The impact of a 1-2-3 punch of Hurricanes this summer has exposed the economic realities we are facing — the fundamentals just aren't there. As such, we're starting to see downward revisions in expectations for third quarter GDP, and it started last week with the Atlanta Fed and the New York Fed.
Last week was quite a set of days. We had President Trump’s address to the United Nations General Assembly, the outcome of the Fed’s latest monetary policy meeting and then yet another hurricane barrel down, this time leaving destruction in its path as Puerto Rico took a direct hit. We spoke about these items on last week’s Cocktail Investing Podcast and shared a number of data points for our 17 investing themes as well.
And while we might still be recovering from last week, and the weekend that was, the upcoming few days will close the books on September as well as the 3Q 2017. While some are still marveling at where Summer 2017 went, we will have just three months until the end of 2017, with another earnings season to contend with and several holidays before we get there.
On the Economic Front
Friday’s IHS Markit Flash US Composite PMI reading showed the expected hurricane-induced dip in activity for the month. Candidly as we get the full boatload of September data in the coming weeks, odds are we will see more modifications to 3Q 2017 GDP expectations in the downward direction. We’ve started to see some such revisions, but let’s remember both the Atlanta Fed and New York Fed only adjust their GDP models as new economic data becomes available. Currently, those two have revised their respective forecasts for the current quarter lower to 2.2% from 3.3% exiting August , and 1.56% from 2.17% three weeks ago, respectively. As the data rolls in, we’ll be mindful on what it means for the market and its current valuation at roughly 19x expected 2017 earnings.
In the coming days, we’ll get some additional housing color in the August New Home Sales report and more data on the business spending in the August Durable Orders report. Later in the week, we will receive the third estimate of 2Q 2017 GDP, and we're not expecting any major revisions from the prior reading of 3.0%.
Capping the week will be one of team Tematica’s “favorite” reports – Personal Income & Spending for August. Given the reliance of the U.S. economy on consumer spending, we like this report for the data that encompasses not only income levels as well as spending levels, but also consumer savings rates. Over the last few months, the rate of growth in both spending and income levels vs. the year-ago level has been falling – not setup up we’d like to see as consumers struggle with far greater debt loads heading into the holiday shopping season.
On the Corporate Earnings Front
Over the next few weeks, we’ll see a trickle of corporate earnings reports give way to a landslide of them by the second half of October. As we get ready for that onslaught, we’ll be reading the thematic tea leaves this week when Darden Restaurants (DRI), Nike (NKE), Pier 1 Imports (PIR), Blackberry (BBRY), ConAgra (CAG), McCormick & Co. (MKC), KB Home (KBH), and Thor Industries (THO) report their quarterly results. Quite a cross-section of companies, but to us, that means a smattering of data points are likely to bubble forth.
With Darden, we’re anxious to hear its take on restaurant traffic following continued weakness reported by the National Restaurant Association. Are Cash-Strapped Consumers staying way and favoring products from ConAgra and McCormick’s? For instance, are diners looking for an Affordable Luxury still taking in a night at Darden-owned Capital Grille?
Last week, Nike (NKE) shares caught a downgrade due to concerns for the basketball shoe category. Is it something more than momentum at Adidas (ADDYY) in that category, and what benefits is Nike expecting with its invigorated relationship with Amazon (AMZN)? We’ll also be scrutinizing Nike’s comments on the athletic shoe appetite in China, a potential indicator for rising middle-class spending and something we pay close attention to with our Rise & Fall of the Middle-Class investing theme.
With the Fed set to boost rates several times over the next year, how likely are we to see home buyers that are currently sitting on the fence step into the housing market ahead of rising mortgage rates? We’ll look for some insight on this as KB Home’s reports its latest results.
Recently, automotive supplier Delphi (DLPH) partnered with Blackberry (BBRY) and its autonomous driving platform. This week we’ll see if that business along with software and security ones are hitting their respective tipping points and if it means considering BBRY shares for our Disruptive Technologies theme on the Tematica Investing Select List .
Aside from those reports, we have two investor days on deck – one from the semiconductor and display capital equipment company that is Applied Materials (AMAT) and one from nutrition and wellness company Nestle SA, which is also a serious provider of chocolate — a Guilty Pleasure if ever there was one. With Applied Materials, we’ll be listening for its outlook on organic light emitting diode (OLEDs) displays, given our position in Disruptive Technology company Universal Display (OLED), which is sporting a 150% return over the last 11 months for Tematica Investing subscribers. The question we hope to have answered is how long until the currently constrained supply for OLEDs display sees industry production match rising demand levels? With Nestle, what are its plan for recently acquired Affordable Luxury company Blue Bottle Coffee and does it intend to use Blue Bottle to go head to head with Starbucks (SBUX), another company on the Tematica Investing Select List?
Thematic Signals
Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:
Cash-Strapped Consumer: Another headache for retailers, US credit card delinquencies on the rise
We’ve talked a quite a bit about rising consumer debt levels despite stagnant wage growth over the last several months. Now we’re starting to see the fallout when consumers rack up too much debt and they can’t make their monthly payments – rising delinquency rates. In our view, this makes an already challenging situation for Cash-Strapped Consumers even more so and poses an additional risk to already struggling retailers. Keep in mind, we’re already seeing rising sub-prime auto loan defaults. Taken together, this paints an ominous picture for the upcoming holiday shopping season and is a reason to think Deloitte’s retail holiday sales forecast of up 4%-4.5% year over year could be overly optimistic.
Safety & Security: Google embraces Safety & Security to challenge Amazon's Alexa
The company formerly known as Google that goes by the name Alphabet is quietly expanding its hardware reach. First by scooping up certain HTC assets that helped develop Google’s Pixel smartphone, which we think is a back-door way of protecting its core search business as voice becomes a more dominant method of search. Second, Google is embracing our Safety & Security theme at Nest as it rolls out several new products, including a new alarm system that comes with Google Assistant support. Given the home insurance break one receives once an alarm system is installed, we suspect Google is looking to challenge Amazon and its Alexa digital assistant using an end-around strategy.
Aging of the Population : Baby Boomers retiring? Not so fast… a new role may be had instead
In keeping with our Aging of the Population theme, for a growing percentage of the American population retirement, if they can afford it, is right around the corner. While many may plan to enjoy their “golden years,” for an increasing share of older Americans, they may have to embrace a different role – unpaid care for the elderly. The subsequent shift in spending could be yet another headwind for the overall economy in the coming years.
Cashless Consumption: China and India dominate mobile payments, not the U.S.
Historically speaking, the adoption of new technology has been West to East, but when it comes to mobile payments the East is clearly leading the West. This has profound implications for potential winners in the push away from cash, checks and even debit and credit card swipes that is part of our Cashless Consumption investing theme. It also adds context as to why Apple, Google, and others are aggressively trying to move into those markets with Apple Pay and Android Pay to battle Alibaba’s Alipay, Tencent’s Tenpay, and Paytm – to sell more devices. As we’ve noted before, this is especially important to Apple as it remains reliant on iPhone sales.