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Sunday, August 5, 2012

Notes from the USA (Aug 2012) – a guest post

In a guest post in Feb ‘12, KKP had presented a Consumer Survey Report from ChangeWave. US consumer spending was increasing then. Consumer confidence and expectations had shown improvement for the 6th straight month.

The improvement in the US economy hasn’t quite progressed according to plan. In fact, it has taken a turn for the worse. In his July 2012 guest post, KKP had introduced two less known indicators to suggest that the US economy was slowing down. The latest survey report from ChangeWave confirms the slow down.


Time and Expectations

Time is fundamental to every strategy for investors and traders. In the markets today, time has become incredibly compressed by the “black hole” of technology and media – causing investors to often think and act in seconds and minutes rather than days and months. This state of affairs surely affects investor psychology in many ways, both good and bad.

ChangeWave’s weekly surveys contribute to a larger mosaic that in combination informs us of the dynamics of the US economy, specific sectors, and major corporations. The data is a snapshot in time, revealing the rate of change and momentum in many critical areas of the economy and its sectors. They also provide the context in which I evaluate all other data and events.

One thing that investors continue to ignore at their own peril is that the global and US economies are experiencing a massive, long-term process of balance-sheet deleveraging. This reflects both excessive consumer debt – as well as huge public sector issues – and the effects are particularly telling in ChangeWave’s consumer surveys. With such constraints on spending, any recovery will struggle to sustain 3.5% growth or better.

The Dow has climbed back above 13,000 on the wide belief that the economy is just lousy enough to prompt Ben Bernanke to initiate another round of quantitative easing and/or some other action to lift the economy or investor spirits. If the economic outlook is more dire than “just lousy enough,” then the US Federal Reserve will be even more limited in effectiveness.

The markets have learned something about Bernanke’s view on the economy and his likely intentions. Bernanke’s counterpart across the pond, European Central Bank chief Mario Draghi, last week vowed to do whatever it takes – assuring that it will be enough. Equity markets reacted very favorably to Draghi’s remarks, which may have set the tone for the U.S. chief.

Of course, reactions to the comments and actions by the central bankers will vary widely depending on one’s time frame and expectations.

Top and Bottom Lines

In April and May, ChangeWave’s consumer surveys indicated without a doubt that the US economy was losing momentum. Subsequent surveys on both the consumer and business sides revealed that the slowdown was taking root. The sideways direction for most of the economy has characterized the recovery since 2010, and it will take much more than the Fed to break this pattern.

Going back as far as Q4 2011, Wall Street analysts’ estimates were on the whole overly optimistic in their projections of corporate revenue and earnings. As we’ve seen since early 2012, analysts have repeatedly stumbled over each other to cut estimates as companies continue to offer downward guidance.

For the current season, after all the adjusted estimates, about 70% of the companies that reported earnings so far have beaten expectations. Yet a troubling 65% have missed the top line on sales. The latter is the result of the strain on demand as ChangeWave’s data has so well illustrated. Unfortunately, there is still relatively little being done to address the weakness in consumer spending.

Despite the lagging top line, investors have been bidding up stock prices. In fact, “the average stock that has reported since earnings season began on July 10th has gained 0.70% on its report day,” according to Bespoke Investment Group. “If the season were to end today, this would be the best performance stocks have seen on their report days since Q4 2010.”

It appears The Street had already lowered expectations enough that the numbers reported were viewed as fairly positive. During the same period last year, when the economic outlook was equally tepid, the average stock fell nearly 2% on its report day.

Now let’s delve into a few more highlights from ChangeWave’s latest consumer spending survey to identify some areas of strength and weakness.

Consumer Bellwethers Lose Momentum

ChangeWave’s July ‘12 consumer survey recorded the third consecutive monthly decline in consumer spending behavior. It also registered a significant decline in spending growth. Thus, it was no surprise when the government reported last week that in Q2 2012 US GDP grew at its slowest pace in a year – rising 1.5% after a revised 2% gain in the prior quarter.

The survey also reveals multiple categories being affected by the current spending slowdown, including restaurants, household repairs, electronics and durable goods. Even discount retailers like Target (TGT), Costco (COST) and Walmart (WMT) are feeling the effects.

During this earnings season, the results of several US retail bellwethers reflect the consumer trends identified by ChangeWave in recent months:

  • Slowing sales in part led Procter & Gamble (PG) to cut profit forecasts three times this year.
  • UPS (UPS), the world’s largest package-delivery company, cut its full-year profit forecast after a drop in Q2 international package sales. The company projects the US will grow 1% in the remainder of 2012.
  • McDonald’s (MCD), Starbucks (SBUX) and Chipotle (CMG), which are typically resilient during tough economic times, saw a bit of a slowdown in US guest-count growth in Q2.

Starbucks’ CEO said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July, according to Bloomberg. “So, this is not a Starbucks issue, this is a macro problem.”

Coach (COH), the largest US luxury handbag maker, reported quarterly revenue that trailed analysts’ estimates. Sales at North American stores open at least a year rose 1.7%, compared with a gain of 10% a year earlier.

Easing Pressures

ChangeWave’s July ‘12 consumer survey showed a modest improvement in consumer expectations and confidence and signs that lower gas prices may be lifting spending in other areas. The findings even uncovered easing job concerns, a strong indicator that corporations, while not yet aggressively hiring, have tempered layoffs, downsizing and other cutbacks.

When asked how much they worry about someone in their family losing their job, 28% reported they worry A Great Deal (8%) or Quite a Bit (20%), while 28% said they Do Not Worry at All – a net 9 points better than previously.


Even though Reduced Income (36%) remains the number one reason why consumers are spending less, it declined 4 points in July ‘12 to its second lowest level of the past two years.

Overall, ChangeWave’s latest consumer survey indicates that the sideways movement of the economy is entrenched and shows no signs of breaking out to either the downside (i.e. recession) or upside (i.e. robust recovery). Of course, we’ll continue to monitor consumer spending and behavior and you’ll be the first to know when the US economy finally breaks out.


KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

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