by Scott Krisiloff, CIO, Avondale Asset Management
It will be another few weeks before earnings season begins to pick back up. Until then weâre picking up scraps of information where we can.
Lennarâs CEO features prominently in this weekâs digest. The underlying fundamentals for the housing industry are arguably stronger than any other industry in the economy. Weâve massively under-built since the bubble and there is a huge demographic wave of millennials who want to buy homes. Still, pricing has been so distorted by low interest rates that itâs tough to say how these forces will balance out.
Unfortunately, my expectation is that millennials will likely end up buying houses at inflated prices and have a similar experience that we got from our college degrees. Societal pressures will cause us to lever up to purchase an asset with an extremely low return on investment.
The Macro Outlook:
Housing market conditions are stronger and strengthening
âmarket conditions certainly feel like they are strong and strengthening. The slow and steady, though sometimes erratic, market improvement that weâve seen for the entirety of this recovery seems to be giving way to a more definitive reversion to normal.â âLennar CEO Stuart Miller (Homebuilder)
Thereâs clearly a sense of general optimism in the market
âAs our traffic has increased, weâre getting some very direct feedback from our customers as they tell us what they are looking for, their timing and, sometimes, their motivation. Thereâs clearly a sense of general optimism in the market. Thereâs a perception that jobs are being created and that wages are actually starting to move upward. Thereâs a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment. The banking world is making more overtures to small businesses and to mortgage borrowers and thereâs a sense that borrowers can make their way through the process.â âLennar CEO Stuart Miller (Homebuilder)
People want to buy before rates go up
âAdditionally, the upward direction of interest rates has encouraged some to get off the fence and consider purchasing a home rather than renting. Rents have risen and the prospect of higher purchase prices and higher interest rates makes a compelling case that todayâs opportunity might be the best opportunity to leave those annual increases in monthly payments behind.â âLennar CEO Stuart Miller (Homebuilder)
60% of 18-35 year olds are living with parents, relatives or roommates
âInterestingly, the front page of U.S.A Today reports today that 60% of millennials ages 18 to 35 are living with parents, relatives and roommates and that is a 115-year high.â âLennar CEO Stuart Miller (Homebuilder)
Pricing power is on the horizon
âLimited supply and production deficits are now intersecting with land and labor shortage and this suggests, though not yet seen, but suggests, that pricing power is on the horizon as we move through the year.â âLennar CEO Stuart Miller (Homebuilder)
You can only be positive when you see such momentum
âto put it very simply we feel very good for the second half of the yearâŠWe have very good bookings, we have good pipeline. We have great momentum in most part of our businessâŠSo you could only be positive when you see such momentum.â âAccenture CEO Pierre Nanterme (Consulting)
International:
The UK and Europe are benefitting from weak currencies
âI think the currency situation particularly in the UK is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and U.S. tourism into the UK. And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that particularly Chinese stores given the euroâs lack of strength is also a place that there is a lot of tourism going on and a lot of shopping going on, so really benefiting from that.â âPVH CEO Manny Chirico (Apparel)
Financials:
Tax reform will create winners & losers
âI will say that Iâve had a recent opportunity to listen to Steve Mnuchin, the Treasury SecretaryâŠAnd the two things that I take away from listening to him is that heâs very smart, very thoughtful in his approachâŠThe other thing that I walked away with is a sense that he and this administration are listening carefully knowing that there will be winners and losers, there will be ups and downs, in any configuration of the tax revamp and so there is, virtually, no ability to draw certainty today from what pieces and in what proportion they are going to be woven into a new tax program.â âLennar CEO Stuart Miller (Homebuilder)
Food inflation remains modest
âwe see a bit more modest inflation outlook versus what we saw a year ago in the fourth quarterâ âGeneral Mills CFO Don Mulligan (Packaged Foods)
Consumer:
The Retail environment is not in a steady state
âThe retail landscape is particularly in the U.S. is not â is in a steady stateâŠI think the important thing to point out is that these changes are really being driven by the consumer, and consumer demand at the same time remains quite strong. But we know that consumer expectations are quite high in terms of product, the type of product they want, the innovation, the style. They want the product fast, they want it easy, they want personal service.â âNike CEO Mark Parker (Apparel)
Third and fourth tier locations will struggle to stay open
âthe trend is now that A&B super centers are going to be open and the C&Ds are not. If you happen to be in a center thatâs not A&B, you have a very large percentage of probability that you will not be making money and if youâre in A&B, the more developers are trying to balance their loss of income by increasing their rents on the A&B. Thatâs why so many specialty store business are going out of businessâ âPerry Ellis Chairman George Feldenkreis (Apparel)
The US has overbuilt retail
âI think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even to a greater extent is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States. So I think some of the challenges with â the challenges that weâre facing in brick and mortar in the United States has to do with there is too many stores. I donât believe that issue to the level that it exist in the United States exist in Europe and in Asia.â âPVH CEO Manny Chirico (Apparel)
Retailers are aggressively cutting inventory
âI think the retailers have done a very good job in department store sector in particular about keeping inventories clear. We came out of the fourth quarter, I think they reacted strongly to some of the softer sales trendsâŠWhatever theyâre planning be it flat sales or slightly negative comps sales, the buy plan is even lower than that.â âPVH CEO Manny Chirico (Apparel)
Customers are asking FedEx for more pickup locations. Maybe there is a role for omnichannel after allâŠ
âFedEx On-Site is a nationwide network of alternate delivery locations, which is a direct response to our customers telling us they want access to more choices for package delivery and drop off. FedEx On-Site locations include some Albertsons and some Kroger grocery stores as well as select Office Depot, OfficeMax and FedEx authorized ship centers.â âFedEx EVP Rajesh Subramaniam (Delivery)
Technology:
Office layouts have changed
âDay-to-day business continues to be considerably softer likely because of the ongoing decline in demand for traditional private offices and open plan cubiclesâŠ[customers] want offices that practically support creativity and innovation by helping their people do their best work.â âSteelcase CEO James Keane (Office Furniture)
Steelcase listed healthcare and technology as weak sectors
âwe experienced growth in six of the 10 vertical markets we track including five with double digit percentage growth rates. This growth was dampened by declines in the technical professional, education, healthcare and information technology sectorsâ âSteelcase CFO David Sylvester (Office Furniture)
Industrials:
Thereâs more to the economy than mobile phones
âAmazon is a wonderful company and they certainly have revolutioned the e-commerce world and weâre not sure what Amazon is going to do one way or another. But the FedEx system that consists of thousands of facilities and the ability to pick up transport and deliver it in one to two business days between any two addresses in the United States has been decades in the making and we think that we have a not great risk of being disruptedâŠpeople focus on e-commerce because everybody looks at this from their mobile phone forward where the real story is everything behind the mobile phone and thatâs what FedEx has in enormous quantities; airplanes, trucks, facility, team members.â âFedEx Chairman Fred Smith (Delivery)
Full transcripts can be found at www.seekingalpha.com
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