Consumer Discretionary
The S&P media sector has been in a consolidation phase for over two years, in relative performance terms. That is consistent with cash flow trends, which flat-lined alongside a slump in sales growth and rising costs. However, we expect both relative performance and cash flow to turn higher. Sales growth has hooked back, because the industry has been able to introduce new services and raise selling prices by enough to drive up consumers' share of spending on media services (second panel). Pricing power has surged in both the cable and entertainment industry. If cash flow grows again, as we expect, then an increasing scarcity of media shares outstanding should ultimately act as an upward force on share prices as investors boost allocations to the space. We reiterate our recent moves to overweight in both the S&P cable & satellite and S&P movies & entertainment sub-components. The ticker symbols for the stocks in this index are: BLBG: S5MEDA - DIS, CMCSA, TWX, FOXA, CBS, OMC, VIAB, IPG, SNI, DISCA, NWSA, TGNA, DISCK, FOX, NWS.
The previous Insight showed that mortgage demand was rising steadily, courtesy of the decline in mortgage rates and willingness of banks to extend mortgage credit. We expect this to translate into steady sales increases for the homebuilding industry. New home sales are gaining as a share of total home sales, flirting with their highest level in the post-crisis era. Importantly, the supply of new homes is now falling relative to total supply, underscoring that meeting this new demand will require faster new home construction. Single family housing starts are rising relative to total starts, a significant change since the financial crisis ended when multifamily dwellings dominated construction activity, as commercial/financial developers were the only ones with easy access to financing. The upshot is that good value in the S&P homebuilding index should be realized. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM.
The decline in global bond yields and negative interest rates abroad represents a windfall for U.S. housing, to the extent that U.S. mortgage rates are lower than they otherwise would be. The latest plunge in yields is translating into a clear acceleration in mortgage demand, as proxied by the advance in mortgage purchase applications. That is a leading indicator for home sales, the lifeblood of the homebuilding industry. Importantly, the financial incentive to buy a home is high and rising, given the attractiveness of owning vs. renting, and the growing gap between house price inflation and mortgage rates. It is no wonder that the latest National Homebuilder's Survey recorded a sharp jump in sales expectations, heralding faster top-line growth ahead. That should be sustainable, as discussed in the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM.
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The overall retailing sector is still struggling with aggressive price discounting, as the retail price deflator hit its lowest level since the 1990s. Consumers have a high propensity to save, which is making it difficult for traditional retailers to manage and budget. The contraction in intermodal railcar shipments and rising retail inventory-to-sales ratios reinforce that conditions remain extremely difficult. However, there are some bright spots. Yesterday's retail sales report showed that pharmacies are enjoying a boom in top-line growth, while hypermarkets are finally regaining traction. On the flipside, restaurants continue to lose sales momentum, which bodes particularly ill for profitability given that labor costs are running at a high-single digit inflation rate (please see Monday's Weekly Report for more details). We are negative on retailers, with the exception of hypermarkets and retail drug stores, both of which warrant above benchmark status.
Media stocks have been through a choppy consolidation phase in recent years, as investors digest competitive threats and changing consumption habits. However, evidence is materializing that media companies are through the worst. Specifically, value has been restored to the S&P movies & entertainment (ME) index. Consumers continue to demonstrate a healthy appetite for content consumption: personal spending on recreation and electronics has reaccelerated as a share of total outlays. While, cord cutting, skinny pay TV packages and OTT threats have cast a dark cloud over both content creators and cable companies, evidence suggests that gloom has been excessive. Personal spending on cable services is hitting new highs in level terms, even excluding price increases, and is soaring in growth rate terms. Importantly, other elements of the industry are strong. Recreation spending is growing at a mid-single digit rate, in real terms, underscoring that both movie and theme park admission traffic is healthy. That is facilitating aggressive price hikes, as evidenced by the surge in the CPI for entertainment. Against this solid revenue backdrop, wages are barely growing, a recipe for profit margin resilience. We recommend using price weakness and near-term volatility to augment positions to overweight, which brings our overall consumer discretionary sector weighting up to neutral.
This week's report discusses whether bad news is good news for stocks, or a potential restraint. Tumbling long-term yields argue for augmenting consumer discretionary sector weightings, <i>via</i> the movies & entertainment group.
The previous Insight showed that the S&P hotel index was in a sustained downtrend, with bearish technical and valuation indications for future relative performance trends. Fundamental forces also argue for caution. Consumer spending growth at hotels is cooling in absolute terms, and plunging compared with overall personal outlays (third panel), with more downside ahead based on the persistent rise in consumer's marginal propensity to save. With travel budgets under stress, hotels are unable to lift selling prices, and are losing pricing power ground in real terms, i.e. relative to overall inflation. Against a backdrop of booming lodging construction, the odds of additional price concessions are rising. We reiterate our underweight stance. The ticker symbols for the stocks in this index are: BLBG: S5HOTL - CCL, RCL, MAR, HOT, WYN.
Despite whiffs of optimism regarding U.S. consumption trends, S&P hotel index relative performance is in a bear market. The share price ratio is well below its 40-week moving average, which itself is drifting lower, and cyclical momentum is contracting, as measured by the 52-week rate of change. Both valuations and technical momentum remain well above previous bear market troughs, warning that downside risks remain acute, particularly if profit drivers continue to sag, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOTL - CCL, RCL, MAR, HOT, WYN.