Category Archives: Retail Sales

Massive Collapse in Brand Image for Nike Following New Colin Kaepernick Branding Campaign…

Never before in the history of corporate branding decisions has a multi-billion dollar company had such a massive and swift drop of brand image as Nike.  The results from Morning Consult Intelligence, a firm that specializes in monitoring and measuring the brand image and reputation for thousands of major companies, reflects a massive drop in brand image across every single demographic.

We suspected there would be a diminishment of brand image, but nothing like the scale discovered within the polled data:

The report features over 8,000 interviews conducted among American adults, including 1,694 interviews pre-campaign launch (8/26/18 – 9/3/18) and 5,481 interviews post-campaign launch (9/4/18 – 9/5/18). Additionally, Morning Consult conducted a study among 1,168 adults in the U.S. about Nike’s ad and the decision to choose Kaepernick as the face of the campaign.

  • Nike’s Favorability Drops by Double Digits: Before the announcement, Nike had a net +69 favorable impression among consumers, it has now declined 34 points to +35 favorable.

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  • No Boost Among Key Demos: Among younger generations, Nike users, African Americans, and other key demographics, Nike’s favorability declined rather than improved.
  • Purchasing Consideration Also Down: Before the announcement, 49 percent of Americans said they were absolutely certain or very likely to buy Nike products. That figure is down to 39 percent now.

FULL Polling Data Available Here

From a pure economic/financial perspective this Nike branding campaign doesn’t make sense.  On its face, it just seems absurd. Why would any major corporation intentionally stake out a branding position that is adverse to their financial interests?

The most likely answer is HERE

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Source: by Sundance | The Conservative Tree House

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Disaster Is Inevitable When America’s Stock Market Bubble Bursts – Smart Money Is Focused On Trade

(Forbes) Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings. Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008. In this report, I will show a wide variety of charts that prove how unsustainable the current bull market is.

Since the Great Recession low in March 2009, the S&P 500 stock index has gained over 300%, taking it nearly 80% higher than its 2007 peak:

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The small cap Russell 2000 index and the tech-heavy Nasdaq Composite Index are up even more than the S&P 500 since 2009 – nearly 400% and 500% respectively:

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The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates. As I explained in a Forbes piece last week, ultra-low interest rates help to create bubbles in the following ways:

  • Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
  • By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
  • By discouraging the holding of cash in the bank versus speculating in riskier asset markets
  • By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
  • By encouraging more borrowing by consumers, businesses, and governments

The chart below shows how U.S. interest rates (the Fed Funds Rate, 10-Year Treasury yields, and Aaa corporate bond yields) have remained at record low levels for a record period of time since the Great Recession:

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U.S. monetary policy has been incredibly loose since the Great Recession, which can be seen in the chart of real interest rates (the Fed Funds Rate minus the inflation rate). The mid-2000s housing bubble and the current “Everything Bubble” both formed during periods of negative real interest rates. (Note: “Everything Bubble” is a term that I’ve coined to describe a dangerous bubble that has been inflating in a wide variety of countries, industries, and assets – please visit my website to learn more.)

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The Taylor Rule is a model created by economist John Taylor to help estimate the best level for central bank-set interest rates such as the Fed Funds Rate. If the Fed Funds Rate is much lower than the Taylor Rule model (this signifies loose monetary conditions), there is a high risk of inflation and the formation of bubbles. If the Fed Funds Rate is much higher than the Taylor Rule model, however, there is a risk that tight monetary policy will stifle the economy.

Comparing the Fed Funds Rate to the Taylor Rule model is helpful for visually gauging how loose or tight U.S. monetary conditions are:

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Subtracting the Taylor Rule model from the Fed Funds Rate quantifies how loose (when the difference is negative), tight (when the difference is positive), or neutral U.S. monetary policy is:

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Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding non-financial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles. (Read my recent U.S. corporate debt bubble report to learn more).

U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble. The chart below shows how share buybacks and dividends paid increased dramatically since 2009:

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Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) has helped to inflate the U.S. stock market bubble since 2009: quantitative easing or QE. When executing QE policy, the Federal Reserve creates new money “out of thin air” (in digital form) and uses it to buy Treasury bonds or other assets, which pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect: it causes stock prices to surge (because low rates boost stocks), as the chart below shows:

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As touched upon earlier, low interest rates encourage stock speculators to borrow money from their brokers in the form of margin loans. These speculators then ride the bull market higher while letting the leverage from the margin loans boost their returns. This strategy can be highly profitable – until the market turns and amplifies their losses, that is.

There is a general tendency for speculators to use margin most aggressively just before the market’s peak, and the current bull market/bubble appears to be no exception. During the dot-com bubble and housing bubble stock market cycles, margin debt peaked at roughly 2.75% of GDP. In the current stock market bubble, however, margin debt is nearly at 3% of GDP, which is quite concerning. The heavy use of margin at the end of a long bull market exacerbates the eventual downturn because traders are forced to sell their shares to avoid or satisfy margin calls.

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In the latter days of a bull market or bubble, retail investors are typically the most aggressively positioned in stocks. Sadly, these small investors tend to be wrong at the most important market turning points. Retail investors currently have the highest allocation to stocks (blue line) and the lowest cash holdings (orange line) since the Dot-com bubble, which is a worrisome sign. These same investors were the most cautious in 2002/2003 and 2009, which was the start of two powerful bull markets.

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The chart below shows the CBOE Volatility Index (VIX), which is considered to be a “fear gauge” of U.S. stock investors. The VIX stayed very low during the housing bubble era and it has been acting similarly for the past eight years as the “Everything Bubble” inflated. During both bubbles, the VIX stayed low because the Fed backstopped the financial markets and economy with its aggressive monetary policies (this is known as the “Fed Put“).

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The next chart shows the St. Louis Fed Financial Stress Index, which is a barometer for the level of stress in the U.S. financial system. It goes without saying that less stress is better, but only to a point – when the index remains at extremely low levels due to the backstopping of the financial markets by the Fed, it can be indicative of the formation of a dangerous bubble. Ironically, when that bubble bursts, financial stress spikes. Periods of very low financial stress foreshadow periods of very high financial stress – the calm before the financial storm, basically. The Financial Stress Index remained at extremely low levels during the housing bubble era and is following the same pattern during the “Everything Bubble.”

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High-yield (or “junk”) bond spreads are another barometer of investor fear or complacency. When high-yield bond spreads stay at very low levels in a central bank-manipulated environment like ours, it often indicates that a dangerous bubble is forming (it indicates complacency). The high-yield spread was unusually low during the dot-com bubble and housing bubble, and is following the same pattern during the current “Everything Bubble.”

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In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression:

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Tobin’s Q ratio (the total U.S. stock market value divided by the total replacement cost of assets) is another broad market valuation measure that confirms that the stock market is overvalued like it was at prior generational peaks:

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The fact that the S&P 500’s dividend yield is at such low levels is more evidence that the market is overvalued (high market valuations lead to low dividend yields and vice versa). Though dividend payout ratios have been declining over time in addition, that is certainly not the only reason why dividend yields are so low, contrary to popular belief. Extremely high market valuations are the other rarely discussed reason why yields are so low.

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The chart below shows U.S. after tax corporate profits as a percentage of the gross national product (GNP), which is a measure of how profitable American corporations are. Thanks to ultra-cheap credit, asset bubbles, and financial engineering, U.S. corporations have been much more profitable since the early-2000s than they have been for most of the 20th century (9% vs. the 6.6% average since 1947).

Unfortunately, U.S. corporate profitability is likely to revert to the mean because unusually high corporate profit margins are typically unsustainable, as economist Milton Friedman explained. The eventual mean reversion of U.S. corporate profitability will hurt the earnings of public corporations, which is very worrisome considering how overpriced stocks are relative to earnings.

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During stock market bubbles, the overall market tends to be led by a smaller group of high-performing “story stocks” that capture the investing public’s attention, make early investors rich, and light the fires of greed and envy in practically everyone else. During the late-1990s dot-com bubble, the “story stocks” were tech stocks like Amazon.com, Intel, Cisco, eBay, etc. During the housing bubble era, it was home builder stocks like Hovanian, D.R. Horton, Lennar, mortgage lenders, and alternative energy companies like First Solar, to name a few examples.

In the current stock market bubble, the market is being led by a group of stocks nicknamed FAANG, which is an acronym for Facebook, Apple, Amazon, Netflix, and Google (now known as Alphabet Inc.). The chart below compares the performance of the FAANG stocks to the S&P 500 during the bull market that began in March 2009. Though the S&P 500 has risen over 300%, the FAANGs put the broad market index to shame: Apple is up over 1,000%, Amazon has surged more than 2,000%, and Netflix has rocketed over 6,000%.

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After so many years of strong and consistent performance, many investors now view the FAANGs as “can’t lose” stocks that will keep going “up, up, up!” as a function of time. Unfortunately, this is a dangerous line of thinking that has ruined countless investors in prior bubbles. Today’s FAANG phenomenon is very similar to the Nifty Fifty group of high-performing blue-chip stocks during the 1960s and early-1970s bull market. The Nifty Fifty were seen as “one decision” stocks (the only decision necessary was to buy) because investors thought they would keep rising virtually forever.

Investors tend to become most bullish and heavily invested in leading stocks such as the FAANGs or Nifty Fifty right before the market cycle turns. When the leading stocks finally fall during a bear market, they usually fall very hard, as Nifty Fifty investors experienced in the 1973-1974 bear market. The eventual unwinding of the FAANG stock boom/bubble is going to burn many investors, including institutional investors who have gorged on these stocks in recent years. 

How The Stock Market Bubble Will Pop

To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions. The Federal Reserve inflated the stock market bubble via its record low Fed Funds Rate and quantitative easing programs, and the central bank is now raising interest rates and reversing its QE programs by shrinking its balance sheet. What the Fed giveth, the Fed taketh away.

The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.

I’m from the same school of thought as billionaire fund manager Jeff Gundlach, who believes that the Fed will keep hiking interest rates until “something breaks.” In the last economic cycle from roughly 2002 to 2007, it was the subprime mortgage industry that broke first, and in the current cycle, I believe that corporate bonds are likely to break first, which would then spill over into the U.S. stock market (please read my corporate debt bubble report in Forbes to learn more).

The Fed Funds Rate chart below shows how the last two recessions and bubble bursts occurred after rate hike cycles; a repeat performance is likely once rates are hiked high enough. Because of the record debt burden in the U.S., interest rates do not have to rise nearly as high as in prior cycles to cause a recession or financial crisis this time around. In addition to raising interest rates, the Fed is now conducting its quantitative tightening (QT) policy that shrinks its balance sheet by $40 billion per month, which will eventually contribute to the popping of the stock market bubble.

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The 10-Year/2-Year U.S. Treasury bond spread is a helpful tool for determining how close a recession likely is. This spread is an extremely accurate indicator, having warned about every U.S. recession in the past half-century, including the Great Recession. When the spread is between 0% and 1%, it is in the “recession warning zone” because it signifies that the economic cycle is maturing and that a recession is likely just a few years away. When the spread drops below 0% (this is known as an inverted yield curve), a recession is likely to occur within the next year or so. 

As the chart below shows, the 10-Year/2-Year U.S. Treasury bond spread is already deep into the “Warning Zone” and heading toward the “Recession Zone” at an alarming rate – not exactly a comforting thought considering how overvalued and inflated the U.S. stock market is, not to mention how indebted the U.S. economy is.

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Although I err conservative/libertarian politically, I do not believe that President Trump can prevent the ultimate popping of the U.S. stock market bubble and “Everything Bubble.” One of the reasons why is that this bubble is truly global and the U.S. President has no control over the economies of China, Australia, Canada, etc. The popping of a massive global bubble outside of the U.S. is enough to create a bear market and recession within the U.S.

Also, as the charts in this report show, our stock market bubble was inflating years before Trump became president. I believe that this bubble was slated to crash to regardless of who became president – it could have been Hillary Clinton, Bernie Sanders, or Marco Rubio. Even Donald Trump called the stock market a “big, fat, ugly bubble” right before the election. Concerningly, even though the stock market bubble is approximately 30% larger than when Trump warned about it, Trump is no longer calling it a “bubble,” and is actually praising it each time it hits another record.

Many optimists expect President Trump’s tax reform plan to result in a powerful boom that creates millions of new jobs and supercharges economic growth, which would help the stock market grow into its lofty valuations. Unfortunately, this thinking is not grounded in reality or math. As my boss Lance Roberts explained, “there will be no economic boom” (Part 1Part 2) because our economy is too debt-laden to grow the way it did back in the 1980s during the Reagan Boom or at other times during the 20th century.

As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won’t take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.

The purpose of this report is to warn society of the path that we are on and the risks that we are facing. I am not necessarily calling the market’s top right here and right now. I am fully aware that this stock market bubble can continue inflating to even more extreme heights before it pops. I warn about bubbles as an activist, but I approach tactical investing in a slightly different manner (because shorting or selling too early leads to under performance, etc.). As a professional investor, I believe in following the market’s trend instead of fighting it – even if I’m skeptical of the underlying forces that are driving it. Of course, when that trend fundamentally changes, that’s when I believe in shifting to an even more cautious and conservative stance for our clients and myself.

Source: by Jesse Colombo | Forbes

Learn about Trumps latest moves on trade negotiations with Canada and Mexico…

Global Car Sales Tumble Amid Slowing Demand, Trade Wars

Global auto sales are in the midst of the first sustained slowdown since the 2008 financial crisis, according to new figures published by the WSJ. This complicates an already precarious situation for automakers, who have also been negatively affected by volatile global trade policy, rising commodity prices, declining demand and tariffs.

China and Europe are two key global markets that are recording the largest slowdown, while the United States continues to try and hammer out new trade agreements. 

The auto market in China – where new-car sales fell 5.3% to 1.59 million in July – compared with the year-earlier period has also slowed due to worsening trade tensions.  For the full year, sales are forecast to grow 1.2% over last year, according to LMC Automotive, down from a 13% growth rate in 2016 and 2.1% in 2017.

At the same time, demand for American vehicles, which generally has acted as a universal global catalyst, has also topped out, largely due to higher prices and higher loan rates, but perhaps also due to rising nationalistic sentiment amid a “don’t buy American” media wave.

Demand is also starting to wane in Europe, sliding to “pre-recession” levels. Many American car companies had already struggled to maintain profitability in Europe where the slowdown in demand is exacerbating the bottom line.

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Of course, not all global demand has dried up: the global economic strength continues to support solid underlying demand. However, on the horizon, speed bumps are emerging: for one, President Trump’s trade policies are having a negative affect on consumer confidence and are seen outside the US as “the biggest threat to continued economic growth.”

By the same token, if tensions ease between the United States and trade partners, however, that could act as a tailwind for the industry as we saw yesterday when automaker stocks rallied following the announcement of the US-Mexico trade deal as part of Trump’s NAFTA overhaul. Similarly, German auto makers also outperformed their respective indices during Monday’s session.

But the United States still has Europe and China targeted for new tariffs. China has responded by taxing US built vehicles 40% when they are imported. Meanwhile, analysts believe that the entire industry is at a tipping point and that a trade war could push auto demand “over the cliff”. According to Oxford Economics, a “moderate trade war scenario” could cause a decline in global GDP by about 0.5% in 2019.

Both Ford and Fiat had been counting on the Chinese market to reduce their dependence on North America. U.S. auto sales, having peaked in 2016 at a record 17.5 million, are on track to decline in 2018 for a second year in a row.

This uncertain scenario has caused automakers and auto suppliers, like Ford and Continental AG, to cite lack of demand in China and Europe as a reason that profits may miss expectations this year. This all comes at a time when R&D spending for the industry is also on the rise:

“The slowdown comes at a very difficult time as [the industry] transitions to more electrification and the robocar arms race sucks up research and development money,” said Dave Sullivan, an analyst with consulting firm AutoPacific Inc.

At the same time, commodity prices are rising, led by steel and aluminum prices – the result of recent Trump tariffs. New emission standards in Europe and China are also causing car companies to spend billions to try and meet new rigorous standards.

Since 2010, global auto sales have been on the rise to the tune of more than 5% annually. This year, even though vehicle sales are estimated to hit 97 million worldwide, the growth rate should slow to 1.8%, according to the forecasting firm LMC Automotive.

All the while, President Trump sees the automotive industry as a bargaining chip – often threatening to introduce additional tariffs that may wind up acting as headwinds for the overall industry. From the WSJ:

In May, the White House asked the Commerce Department to investigate whether it could use a national-security law to impose tariffs of up to 25% on cars and auto parts imported into the U.S.

Such actions could further crimp car sales, auto makers and analysts say.

“This would produce a near standstill in the vehicle markets,” said Justin Cox, a senior analyst with LMC Automotive. The firm forecasts that, if the trade dispute escalates, new-car sales in 2020 are likely to come in three million vehicles lower than current forecasts.

In China, new car sales fell 5.3% in July, which was a shock to an industry that has been experiencing rapid growth as a result of new wealth accrued by the country’s middle class. China is now the world’s largest auto market by number of sales, with 28.6 million new vehicle sales last year, according to the report.

Meanwhile, back in the United States, Ford cut its guidance back in July, blaming rising costs and the trade environment in both Europe and China. As we previously reported, July car sales in the US also tumbling as profit-seeking automakers slashed discounts. 

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As we noted then, all major manufacturers reported a sharp drop in U.S. deliveries for July, led by a 15% plunge at Nissan Motor. The reason: for the first time in 55 months, the auto industry – perhaps due to concerns about the impact of auto tariffs – cut back spending on incentives, snapping a streak of monthly consecutive increases that began 4 1/2 years ago, according to J.D. Power.

Rising rates and blowing out summer inventory were also blamed for sales tumbling.

Charlie Chesbrough, senior economist for Cox Automotive, pointed out another possible issue: that while automakers are pulling back on new-vehicle incentives, there are great deals on used-car lots. Returns of vehicles that have been leased are on the rise, and that added supply gives consumers more choice of lower-priced alternatives to new models.

“There is such tremendous competition from the used-car market,” Chesbrough told Bloomberg. “We have so many off-lease vehicles coming back to market and they are cheaper than new cars.”

But as these new global sales figures show, the problem isn’t just contained to the US. If tensions between the United States, China and Europe don’t improve, global automakers will be forced to start looking at emerging markets – places like India and Africa – to begin growing new markets in order to help try to keep up with targets. 

Source: ZeroHedge

Meet Tally: The Grocery Stocking Robot About To Eradicate Tens of 1,000’s of Minimum Wage Jobs

Amazon wiped out billions of dollars worth of grocery store market cap last month when they announced plans to purchase Whole Foods.  The announcement sent shares of Kroger, Wal-Mart, Sprouts, and Target, among others, plunging… (WMT -4%, TGT -5.5%, SFM -7.6%, KR -12%).

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But, as we pointed out back in May, well before Amazon’s decision to buy Whole Foods, Amazon’s success in penetrating the traditional grocery market was always a matter of when, not if.  Concept stores, like Amazon Go, already exist that virtually eliminate the need for dozens of in-store employees which will allow them to generate higher returns at lower price points than traditional grocers.  And, with grocery margins averaging around 1-2% at best, if Amazon, or anyone for that matter, can truly create smart stores with no check outs and cut employees in half they can effectively destroy the traditional supermarket business model.

And while the demise of the traditional grocery store will undoubtedly take time (recall that people were calling for the demise of Blockbuster for nearly a decade before it finally happened), make no mistake that the retail grocery market 10-15 years from now will not look anything like the stores you visit today.

And while the demise of the traditional grocery store will undoubtedly take time (recall that people were calling for the demise of Blockbuster for nearly a decade before it finally happened), make no mistake that the retail grocery market 10-15 years from now will not look anything like the stores you visit today.

So, grocers have a choice: (i) adapt to the technological revolution that is about to transform their industry or (ii) face the same slow death that ultimately claimed the life of Blockbuster.

As such, as the the St. Louis Post-Dispatch points out today, the relatively small Midwest grocery store chain of Schnucks has decided to roll out the first of what could eventually be a large fleet of grocery stocking robots.

A slender robot named Tally soon will be roaming the aisles at select Schnucks groceries, on the lookout for out-of-stock items and verifying prices.

Maryland Heights-based Schnuck Markets, which operates 100 stores in five states, on Monday will begin testing its first Tally at its store at 6600 Clayton Road in Richmond Heights. The pilot test is expected to last six weeks. A second Tally will appear in coming weeks at Schnucks stores at 1060 Woods Mill Road in Town and Country and at 10233 Manchester Road in Kirkwood.

The robots are the first test of the technology in Missouri and could ultimately be expanded to more Schnucks stores.

Each 30-pound robot is equipped with sensors to help it navigate the store’s layout and avoid bumping into customers’ carts. When it detects product areas that aren’t fully stocked, the data is shared with store management staff so the retailer can make changes, said Dave Steck, Schnuck Markets’ vice president of IT and infrastructure.

Tally, created by a San Francisco-based company named Simbe, is also being tested at other mass merchants and dollar stores all across the country.

Founded in 2014, Simbe has placed Tally robots in mass merchants, dollar stores and groceries across the country, including some Target stores in San Francisco last year.

“The goal of Tally is to create more of a feedback mechanism,” Bogolea said. “Although most retailers have good supply chain intelligence, and point-of-sale data on what they’ve sold, what’s challenging for retailers is understanding the true state of merchandise on shelves. Everyone sees value in higher quality, more frequent information across the entire value chain.”

The robot does take breaks. When Tally senses it’s low on power, it finds its way to a charging dock. And, the robot is designed to stay out of the way of customers. If it detects a congested area, it’ll return to the aisle when it’s less busy. If a shopper approaches the robot, it’s programmed to stop moving.

Meanwhile, with nearly 40,000 grocery stores in the U.S. employing roughly 3.5mm people, most of whom work at or near minimum wage, Bernie’s “Fight for $15” agitators may want to take note of this development.

Source: ZeroHedge

When Does A Home Become A Prison?

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The housing market is suffering from a supply shortage, not a demand dilemma. As Millennial first-time homebuyer demand continues to increase, the inventory of homes for sale tightens. At the same time, prices are increasing, so why aren’t there more homeowners selling their homes?

In most markets, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. In the housing market, the seller and the buyer are, in many cases, actually the same economic actor. In order to buy a new home, you have to sell the home you already own.

So, in a market with rising prices and strong demand, what’s preventing existing homeowners from putting their homes on the market?

“Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”

The housing market has experienced a long-run decline in mortgage rates from a high of 18 percent for the 30-year, fixed-rate mortgage in 1981 to a low of almost 3 percent in 2012. Today, five years later, mortgage rates remain just a stone’s throw away from that historic low point. This long-run decline in rates encouraged existing homeowners to both move more often and to refinance more often, in many cases refinancing multiple times between each move.

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It’s widely expected that mortgage rates will rise further. This is more important than we may even realize because the housing market has not experienced a rising rate environment in almost three decades! No longer is there a financial incentive to refinance for most homeowners, and there’s more to consider when moving. Why move when it will cost more each month to borrow the same amount from the bank? A homeowner can re-extend the mortgage term another 30 years to increase the amount one can borrow at the higher rate, but the mortgage has to be paid off at some point.  Hopefully before or soon after retirement. Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”

There is one more possibility caused by the fact that the existing-home owner is both seller and buyer. In today’s market, sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it is seemingly in their best interest to do so.

Consider two existing homeowners. They both want to buy a new house and move, but are unable to communicate with each other. If they both choose to sell, they both benefit because they increase the inventory of homes available, and collectively alleviate the supply shortage. However, if one chooses to sell and the other doesn’t, the seller must buy a new home in a market with a shortage of supply, bidding wars and escalating prices. Because of this risk, neither homeowner sells (non-cooperation) and neither get what they wanted in the first place – a move to a new, more desirable home. Imagine this scenario playing out across an entire market. If everyone sells there will be plenty of supply. But, the risk of selling when others don’t convinces everyone not to sell and produces the non-cooperative outcome.

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Possible Outcomes

  1. Owner moves, but pays a price escalated by supply shortages for a more desirable home
  2. Owner stays in current house and does not get a more desirable home
  3. Owner moves, finding a more desirable home without paying a price escalated by supply shortages

Rising mortgage rates and the fear of not being able to find something affordable to buy is imprisoning homeowners and causing the inventory shortages that are seen in practically every market across the country. So, what gives in a market short of supply relative to demand? Prices. According to the First American Real House Price Index, the fast pace of house price growth, combined with rising rates, has had a material impact on affordability. In our most recent analysis in April, affordability was down 11 percent compared to a year ago. It was once said that a man’s home is his castle.  In today’s market, a man’s home may be his prison, but he is getting wealthier for it.

By MarK Fleming | First American Economic Blog

 

Premium Homes Dominate Inventory For Sale

Don’t Call It A Comeback: How Rising Home Values May Be Stifling Inventory

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By Ralph McLaughin | Chief Economist For Trulia

U.S. home inventory tumbled to a new low in the first quarter of 2017, falling for eight consecutive quarters. Homebuyers have now been stifled by low inventory for the last two years despite prices rising to pre-recession highs in many markets.

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In this edition of Trulia’s Inventory and Price Watch, we examine how home value recovery may be limiting supply in markets that have recovered most. We find that homebuyers in markets with the biggest gains are facing the tightest supply.

The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the price range they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.

Looking at the housing stock nationally and in the 100 largest U.S. metros from Q1 2012 to Q1 2017, we found:

  • Nationally, the number of starter and trade-up homes continues drop, falling 8.7% and 7.9% respectively, during the past year, while inventory of premium homes has fallen by just 1.7%;
  • The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers. Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year, whereas premium homebuyers only need to shell out 0.9% more of their income;
  • A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years. On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.

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2017 Ushers in a Dramatic Shortage of Homes

Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year. In addition:

  • The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year;
  • The number of trade-up homes on the market decreased by 7.9%, while the share of trade-up homes dropped from 23.9% to 23%. Trade-up homebuyers today will need to pay 1.6% more of their income for a home than last year;
  • The number of premium homes on the market decreased by 1.7%, while the share of premium homes increased from 50% to 51%. Premium homebuyers today will need to spend 0.6% more of their income for a home than last year.

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How and Where a Strong Housing Market May Be Hurting Inventory

In the first edition of our report, we provided a few reasons why inventory is low: (1) investors bought up much of the foreclosure home inventory during the financial crisis and turned them into rental units, (2) price spread – that is, when prices of homes in different segments of the housing market diverge from each other – makes it difficult for existing homeowners to tradeup to the next the segment, and (3) slow home value recovery was making it difficult for some homeowners to break even on their homes. While there is evidence that investors indeed converted owner-occupied homes into rentals as well as evidence from our first report that increasing price spread is correlated with decreases in inventory, little work has examined how home value recovery affects inventory. This is perhaps due to the tricky conceptual relationship between home values and inventory: too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.

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In fact, we find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years. The linear correlation was moderate (-0.36) and statistically significant. We also found that markets with the strongest recovery, on average, have experienced the largest decreases in inventory.

For example, the five-year average change in inventory of housing markets currently valued below their pre-recession peak (< 95% of peak value) isn’t that different from ones that have recovered to 95% – 105% of their peak. (-27.6% vs. -30.1%). However, the average change in inventory in well-recovered markets (> 105%) is 0more drastic at -45.4%.

The disparity also persists when looking at changes in inventory within each segment, although the difference is largest for starter homes. On average, markets with less than 95% recovery or 95% to 105% recovery had a 34.2% and 31.7% decrease in starter inventory, while markets with more than 105% home value recovery had a whopping 58.2% drop. These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.

Secular Trend In Rates Remain Lower: Yield Bottom Still Ahead Of Us

Donald Trump’s victory sparked a tremendous sell-off in the Treasury market from an expectation of fiscal stimulus, but more broadly, from an expectation that a unified-party government can enact business-friendly policies (protectionism, deregulation, tax cuts) which will be inflationary and economically positive. It doesn’t take too much digging to show that the reality is different. The deluge of commentaries suggesting ‘big-reflation’ are short-sighted. Just as before last Tuesday we thought the 10yr UST yield would get below 1%, we still think this now.

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Business Cycle

No matter the President, this economic expansion is seven and a half years old (since 6/2009), and is pushing against a difficult history. It is already the 4th longest expansion in the US back to the 1700’s (link is external). As Larry Summers has pointed out (link is external) after 5 years of recovery, you add roughly 20% of a recession’s probability each year thereafter. Using this, there is around a 60% chance of recession now.

History also doesn’t bode well for new Republican administrations. Certainly, the circumstances were varied, but of the five new Republican administrations replacing Democrats in the 19th and 20th centuries, four of them (Eisenhower, Nixon, Reagan, and George W. Bush) faced new recessions in their first year. The fifth, Warren Harding, started his administration within a recession.

Fiscal Stimulus 

Fiscal stimulus through infrastructure projects and tax cuts is now expected, but the Federal Reserve has been begging for more fiscal help since the financial crisis and it has been politically infeasible. The desire has not created the act. A unified-party government doesn’t make it any easier when that unified party is Republican; the party of fiscal conservatism. Many newer House of Representatives members have been elected almost wholly on platforms to reduce the Federal debt. Congress has gone to the wire several times with resistance to new budgets and debt ceilings. After all, the United States still carries a AA debt rating from S&P as a memento from this. Getting a bill through congress with a direct intention to increase debt will not be easy. As we often say, the political will to do fiscal stimulus only comes about after a big enough decrease in the stock market to get policy makers scared.

Also, fiscal stimulus doesn’t seem to generate inflation, probably because it is only used as a mitigation against recessions. After the U.S. 2009 Fiscal stimulus bill, the YoY CPI fell from 1.7% to 1% two years later. Japan has now injected 26 doses (link is external) of fiscal stimulus into its economy since 1990 and the country has a 0.0% YoY core CPI, and a 10yr Government bond at 0.0%.

Rate Sensitive World Economy

A hallmark of this economic recovery has been its reliance on debt to fuel it. The more debt outstanding, the more interest rates influence the economy’s performance. Not only does the Trump administration need low rates to try to sell fiscal stimulus to the nation, but the private sector needs it to survive. The household, business, and public sectors are all heavily reliant on the price of credit. So far, interest rates rising by 0.5% in the last two months is a drag on growth.

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Global Mooring

Global policies favoring low rates continue to be extended, and there isn’t any economic reason to abandon them. Just about every developed economy (US, Central Europe, Japan, UK, Scandinavia) has policies in place to encourage interest rates to be lower. To the extent that the rest of the world has lower rates than in the US, this continues to exert a downward force on Treasury yields.

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Demographics

As Japan knows and we are just getting into, aging demographics is an unmovable force against consumption, solved only with time. The percent of the population 65 and over in the United States is in the midst of its steepest climb. As older people spend less, paired with slowing immigration from the new administration, consumer demand slackens and puts downward pressure on prices.

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Conclusion

We haven’t seen such a rush to judgement of boundless higher rates that we can remember. Its noise-level is correlated with its desire, not its likelihood. While we cannot call the absolute top of this movement in interest rates, it is limited by these enduring factors and thus, we think it is close to an end. In a sentence, not only will the Trump-administration policies not be enacted as imagined, but even if they were, they won’t have the net-positive effect that is hoped for.  We think that a 3.0% 30yr UST is a rare opportunity buy.

Source: ZeroHedge