Trouble Under the Hood

Good Afternoon,
                      I’m starting to realize something. Something that I’ve been acutely aware of for quite some time, but maybe due to my exposure to the mainstream media became less sensitive to. With what has been gradual improvement in the economy across a broad spectrum of data-points, the economy is still wildly inconsistent, and still badly underperforming. Nine long years, and we are not really right yet. The markets may have taken off after the US election in a bold step toward hope, but the economy itself still has to catch up to those markets.
Cold November Rain
                      The November macro is pouring in right now, and the month is starting to look awful… one major step back from the progress that we thought we were finally starting to make. This morning, Housing Starts severely disappointed. True, October brought us the best numbers for Housing Starts since 2007, but that bright spot is now sandwiched between the two worst months since June of 2015. How inconsistent is that? Yesterday, Core CPI also disappointed, printing at 2.1% y/y. That’s is above the Fed’s goal, but this item typically runs about half of one percent higher than Core PCE, which is the Fed’s focus. This 2.1% print also equals the lowest rate for core consumer level inflation for this entire year.
                      Let’s go back to Wednesday. That’s the day that November Retail Sales disappointed, bringing lowered revisions to October’s data along with it. That report also showed a profound lack of fun. What do I mean by that? Yes people spent on gasoline, rent, medical care, but what did they stop spending on? Hobbies, sporting goods, music, and books… that’s what. Nobody spent on anything that they didn’t have to buy. Industrial Production kept pedaling backwards on Wednesday as well. November Industrial Production hit the tape at -0.4% m/m, and -0.6% y/y on not just manufacturing weakness, but weakness in the utilities as well. Capacity Utilization plummeted to 75%, after having rebounded from a multi-year low of 74.9% earlier in the year.
                      We’ve heard so much about our improving labor market, with it’s misleading 4.6% headline Unemployment Rate. First and foremost, wages have struggled to grow. Over the year average hourly earnings are indeed up 2.4%, which I guess is better than we have become accustomed to, but let’s not lose sight of the fact that those hourly earnings actually contracted in November from October. That does not happen in a tight labor market, and it does not happen in an economy that is approaching full employment. To cement just how tough it is out there… Participation is now 62.7%, which is a 2016 low. The number of multiple jobs holders now exceeds 8,107,000, which is an 18 year high. Those people now comprise 5.3% of the labor force, which itself is a seven year high. With a “non-participation” rate of 37.3%, this means that a whole lot of people are not working at all, while more people than have had to in a generation are working harder than ever. I imagine holding down second jobs is not something most people do for fun. I know, I’ve been there.
                       The bottom line is that this recovery, if you even want to call it that, continues to be painful for most of America. This is why 98.4% of the counties in this country rejected the status quo on election day. Is the election of Donald J. Trump a “Hail Mary” pass? A desperate attempt to change something…anything? The perception is already in place that the economy will improve on the pillars of lower taxes, repatriated money, and deregulation. The way to navigate this is to be in the right spot, at the right time. That means being invested in what are now being referred to as “Trump stocks”. Too late? the markets may pause, but we’re going out at least six months here, probably even longer. From the financial space (banks, capital markets, consumer finance, and insurance). to the Industrials. If you believe in the growth – reflation story, then this is where business will be done. Examples of what may do well in finance, but still be affordable to the retail investor would be BAC, KEY, V, and DFS.  Within that Industrial sector, I think the Transports will continue to do well as businesses become more aggressive, and the president-elect begins to push for spending on infrastructure. I like the airlines, and delivery services to some degree. I like the railroads more, especially those that would be exposed to the coal space.  My favorites in this group are CSX, and NSC, but do think UNP still does well going forward.
Positions in stocks mentioned: Long equity in BAC, KEY, and CSX

One thought on “Trouble Under the Hood”

  1. Thanks Mike. Always love your feedback, which I think in this case is more detailed than my original note !!

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