A double-dip, admittedly, is not yet a sure thing but I am definitely warming to the view. As an aside, I spent a memorable weekend with Gary Shilling, Nouriel Roubini and Marc Faber, and not even these “bears” believe the economy will double dip. I should add that we were joined by Louise Yamada and Fred Hickey — all legends.
Suffice it to say that there is probably a greater chance that profits go down than meet the consensus estimate, especially considering the deflationary shock out of Europe as well as the tremendous headwind for foreign-derived corporate earnings from the recent surge in the U.S. dollar. So from our lens, slapping on a 12x forward multiple on a range of corporate earnings of $60-75 leaves quite a bit of downside potential in a market that is still priced for too much growth, and 20% overvalued on a Shiller normalized real P/E basis. Judging by Felix Zuluaf’s comments in the Barron’s Roundtable, we would have to assume that his math would not be far off — he sees book value justifying a move towards 500!
NO SAILS IN RETAIL
U.S. retail sales came in far weaker than expected in May with a 1.2% MoM decline, the worst print since last September. As we had warned, much of the pickup in unit auto sales last month that got everyone excited was in fleet sales (government buying) so we actually saw a hefty 1.7% decline in motor vehicle receipts (could have been some deflation as well).
Apparel sales is getting clobbered — mirroring what we saw in the recent CPI numbers, apparel sales were down 1.3% MoM on top of a 0.7% drop the month before. After two huge stimulus-led gains, home improvement posted a record 9.3% plunge. Department store sales sagged 1.8% for the second month in a row. Restaurant activity was basically flat.
As bad as the data was, the “core” number (retail sales excluding autos, building supplies and gasoline station sales) that goes into the consumer spending part of the GDP data did manage to eke out a 0.1% MoM gain — soft, but hardly a disaster. There were a few bright spots that held this metric up, including furniture/appliances (+0.8% MoM); food and pharmacies were both up 0.3% too — steady-as-she-goes sectors.
But overall, it was clearly a disappointment to see that in a month when households spent 3.3% less filling up their cars and posted a nice (though less than expected) 431k gain in employment that the rest of the retail spending pie was trimmed 1%. Maybe frugality is back in, and the savings rate is heading back up. When the economy is not in recession, declines in gas station receipts coincide with gains in ex-gas retail sales more than 80% of the time. Maybe something funky is starting to go down here.
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