Overview of Key Trends
A few thoughts on major market trends.
Housing continues a death spiral and the extended players are getting affected. The stocks have recovered a bit from recent housing news, but the trend is obvious.
Home building - Home builders are in a unique situation. A slowdown in housing construction immediately leads to an inventory buildup in construction materials. Builders are able to maintain margins by squeezing suppliers. Subcontractors like BMHC are in their sights as well. TOL has a solid cash position but BMHC has $800M debt and $742M cash and assets, of which almost $200M is inventory. They are leveraged, their key assets have deteriorating value, and they are not creating much cash. BMHC hopes to survive thanks to economies of scale, but none exist when the market turns down.
Furniture - ETH announced that sales are slower than they expected barely 1 month ago. Interestingly enough, Yahoo news includes under ETH headlines a reference to a fabric company that is firing 225 employees. Demand must be really dropping. Indeed, Williams Sonoma announced that Pottery Barn sales are slowing faster than expected. "The consumer response in Pottery Barn is continuing to trend well below our expectations, causing us to approach the third and fourth quarters with an extremely cautious outlook," said Chairman and Chief Executive Howard Lester.
Watch them go after sales by sacrificing margins. Retailers will squeeze vendors very hard to recover that free interest being offered.
Home furnishings - CPWM pulled back from a low because of some positive news from Target. The problem is that Target is eating into CPWM's sales. I am thinking FO is also very much at risk except that they are so diversified, a slowdown in faucets won't stop their march significantly.
Consumer Durables - Despite obvious signs of weakening sales, WHR and others are maintaining stock strength. WHR look sparticularly vulnerable to LG's (Korean company LuckyGoldstar) foray into the heart of their business. The LG washing machines are both cheaper and better rated than WHR's. It is noteworthy that the EU just fined LG for dumping - that indicates aggressive competitive pricing. http://biz.yahoo.com/ap/060831/eu_south_korea_refrigerators.html?.v=3
"Average prices fell 5 percent while the South Koreans undercut European manufacturers -- such as Electrolux AB and Siemens AG -- by between 34.4 percent and 42 percent."
WHR's margins are under pressure and it has announced that in the face of slowing unit sales in the US, that the company will preserve margins by raising prices. Price increases are hard in the face of aggressive competition.
It is remarkable that WHR tried to be part of the EU duty impact, except the EU pointed out that WHR products are not made in the EU and so can not be a victim of dumping in the EU.
Lastly, what is the state of affairs with respect to consumer spending? This one is more mixed. A downturn in the US housing market will be more painful and widespread than expected. It will affect the high end and low end markets.
Most economists expect a housing slowdown to knock off 1% from GDP. They say this because construction drives a lot of employment and manufacturing (via the use of raw materials and machinery). Also, and especially in the past few years, homeowners dipped into the house equity as an ATM machine.
The GDP is running between 2%~3%. It averaged ~3% for 6 of the last 8 quarters, and the recent GDP is smack in the middle of 2005/2006 performance. While we are slowing from a frothy 5% in Q4 2005 and Q1 2006, we are not suddenly falling off the cliff.
We are trending down and the housing market will accelerate that trend. Consumer spending drops in these circumstances. However, I don't think that the damage will show itself until AFTER this holiday season. TRID, for example, will do well because flat panel TVs will be the item this year.
Other companies to consider shorting as we slow down:
Tiffany's (TIF) released earnings that show margin problems.
Sothebys (BID) as a business is not showing much strength: expected sales growth of 7% and earnings growth of 20%. With a forward P/E of 20+, BID is not overpriced. Unless there is a slowdown in wealth.
Housing continues a death spiral and the extended players are getting affected. The stocks have recovered a bit from recent housing news, but the trend is obvious.
Home building - Home builders are in a unique situation. A slowdown in housing construction immediately leads to an inventory buildup in construction materials. Builders are able to maintain margins by squeezing suppliers. Subcontractors like BMHC are in their sights as well. TOL has a solid cash position but BMHC has $800M debt and $742M cash and assets, of which almost $200M is inventory. They are leveraged, their key assets have deteriorating value, and they are not creating much cash. BMHC hopes to survive thanks to economies of scale, but none exist when the market turns down.
Furniture - ETH announced that sales are slower than they expected barely 1 month ago. Interestingly enough, Yahoo news includes under ETH headlines a reference to a fabric company that is firing 225 employees. Demand must be really dropping. Indeed, Williams Sonoma announced that Pottery Barn sales are slowing faster than expected. "The consumer response in Pottery Barn is continuing to trend well below our expectations, causing us to approach the third and fourth quarters with an extremely cautious outlook," said Chairman and Chief Executive Howard Lester.
Watch them go after sales by sacrificing margins. Retailers will squeeze vendors very hard to recover that free interest being offered.
Home furnishings - CPWM pulled back from a low because of some positive news from Target. The problem is that Target is eating into CPWM's sales. I am thinking FO is also very much at risk except that they are so diversified, a slowdown in faucets won't stop their march significantly.
Consumer Durables - Despite obvious signs of weakening sales, WHR and others are maintaining stock strength. WHR look sparticularly vulnerable to LG's (Korean company LuckyGoldstar) foray into the heart of their business. The LG washing machines are both cheaper and better rated than WHR's. It is noteworthy that the EU just fined LG for dumping - that indicates aggressive competitive pricing. http://biz.yahoo.com/ap/060831/eu_south_korea_refrigerators.html?.v=3
"Average prices fell 5 percent while the South Koreans undercut European manufacturers -- such as Electrolux AB and Siemens AG -- by between 34.4 percent and 42 percent."
WHR's margins are under pressure and it has announced that in the face of slowing unit sales in the US, that the company will preserve margins by raising prices. Price increases are hard in the face of aggressive competition.
It is remarkable that WHR tried to be part of the EU duty impact, except the EU pointed out that WHR products are not made in the EU and so can not be a victim of dumping in the EU.
Lastly, what is the state of affairs with respect to consumer spending? This one is more mixed. A downturn in the US housing market will be more painful and widespread than expected. It will affect the high end and low end markets.
Most economists expect a housing slowdown to knock off 1% from GDP. They say this because construction drives a lot of employment and manufacturing (via the use of raw materials and machinery). Also, and especially in the past few years, homeowners dipped into the house equity as an ATM machine.
The GDP is running between 2%~3%. It averaged ~3% for 6 of the last 8 quarters, and the recent GDP is smack in the middle of 2005/2006 performance. While we are slowing from a frothy 5% in Q4 2005 and Q1 2006, we are not suddenly falling off the cliff.
We are trending down and the housing market will accelerate that trend. Consumer spending drops in these circumstances. However, I don't think that the damage will show itself until AFTER this holiday season. TRID, for example, will do well because flat panel TVs will be the item this year.
Other companies to consider shorting as we slow down:
Tiffany's (TIF) released earnings that show margin problems.
Sothebys (BID) as a business is not showing much strength: expected sales growth of 7% and earnings growth of 20%. With a forward P/E of 20+, BID is not overpriced. Unless there is a slowdown in wealth.
posted by Andrew at
3:14 PM
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