Yesterday was a tough session for the market with several narratives, including resolve, as buyers emerged to selectively buy the dip.
The biggest winners in the market were consumer staples, which have zero pricing power, but at current valuation metrics have become a good source of value. Money also flowed into real estate and utility names as investors searched out safety and yield.
The biggest losers were a direct reflection on geopolitical and geo-economic risk. Some in the media were too focused on Turkey, which is the 17th largest economy in the world on a nominal basis and 63rd largest on a per capita basis.
Broken China
China: we continue to see cracks in their economy, including a big earnings miss by one of the largest tech companies, to bond defaults of government backed companies. China has a massive credit and debt problem, which isn’t helped when the Yuan drifts to a ten-year low. I continue to believe the trade spat with China has created a win-win situation particularly for China.
Right now, consumer spending is the largest percentage of GDP in China’s history and the government would like to see it increase a lot more. Tariffs won’t help. The wildcard is how much China is willing to curb its theft of intellectual property and abandon its draconian joint venture rules.
- As a result of China news, the U.S. stocks that were the biggest losers on the session were technology on the NASDAQ, and on the Dow Jones Industrial Average, China proxies Caterpillar and Boeing had the biggest percentage declines.
Oil: That massive inventory build belies the notion demand is running ahead of supply. Crude oil broke key support and broke up a lot of big time trades as conventional wisdom was crude was going to $80.00 this year.
- Oil giants Chevron and Exxon endured the biggest percentage losses after China plays.
Outside of equities, commodities in general look awful led by cooper, which is another troubling sign about the Chinese economy. But there was no flight to gold, so the doomsday scenario is a long way away.
Market Breadth
Although the market staged an impressive rebound, some of which was technical, as the Dow Jones industrial Average bounced off its 50-day moving average, market breadth was not pretty.
NYSE & NASDAQ
- 1,714advancers to 4,270 decliners
- 1,248,000,000 up volume to 4,601,000,000
- 123 new highs to 349 new lows
US Consumer Strong
Missed in the session is the strong economic and muscular American consumer. There have been lots of factors in the so-called "death of the mall" beyond Amazon and a spent consumer. Consider overbuilding. From 1970 to 2015, American malls grew twice as fast as US population.
U.S. mall space per capita:
- 43% above Canada
- 411% above UK
- 879% above Germany
Retail Sales July 2018 | M/M | Y/Y |
Headline | +0.5% | +6.4% |
Ex autos | +0.6% | +7.2% |
Autos | +0.2% | +3.5% |
Furniture | -0.5% | +3.5% |
Electronic | +0.1% | +4.2% |
Building & Garden | +0.0% | +3.4% |
Food & Beverage | +0.6% | +4.6% |
Grocery | +0.8% | +4.9% |
Health & Personal Care | -0.4% | +5.0% |
Gasoline | +0.8% | +22.2% |
Sporting Goods | -1.7% | -4.9% |
Department Stores | +1.2% | +0.3% |
Internet | +0.8% | +8.7% |
Restaurants & Bars | +1.3% | +9.7% |
Too Much Debt?
This week, the NY Fed releases the latest on American household debt and for many people, it triggered anxiety and visions of 2008-2009.
Household debt hit $13.29 billion in 2Q2018, +$454 billion year to year. The pre-recession peak was $12.68 billion in 3Q2008. Of course, we can’t anticipate the US economy to grow at fastest rates without increased spending and increased debt.
There is a difference, however. It is the composition of debt, the health of American households and the absence of collateralize debt obligation schemes.
Composition of Debt
The rise of student and auto debt has been remarkable, particularly the former. Student loan defaults are a yellow flag, although, there has been sharp improvement since last year. Conversely, 1.2% defaults on mortgage and 4.8% for credit cards isn’t at levels that tips the country into recession
Composition of Household Debt | 3Q 2008 | 2Q 2018 | Default |
MORTGAGE DEBT | 73.3 | 67.7 | 1.2% |
HOME EQUITY LINE OF CREDIT | 5.5 | 3.3 | 1.1% |
STUDENT LOAN DEBT | 4.8 | 10.6 | 8.6% |
AUTO LOAN DEBT | 6.4 | 9.3 | 2.3% |
CREDIT CARD DEBT | 6.8 | 6.2 | 4.8% |
Ability to Pay
There are lots of metrics to consider when analyzing the ability of households to meet debt payments. One is looking at Household Financial Obligation Ratio as a percentage of disposable income, which includes:
- Consumer debt
- Mortgage debt
- Auto leases
- Rentals payments
- Homeowner insurance
- Property tax payments
The current read on FOR is benign in historic context that sees the peak in recent years in the fourth quarter of 2017.
Additional measures of the ability to meet debt obligations, which also means room to grow debt obligations.
On the topic of debt, I do believe government debt is a much bigger issue and the ultimate ticking time bomb, but I’m not sure when it blows. Over the past decade, there have been so many milestones reached that years earlier would have seemed like the kiss of death.
Today’s Session
What a difference a day makes. The markets are rocking this morning. The Dow is up almost 300 points. Walmart (WMT) issued a blow-out quarter and is being rewarded to the tune of almost $10 (10%).
In the Afternoon note, we will review Housing Starts and Building permits, Initial claims and Philly Fed data.