Analysts that follow individual stocks still seem to want to wear “rose-colored glasses,” though generally revenues and earnings look softer than they have in many years. As usual, they mostly expect a big second half of the year increase in earnings. However, it is getting harder for them to ignore the obvious. All one needs to do is listen to the managements of many major retailers like Kohl’s, Target, and Macy’s in recent days as they report another dismal quarter of earnings to realize that things are not nearly as swell as equity indices imply. We have not heard such downbeat assessments and forward guidance outside of a recession and numerous retail stocks are at multi-year lows in response. Unless you sell food, RV’s, or hammers, the consumer is conspicuously absent from your establishment.
We had half-joked last month about the need to triple seasonally adjust the weak data to keep the planners happy, and, in spite of so many major retailers discussing the nothing short of terrible conditions, the government’s April retail sales figure was reported as quite robust. How did that occur? The seasonal adjustment factor for the April data was three times that of recent years. Yep, a triple seasonal adjustment as the economists at Macromavens pointed out. Was that simply because of Easter falling into March this year? Apparently not. March was heavily seasonally adjusted as well. You just can’t make this stuff up! We expect the data rigging to continue in a major way and worry that it will lead to even less clarity for the notoriously poor economists at the Fed.
Department store woes are not just the result of Amazon taking more market share from the “brick-and -mortar” retailers. That has been going on forever. Restaurants and hotels are also seeing soft numbers and the “smart” phone market is losing its luster if you look at Apple’s sales and industry data. Auto inventories are high and reflect the fact that while monthly sales data reported by the manufacturers remains good, they simply reflect shipments to the dealers, not ultimate consumers.
If we sound like a broken record in discussing how reality is much worse than market expectations, apparently there is a good reason. The Citigroup Surprise Index, which tracks differences between economic forecasts and where actual data is reported, has been in negative territory for over a year and by a lot. Such significant over-estimation of growth has not happened often, if ever. In addition, industrial production remains recessionary. Inventories across many sectors of the economy remain quite high relative to sales and rail traffic remains very weak. You are not going to hear about train carload volumes and intermodal shipments falling a combined 8% for the first 19 weeks of 2016 on the nightly news, but that data says more about what is going on out there than a lot of the seasonally adjusted bunk. We point this stuff out every month because it helps explain why we have a hard time buying equities with any cyclicality when they often trade near 20 times peak earnings when, given the underlying environment, they should be trading closer to 10 times trough EPS. We do not see that 50-75% price gap as making any sense at all.
We think current markets especially favor high levels of patience and discipline. Though credit spreads have narrowed in recent weeks, corporate bankruptcies are on a substantial rise and credit measures are deteriorating. We continue to expect the credit cycle to play out in a manner that makes current high yield corporate bond prices and equity multiples appear foolish. Meaningful treasury curve flatness, with long bonds quite firm, should give pause to those chasing equities higher.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.