Consumer Discretionary
The major banks are more willing to lend to the consumer and less willing to lend to the corporate sector.
Expectations of a prolonged period of abundant liquidity and rising confidence that recession is not imminent have created the conditions for a potential blow-off phase. This week we are fine-tuning our portfolio for peak performance.
In successful investment analysis "less is more, and usually much more effective."
While we are neutral on the broad consumer discretionary index, we remain constructive on the S&P homebuilding sub-group. U.S. bond yields are probing multi-decade lows mostly as a consequence of global deflationary forces and unorthodox monetary policy abroad. This is a welcome assist to the U.S. housing market, as these exogenous factors have pushed down the U.S. 30-year mortgage rate, providing an incentive for consumers to reenter the housing market (bottom panel). A simple homebuilding demand/supply indicator, comprising new home sales expectations versus new home inventories, is steadily climbing. Historically, this gauge has led new home sales prices, and the current message is to expect the latter to reaccelerate. Homebuilder profits have considerable leverage to selling prices, underscoring that a round of positive earnings revisions lies ahead. Bottom Line: Continue to overweight the S&P homebuilding index. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM.
In early-April we boosted our S&P cable & satellite exposure to above benchmark, as cord-cutting has been less destructive than feared and the industry continues to successfully lift subscription rates in a world plagued by deflation. Similarly, in mid-June we lifted the S&P movies & entertainment index to overweight, because value was simply too attractive to ignore amidst signs of fundamental improvement. For instance, the latest ISM services release was comfortably above the boom/bust line, signaling that services-industry demand remains upbeat. That is consistent with solid media pricing power (second panel). Entertainment admissions, cable network and cable TV pricing power are all showing solid gains. The better-than-expected June employment report should soothe any lingering concerns about the sustainability of discretionary outlays on media services, and provide confidence in the durability of pricing power gains. Consequently, good value should ultimately be realized. Bottom Line: We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX.
Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.
There is a strong incentive for homeowners to invest in their own homes, as existing home prices have eclipsed pre-crisis peaks. Mortgage credit is also readily available and growing again after a multiyear contraction, which will aid in the resale process. There is significant scope for mortgage credit to grow, which implies a long sales runway for home improvement retailers. The latter had battened down the hatches following the housing crisis, closing stores and curtailing investment. Low construction spending is supportive of near-term same-store sales performance, and also implies that the industry can shift back into expansion mode at some point. If so, then historically appealing relative valuation levels have room to expand. We recommend moving back to an overweight stance in this group. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5HOMI- HD, LOW.
The decline in global bond yields and negative interest rates outside the U.S. represent a windfall for U.S. housing, to the extent that U.S. mortgage rates are pushed below levels warranted on U.S. fundamentals alone. With a fully functioning banking system, and a willingness to extend mortgage credit, the housing sector should accelerate in the second half of the year. By extension, the S&P home improvement retailing index is poised for liftoff. The group has corrected laterally in recent months, ignoring the bullish signal from the plunge in Treasury yields (shown inverted, top panel). There is already evidence that lower mortgage rates are stoking housing demand: mortgage purchase applications are gaining traction after a long slumber, and refinancing activity is perking up. Mortgage rates have declined sufficiently to make refinancing a viable option for many homeowners. As housing-related financing becomes more readily accessible, the means and incentive to undertake renovation projects should accelerate. The NAHB remodeling survey has been grinding lower, but a reversal is likely given rising mortgage demand and a high level of pending home sales, a catalyst for home improvement projects. Importantly, there is a long runway for growth ahead, please the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOMI- HD, LOW.
The Brexit drama has moved from the realms of psephology into the realms of game theory. How will the game play out? And how will the economy and financial markets react?