October retail sales have been released and, as expected, were revised to show a drop.
The Good News: 2015 Holiday Spending Looks Great
Vice spending is consistent with a retail sales (ex-autos and gas) year over year growth rate trajectory of 3.8%. That’s a little below last year, but still solid growth.
Good news for vice purveyors: people are hell bent on spending frivolously on blackjack and booze, among other things. Even better, November and December look on course to show another blockbuster holiday shopping season. However, y/y growth will be slower than last year.
Seasonal hiring will be slightly higher than last year despite the mild growth in nominal sales. That growth will come from the shift to cyber-shopping: companies need fewer customer support people per shopping dollar and more logistical and IT support staff.
The nature of holiday shopping has changed dramatically the way holiday tech support gets utilized. Networks have a nasty habit of going down and, until recently, retailers would lock down their networks and websites by November. Why introduce changes into the system and potentially bring it down precisely when your customers are trying to spend money? Also, locked down systems tend to require fewer IT staff.
But shopping today – whether cyber-shopping or in the store – is all very web-centric and pricing is much more dynamic. Vendors on Amazon.com are changing prices all the time, which forces brick-and-mortar companies to price match and post new prices. In other words, websites have gone from being frozen in amber during the holiday shopping season to changing every minute. Retail IT departments have to be more actively engaged. More, not less, technical support is needed.
More cyber-shopping drives more logistical support in the form of warehousing fulfillment staff, truck drivers, and garage mechanics to keep those trucks running, etc.
The Bad News: Spending to Slow Sharply in 1Q 2016
Vice spending is a leading indicator, and it’s pointing to a sharp drop in retail spending growth beginning December – not a contraction, but much slower growth.
If the key to retail spending is wage growth, then the key to wage growth is payroll growth. As the chart of retail sales and payroll growth shows, retail spending will ebb and flow according to payroll growth. It has been slowing since January because payroll growth has been slowing.
Meanwhile, with payrolls holding at a slightly lower pace the last few months, it’s safe to expect a corresponding downshift in retail spending.
That brings us full circle to the Vice Index’s signals, which also says to expect a downshift in spending, but starting in December after the holiday spending rush.
Gambling? Yes, Please!
September gambling rebounded with the late Labor Day weekend. Labor Day weekend gambling fell mostly into September – August dipped, then September jumped. But there’s mixed news.
While gambling continued, it did so at a slightly slower pace. Despite the extra oomph from a full Labor Day weekend, September’s growth was flat compared to July’s.
The opposite is true for Macau casinos, where it’s nothing but bad news. The Macau Gaming Inspection Bureau reported a 28% y/y drop in October’s gaming revenues. The silver lining is that the pace has flattened.
Much of this is tied to VIP gambling, which is down hard ever since the Chinese government began a crackdown on corruption. SJM Holdings (a large Macau-based casino owner) just reported a 50% drop in VIP gambling revenue.
It’s a microcosm of the global economy: a crashing China and a US advancing at a mild pace.
Restaurants Turn Bearish
Restaurant operators have begun firing as sales expectations accelerate down.
Lower foot traffic concerns are accelerating and restaurants are reporting that their staffing is slightly below last year.
The downshift began in March (shortly after the energy and manufacturing sector pain started). Retail spending on food services dipped and restaurant-sourced data points showed even more contraction. That’s really bad for any consumer spending stock.
Hookernomics: No More Price Hikes
Escort inflation has played out.
Escorts raised prices in the spring. Partly because they had to: hotel prices have soared in major metro areas and Airbnb isn’t a solution (yet). Partly because they could: many escorts work from home or are strictly out-call (they visit you at home, at work, at your hotel, etc.). Most importantly, customers were willing to pay the higher prices, indicating cash flow and discretionary income were strong.
Fast forward to today: the season of spending. The escort business will enjoy a boom in holiday shopping just like every other service business. The holidays provide both the opportunity and the means for more escort spending. Holiday dinners, gift giving, and bonuses all provide great camouflage for customers to visit escorts (basically cheating husbands can easily hide the cost and time).
But hookers are not taking the opportunity to greet the rising demand with price hikes. Prices move opportunistically, firming if not actually rising over the holidays. Instead, prices are flat so far. Also, availability remains high.
The best analogy is the hotel business. Strong demand leads to fewer vacancies, fewer price bargains, and higher revenue per available room. That is not happening at this time. It’s a circumstantial indicator that demand is not robust.
What It All Means
There will be a certain Santa Rally heading into the New Year. Consider selling into that strength.
The major question is what happens next in the US and China private sector growth, and there really won’t be good visibility until February. That’s a long time to wait without solid news and the market will be very nervous, which means volatile swings.
The key danger is a negative feedback loop: unless we see growth at the top line, companies will be forced to cut back. Sometimes that will mean layoffs, sometimes that will mean small or no raises.
If China resumes stimulus, then the game is back on.
But take a step back and recognize that there is more downside risk than upside in the market. The market is flat for the year (in the summer, I had forecast S&P 500 year-end of 2,200 and we may hit that). If we expect macroeconomic conditions to be the same or a bit worse going forward, then we really can’t expect the market to grow that much.
In my review of hiring by top public companies, most are hitting the brakes. CEOs have initiated Plan A: wait-and-see and manage spending. In February we will get to know if they will shift to Plan B: cut spending and lay off workers. Plan B is the tipping point for the market and the economy.
The markets have to wait a loooong time for visibility. Imagine a teenager waiting for a phone call all weekend, and you will have a sense of how smoothly the markets will perform. I prefer to sit on the sidelines and jump in when there are panic-driven deep drops and then exit when things get over-bought.
In the meantime, if you are interested in portfolio re-balancing, get out of the tech and consumer sectors. Aerospace looks good because of a global surge in military spending.
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