I returned from Atlanta on Sunday, and it’s clear that the US consumer is fading quickly. Higher gas prices and falling home prices are slamming the door shut on consumer spending. The evidence is clear that growth in consumption was actually less than many had expected.
I walked around two very nice malls while in Atlanta, and the busiest by far was the Apple Computer store. One might assume the floor traffic was mainly I-Phone related, but this assumption is not accurate. Apple's computer business is red hot, and I have to admit, I was impressed.
One consumer area that has slowed dramatically is the restaurant business. Cheesecake Factory (CAKE) was the busiest, but our wait during the restaurants peak period was only 5-10 minutes (versus 45 min-1 hour a year ago). PF Chang's (PFCB) was not busy.
My observations are telling me that we haven’t seen the full impact from the housing recession on the consumer. In addition, consumer debt has skyrocketed as credit-card debt has passed $2.44 trillion. The risks to the economy and the stock market are clearly increasing.
Other areas likely to be affected by a weak housing market are sales of furniture, home appliances, and building materials which account for about 14% of retail sales. As sales continue to slow, and inventories build, the labor market will weaken and GDP growth will continue to disappoint.
What continues to amaze me is how some corporations are masking their slowing growth with debt induced buybacks. As an example Home Depot (HD) and Sears Holdings (SHLD) come out and lower estimates, and then announce huge buybacks (with debt) in hopes that investors will ignore the fact that sales are slowing.
On the flip side, Conoco-Phillips (COP) is virtually printing money, and using its excess cash to buyback $15 billion of the company's shares. The program would consume 10-11% of shares outstanding, and the price target for the stock has been raised to $100/ share. See, this is a "real" stock buyback with cash on hand. In the case of HD and others, they are using cash on hand and issuing debt to fund their buybacks.
Yesterday, Federal Reserve Chairman Ben Bernanke gave a useless speech on the academic theory of economics. That's all well and good, but like most everything in life, there is theory, and then there is application.
I think it's real clear that inflation is out of control. Last week, the Bank of England raised its key lending rate by a quarter of a point, to 5.75%. In its statement, they said "The committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside." In addition, they warned "that most indicators of pricing pressure remain elevated."
Source: Shadow Government Statistics
Our take here is simple. The Bank of England sees the same inflationary pressures that you and I do. The rise in commodity prices is affecting every economy around the world. The difference of course is, the Bank of England is doing something about it, and ours is not.
We will continue to remain defensive for the remainder of the summer.
