the bears get their second wind?), traders who are bullishly positioned should be hyper-sensitive about their risk control discipline.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Green shoots in China?


Author Cam Hui

Posted: 1 May 2012

In the past few weeks, the markets have shown concern that China may be on the verge of a hard landing. My reading of the charts indicate that those concerns are starting to recede and there may be signs of “green shoots” out of China. Bear in mind the following two caveats to my analysis:

  • “Green shoots” are fragile and can easily be trampled underfoot; and
  • “Green shoots” are indications of stabilization, not signs that a roaring bull market is about to begin.

First, a chart of the Shanghai Composite shows that the index has rallied through an intermediate term downtrend (solid line) and that market is in the process of a sideways consolidation. In fact, it could be argued that the Shanghai Composite is starting to form a wedge pattern (dotted lines). Depending on which way the pattern resolves itself, it could point to the future trajectory of Chinese growth.

China is an enormous consumer of commodities. In this post (see Time to take some risk off the table), I pointed to the dismal behavior of commodity sensitive currencies as a sign for caution. Now, commodity sensitive currencies such as the Australian Dollar has rallied through its downtrend. A period of sideways consolidation is likely at this point.

The Canadian Dollar, which is another commodity sensitive currency whose economy has greater leveraged to the American economy than the Australian economy, recently staged an upside breakout from a trading range.

Commodity prices are also showing a tender green shoot, though that one is far more fragile. The CRB Index below shows that commodity prices have staged an upside breakout from a short-term downtrend (solid line), but the longer intermediate term downtrend (dotted line) remains intact.

The liquidity weighted CRB Index is more heavily weighted towards the energy complex. A look at the equal-weighted CRB Index, called the Continuous Commodity Index or CCI, shows that the CCI has staged an upside breakout through the intermediate downtrend. The most likely scenario is that commodity prices undergo a period of sideways consolidation.

To be sure, these “green shoots” are early signs of recovery which can easily be trampled. The strength in commodity prices may be a false start, as Izzy at FT Alphaville pointed out that it could be just more inventory accumulation and not the result of actual physical demand.

Constructive on China
My current framework for the analysis of the global outlook is to examine the Three Axis of Growth, namely the United States, Europe and China. For now, I believe that the message of the markets from China has changed from bearish to a fragile stabilization. No doubt the aforementioned markets will retrace some of their gains, but chances are good that the risks of a hard landing are receding.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Can the bears take control from China?


Author Cam Hui

Posted: 21 Mar 2012

In the wake of the BHP Billiton warning about slowing steel demand growth in China, global equity markets deflated overnight. This incident illustrates the point I made earlier in the week about how the health of this equity rally depends on the American consumer.

Another market analyst made the point to me succintly about the lagging performance of commodities and commodity related stocks. The Aussie Dollar is underperforming the Canadian Dollar. Australia is more levered to China (and more weighted to base metals) while Canada is more exposed to the United States. If CADUSD is outperforming AUDUSD, then it’s a sign that the market believes that there is more near term economic upside in the US compared to China.

Bullish tripwires
I have made the point that depending on the American consumer to fuel this equity rally is a risky bet. If this rally is have any real legs, then we need to see a broader based rally around the world. Right now, the weak link is the Chinese outlook. As a pre-condition, commodity prices ideally should start to recover more and begin to take a leadership position in the next few months in order for this bull to get a second wind.

Here are what I am watching for. First, commodity sensitive currencies like the Aussie Dollar need to, not only hold support, but to show some strength and rally through resistance at 108.60.

Similarly, the Canadian Dollar, which has held up better than the AUDUSD exchange rate, needs to rally through resistance at 101.60.

Finally, I am watching the Hang Seng Index, which rallied up to 21,800 but couldn’t overcome the overhead resistance at that level. I view the more established Hong Kong market as an important barometer of Chinese policies towards the teetering property sector.

The Hang Seng is now approaching a minor technical support level. Should it decisively break support, that would be a sign that the bears have won a round in the bull-bear tug of war.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Interpreting the retail sales number


Author Cam Hui

Posted: 15 Feb 2012

The retail sales number reported today came in mixed. The headline number came in below expectations, but the ex-auto number was strong. There were revisions everywhere.

What to make of this?

I believe that the American consumer it’s would be a mistake to think that the American consumer as down and out. The Consumer Metrics Institute produces a series of figures that tracks American consumer activity on a daily basis. The daily series shows a modest uptick.

Daily numbers are inherently noisy, but the monthly figures show a definite rebound in consumer demand.

For the final word, Nomura (via Business Insider) interpreted the retail sales report positively:

The control measure feeds into estimates for the consumer spending component of GDP and suggests a healthy round of spending to start the year. Lastly, our preferred measure of consumer comfort, the category of dining out, increased by a strong 0.6% in January. Dining out can be seen as one of the ultra-discretionary categories of spending that is typically the first place households will cut back on spending if confidence is faltering.

Remember that we are in a central bank induced liquidity rally. Last week the BoE joined the party, this week it was the BoJ. Enjoy.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

 

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