Investing in A Working Class Recession
The recession has already bitten for the working class. That's a bold statement and I have to defend it.
First, let me say that when I say 'recession', I mean a contraction in spending accompanied by rising unemployment.
Second, by 'working class' I mean wage earners, people who depend on a weekly or bi-weekly paycheck: blue collar workers (manual laborers) and service industry workers (retail services, sales people, restaurants, real estate brokers/agents, etc).
The exceptions will be in anything tied to the global boom: oil, mining, plane manufacturing, farming.
The symptoms of a recession are rising unemployment and reductions in spending.
Let's review the Unemployment trends first.
1. For the past 5 months:
Agricultural Employment: Up ~7.5%
Non-Agricultural Employment: Flat
2. Unemployment is up since last year. It is up most for folks 25 years and older: from 3.5% to 3.8%
3. Breakdown of the 138M Employed non-farm workers (Nov 2006 vs Nov 2007):
http://www.bls.gov/news.release/empsit.t14.htm
Natural resources (0.5% of total employed): Up 5%
Construction (5% of total employed): Down 3%
Manufacturing (10% of total employed): Down 1.5%
Biggest drop: Cars
Retail (11% of total employed): flat
Biggest winner: Food and beverage
Biggest loser: Building material and garden supply
Financial including real estate (6% of total employed)): Flat
Professional services (14% of total employed) Up 4%
Education & Healthcare (14% of total employed): Up 3%
Biggest winner: Healthcare, up 400K jobs
Leisure & Hospitality (10% of total employed) Up 3%
CONCLUSION: Unemployment is trickling up but the wave of layoffs in real estate, banking, retail and so forth are not showing up yet.
Am I wrong? Nope.
1. Timing: it's the holidays and most companies will wait a bit
2. Announce layoffs when it matters: most companies will use the earnings release to trigger layoffs.
3. Delays in reporting: most companies give a few weeks and months of severance pay. So folks don't apply for unemployment immediately.
The increase in hiring in leisure is very telling: that's a place where wage costs are rising at a time when I am forecasting a stalling in spending.
That means, from an investing point of view, bad news is coming and it will 'surprise' the experts.
Next, let's consider the status of consumer spending
1. Holiday spending weak.
There are a lot of folks spinning the numbers. The most popular way is a month by month comparison. The big problem with that is that this year's November included 1 week post Thanksgiving - and that's prime shopping season.
My preferred way to monitor sales is to use the Mastercard retail sales figures which measure sales from Thanksgiving to Christmas. Not only does this neutralize the November phenomenon, it also includes gift cards. That's important because gift cards are 5% of total spendingthese days and a lot of 'experts' like to suggest sales are better because of rising gift card purchases. (Retailers can't count gift cards as a sale, so it delays the actual sale).
In any case, Mastercard reported sales are up 3.6%.
But that includes inflation and things like surging gas prices. Adjust for that and you find that sales are actually flat or down.
And that's after major sales and promotions. The margins will be hurting
2. Falling consumer confidence
Expectations are that consumer confidence will again drop, this time to 86.5. That will be the 5th straight month of decline.
If anything, the most positive thing that can be said is that spending and employment have peaked and are showing signs of slowdown.
So I've been thinking that this is a good time to short a few companies because they haven't reported yet. So I had some basic sectors in mind, and this week I want to do some due diligence. But I start with where the paycheck goes
1. Food - I think folks will cook more. So general Foods and Krafts are in a good place. Restaurants that are like TGI FRidays and Applebees will suffer. I figure McDs and other fast food chains may face problems as well. I wonder if Starbucks will get hit.
2. Leisure & Entertainment - Cable will get hit - a few unpaid bills ($100 a month will matter) and at the very least no rise. Non-vegas casinos will get crushed. Even Vegas will get hit, although they have a multinational crowd. Vacation destinations, cruises, hotels and airlines will struggle. (A lot of conferences will start to get canceled.)
3. Big ticket items like Cars and Boats - Nobody will be buying these for a while. I want to short whoever makes jacuzzi tubs. Goodbye harley Davidson. A lot of vehicles will get sold, not bought, as folks try an dcut back expenses. Car sales will be down.
4. Luxury items - Any jewelry seller that caters to blue collar workers.
5. Services - Gardening, pest control, security, insurance, banking. You name it and folks will be cutting back. I especially see insurance getting hit: reduced coverage, fewer vehicles & houses covered, and so on. banking has been hit but it still has aways to go.
So, I need to do some research on specific companies, but there are plenty. If you have any suggestions, please share
First, let me say that when I say 'recession', I mean a contraction in spending accompanied by rising unemployment.
Second, by 'working class' I mean wage earners, people who depend on a weekly or bi-weekly paycheck: blue collar workers (manual laborers) and service industry workers (retail services, sales people, restaurants, real estate brokers/agents, etc).
The exceptions will be in anything tied to the global boom: oil, mining, plane manufacturing, farming.
The symptoms of a recession are rising unemployment and reductions in spending.
Let's review the Unemployment trends first.
1. For the past 5 months:
Agricultural Employment: Up ~7.5%
Non-Agricultural Employment: Flat
2. Unemployment is up since last year. It is up most for folks 25 years and older: from 3.5% to 3.8%
3. Breakdown of the 138M Employed non-farm workers (Nov 2006 vs Nov 2007):
http://www.bls.gov/news.release/empsit.t14.htm
Natural resources (0.5% of total employed): Up 5%
Construction (5% of total employed): Down 3%
Manufacturing (10% of total employed): Down 1.5%
Biggest drop: Cars
Retail (11% of total employed): flat
Biggest winner: Food and beverage
Biggest loser: Building material and garden supply
Financial including real estate (6% of total employed)): Flat
Professional services (14% of total employed) Up 4%
Education & Healthcare (14% of total employed): Up 3%
Biggest winner: Healthcare, up 400K jobs
Leisure & Hospitality (10% of total employed) Up 3%
CONCLUSION: Unemployment is trickling up but the wave of layoffs in real estate, banking, retail and so forth are not showing up yet.
Am I wrong? Nope.
1. Timing: it's the holidays and most companies will wait a bit
2. Announce layoffs when it matters: most companies will use the earnings release to trigger layoffs.
3. Delays in reporting: most companies give a few weeks and months of severance pay. So folks don't apply for unemployment immediately.
The increase in hiring in leisure is very telling: that's a place where wage costs are rising at a time when I am forecasting a stalling in spending.
That means, from an investing point of view, bad news is coming and it will 'surprise' the experts.
Next, let's consider the status of consumer spending
1. Holiday spending weak.
There are a lot of folks spinning the numbers. The most popular way is a month by month comparison. The big problem with that is that this year's November included 1 week post Thanksgiving - and that's prime shopping season.
My preferred way to monitor sales is to use the Mastercard retail sales figures which measure sales from Thanksgiving to Christmas. Not only does this neutralize the November phenomenon, it also includes gift cards. That's important because gift cards are 5% of total spendingthese days and a lot of 'experts' like to suggest sales are better because of rising gift card purchases. (Retailers can't count gift cards as a sale, so it delays the actual sale).
In any case, Mastercard reported sales are up 3.6%.
But that includes inflation and things like surging gas prices. Adjust for that and you find that sales are actually flat or down.
And that's after major sales and promotions. The margins will be hurting
2. Falling consumer confidence
Expectations are that consumer confidence will again drop, this time to 86.5. That will be the 5th straight month of decline.
If anything, the most positive thing that can be said is that spending and employment have peaked and are showing signs of slowdown.
So I've been thinking that this is a good time to short a few companies because they haven't reported yet. So I had some basic sectors in mind, and this week I want to do some due diligence. But I start with where the paycheck goes
1. Food - I think folks will cook more. So general Foods and Krafts are in a good place. Restaurants that are like TGI FRidays and Applebees will suffer. I figure McDs and other fast food chains may face problems as well. I wonder if Starbucks will get hit.
2. Leisure & Entertainment - Cable will get hit - a few unpaid bills ($100 a month will matter) and at the very least no rise. Non-vegas casinos will get crushed. Even Vegas will get hit, although they have a multinational crowd. Vacation destinations, cruises, hotels and airlines will struggle. (A lot of conferences will start to get canceled.)
3. Big ticket items like Cars and Boats - Nobody will be buying these for a while. I want to short whoever makes jacuzzi tubs. Goodbye harley Davidson. A lot of vehicles will get sold, not bought, as folks try an dcut back expenses. Car sales will be down.
4. Luxury items - Any jewelry seller that caters to blue collar workers.
5. Services - Gardening, pest control, security, insurance, banking. You name it and folks will be cutting back. I especially see insurance getting hit: reduced coverage, fewer vehicles & houses covered, and so on. banking has been hit but it still has aways to go.
So, I need to do some research on specific companies, but there are plenty. If you have any suggestions, please share
posted by Andrew at
9:53 PM
2 Comments:
Andrew,
I totally agree. I also see shorting in the areas of RV manufacturing, esp MNC because they cant only sell and they will get hit with the same sub-prime borrowers. and clothing companies like GES, GPS. Also some construction companies like TEX will suffer, I guess. But, I would like to hear from your perspective.
RV and jet ski companies are ripe for a plunge - except the RV guys have already been hit.
CLothing will be hit, but I haven't looked closely.
It's a wierd place to be - nobody can argue that these companies will grow, so the pressure is on them to disprove that they are ripe for collapse.
Which means any put is hard to go wrong
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