WCM Chart of the Week for February 21, 2020

More and more companies, including airlines and oil companies, are announcing an intention to achieve carbon-neutral operations over the next couple decades. But, it is important to look behind the headlines and understand what that sort of pledge actually means.  What business is the company actually in and does the pledge include their supply chain or product output? From the Climate Accountability Institute (Oct. 9, 2019, data through 2017), global fossil fuel and cement emissions from 1965 to 2018 totaled 1,354 billion tonnes of carbon dioxide and energy-related methane (GtCO2e); The twenty largest investor-owned and state-owned fossil fuel companies produced carbon fuels that emitted 35% of the global total (480 GtCO2e); Looking over the entire historical data set they find their current database of 103 fossil fuel and cement entities emitted 1,221 GtCO2e, or 69.8% of global since 1751 (1.75 TtCO2e); of which the Top Twenty companies are responsible for 526 GtCO2e, or 30% of all fossil fuel and cement emission since 1751. [Charts and data, Climate Accountability Institute, October 2019]

Climate Accountability Institute, October 2019
Climate Accountability Institute, October 2019

WCM Chart of the Week for February 10, 2020

The US Bureau of Labor Statistics has been reporting impressive trends across many demographic categories for several quarters. One of the most important trends we see is development in the female workforce. Total US Labor Market participation reached an impressive 83.1% rate in the key age category of 25-54 year-olds. These levels have not been reached since the pre-crisis era over a decade ago. The real story is gains made by female workers. Women in this demographic have led the overall participation rate, rising from 73.3% in late 2015 to its latest reading of 77%, three times the percentage gain of men in the same category who rose from 88.2% to 89.3% over the same period. Even with this good news, we cannot lose focus on UN SDG #5 (Achieve Gender Equality and Empower All Women and Girls). Women in the US still earn only about 80 cents on the equivalent dollar wage for a man, a gap which expands further for Latinas, black women and women of Native American and Hawai’ian descent. [Chart courtesy Bloomberg LP © 2020, data US BLS]

WCM Chart of the Moment for February 3, 2020

In the wake of Brexit and the risk of a pandemic it was time to take a diligent step back and compare current happenings with a bit of history. As the Coronavirus spreads within China and the WHO raises the specter of a global pandemic, investors have become concerned about the impact on the human condition and the global economy. During the SARs outbreak in 2003, Chinese economic activity was sharply impacted as GDP decelerated from 11.1% to 9.1% in the second quarter of 2003, and retail sales growth plummeted from 11.1% to 4.5% in the April to May months of that year. The SARS epidemic may, in contrast, look reasonably contained given what we don’t know about the Coronavirus. From a global economic standpoint, the Coronavirus impact is likely to be more severe given that China’s economy in 2003 represented a much smaller share of the world and it was much less consumer-oriented then.  Chinese officials have limited travel and quarantined large segments of their population in order to limit the spread of the virus.  Those actions will likely lead to stunted manufacturing output, and more importantly lower levels of consumption and retail sales which today represent a larger share of China’s economy.  The impact of an even slower growing China will likely be a challenge for growth in the rest of the world. [chart courtesy of Bloomberg LP © 2020]

WCM Chart of the Week for January 22, 2020

Earnings estimates across corporate Asia are gaining ground on European and even American companies.  This is a welcome sign especially compared to the US with its well publicized solid fundamentals.  Beyond the headlines stemming from social unrest in Hong Kong, many of the region’s stock markets exhibit favorable valuations and may attract investors pursuing stronger growth that is difficult to find in Europe at the moment.  Also, with US equities continuing to hit all-time highs, investors may opportunistically rotate into this part of the world until American indices consolidate. [chart source Bloomberg LP © 2020]

WCM Chart of the Week for January 10, 2020

When you measure is everything.  The major stock indices in the United States posted the strongest returns in recent years with the Nasdaq up 36.7%, Dow Jones Industrials up 25.3% and the S&P 500 (pictured below) 31.5% on a total return basis in the calendar year 2019.  These results are undoubtedly impressive but are highly endpoint dependent.  At the beginning of 2019 the equity market was reeling mainly due to the perception that the US Federal Reserve intended to pursue overly restrictive monetary policy only to announce quite the opposite at this time last year.  The beginning of 2019 was a low point for US equity indices and the year ended with all-time record highs, producing very impressive calendar year returns.  What we highlight on this week’s chart is the 14.26% total return (11.16% annualized) of the S&P 500 when measured from the September 2019 high prior to the fourth quarter US Fed-induced market rout. That return is historically strong but not as dramatic as measuring January to January would suggest.

For a bit of recent historical perspective, 2013 surpassed 2019 when the Nasdaq, Dow Jones and S&P 500 delivered total returns of 41.7%, 29.7%, and 33.1% respectively, followed by solid returns (all three indices posted 10%+ total returns) in 2014. [data courtesy S&P, chart courtesy Bloomberg LP © 2020]

WCM Yule Chart for 2019

Nothing says holiday cheer like Asian exports. Actually, come to think of it that probably says a lot about holiday cheer depending on what is under your tree, menorah, or Festivus pole. Equities in Asia have been rallying since early this Fall but have underperformed global peers this year. But, on a positive note, container traffic in Singapore just hit an all-time high, which should be supportive of Asia’s bourses going forward. The reason container traffic is important is because it is a barometer of trade momentum in the region and Singapore is a strategic transfer point for goods. Its exports hover around 200% of GDP.  Trade flows should continue to improve with Phase 1 of the US – China trade agreement and US House of Representatives passage of the US Mexico Canada Agreement (passage in the US Senate is likely).  These developments are critical considering global economic activity is moderating. [chart courtesy Bloomberg LP © 2019 and Maritime & Port Authority of Singapore, MSCI]

WCM Chart of the Week for December 13, 2019

Boris Johnson’s Conservative Party triumphed in Parliamentary elections on December 12th, gaining 48 seats, which gives the party a clear majority in the House of Commons.  Support was surprisingly strong in Northern England and Wales which have been historically been Labour Party strongholds.  The outcome all but makes Brexit a certainty and Johnson has indicated that he will accelerate legislation through parliament to meet the January 31 target date for leaving the EU.  The Great British Pound (pictured below) as well as the UK stock market rallied strongly, likely in anticipation of the electoral outcome.  British assets have been trading at significantly lower valuations than comparable global assets and this may be a catalyst that brings values more in line.  In our view, there still is uncertainty regarding potential disruption in supply chains and labor markets as the Brexit process unfolds.  There is, however, more clarity regarding this tense situation. [chart courtesy Bloomberg LP © 2019]

WCM Chart of the Week for December 6, 2019

This morning the Labor Department announced that payrolls expanded by 266,000 in November, well ahead of estimates.  Just as important, the previous month’s jobs were revised upwards to 156,000 and the unemployment rate matched the 50-year record low of 3.5%.  Average hourly wages also expanded 3.1% signaling that consumers’ wallets are gaining on the overall economy.  Hiring momentum is no doubt strong and is outpacing growth in the labor force.  While this is good for employees currently, continued wage inflation may cut into future corporate profits.  The low inflation environment may make it difficult for companies to raise prices as wage pressures may crowd out margins. [chart courtesy Bloomberg LP (c) 2019]

It’s beginning to look a lot like retail

As our esteemed Doug Wilde regularly points out, manufacturing isn’t the bellwether it once was of US economic output. We are a nation of users, not makers, now, and Retail is what matters. Unless you live in a well-stocked bunker, it is hard to avoid the focus on retail consumption this time of year. We will soon wrap up the big week of consumption capital in motion from “Black Friday” through “Small Business Saturday”, “Cyber Monday” and “Giving Tuesday”. That last one is of course about giving charity and not presents, but the relentless campaigns in person, by phone, and online have made it feel like one more consumption decision while rummaging through the wallet or purse.

From an investor’s point of view it is increasingly difficult to gauge retail activity because how people shop has shifted significantly in just the last few years. Reporters standing in shopping malls near the Santa villages breathlessly pointing to the crowds and bags does not tell the whole story. Even the viral mayhem videos at discount department stores when the throngs pummel each other to grab the BOGO Alexa-enabled combination teddy bear/espresso machine/lawnmower are entertaining yes, anecdotal mostly, informative not so much.

What we hear again and again is that online is killing traditional retail. For anyone who has walked this Earth for long enough there is actually a little bit of schadenfreude since today’s “traditional retail” killed local merchants and main streets a generation or two previously. We do agree that online shopping has been the weapon of choice to kill off department stores and shopping malls, but this is not some great innovation or revelation. Us oldsters remember Sears, JC Penney, Montgomery Ward and other catalogs where almost anything under the sun was a phone call or mail order away. For families that lived out in the boondocks, that was the only way to access a lot of products, not much different from today where significant portions of the population are not close to “traditional retail”.

So why do we care as portfolio managers? First, we do want to obtain a clean look at the American consumer as an indicator of the health of our economy. Second, consumption patterns tell us a lot about where growth can be found, and of course has a direct connection not just to the growth of equities of companies all along various supply chains, but to the growth of debt to finance making, selling and consuming. Employment patterns are also closely tied to consumption patterns, particularly during the holiday season.

We see the mix of retail venues changing. Other than automobiles, where the traditional distribution structure is consolidating but not really changing despite Elon Musk’s best efforts, with whom and when people shop is shifting. We can now do a lot of financial damage with an iPhone while wearing footy pajamas and binging The Office. And even through that little 5.5” window, the process of consumption is changing. An influencer on Instagram can hype a product, provide an in-app link, and voila, you are purchasing it with a couple finger taps. The reality now, as we have written before, is that America is simply over-retailed. There are too many places and ways to buy the same products. A lot of the factors that differentiated channels before have dissolved. Price differences have been arbitraged away because of comprehensive access to competitive pricing information. The quest for instant gratification can be satisfied as easily by clicking and waiting by the front door as heading to the mall. Expertise and consultation are more likely to be found online than with the teenaged clerk who is just counting the hours until the shift is over. And when those teenagers do get off work, they aren’t going to roam the malls and food courts themselves to socialize and maybe spend. They may be going home and meeting up with friends through MMO games and even spending those earned dollars leveling up their avatars with swag or new capabilities. How do you measure that in old retail terms?

If people are buying directly from manufacturers’ branded captive websites and catalogs, or through social media, or through major online portals, and of course through bricks-and-mortar stores, how do we get anything resembling a complete much less accurate picture of retail consumption? Some of that insight can come from looking elsewhere in the supply chain. We can consider raw materials, packaging, shipping and logistics, royalties and licensing fees. We can look at volumes through final mile services like UPS and Fedex. We can look at sales tax receipts (although the patchwork of rules around interstate tax collection means this gets you a massive undercount). We can look at hiring, particularly seasonal hiring, which is moving away from retail counters and towards fulfillment centers. We can also look at aggregate transactional data from consumer credit and newer virtualized and peer-to-peer payment methods.

The big issue is that a lot of this data is scattered, not gathered and reported in a timely fashion, and has to be collated and interpreted. Joe the Weatherman reporting from the mall about how long the lines are and how full the bags is not going to do it. We will also look at but retain healthy skepticism about reports from trade groups like the National Retail Federation, which exists to promote the interests of its members. Useful information, but it has to be viewed in the context of its mission and stakeholders. That leaves us the government statisticians, who don’t necessarily have an axe to grind, but the data is lagged and the coverage has not always kept up well with how the retail landscape has changed. The US Census Bureau will be releasing the November 2019 Advance Monthly Retail report on December 13th.

Right now we see the US consumer as reasonably robust. The change in how consumption is taking place means looking elsewhere in the markets to participate in that growth. For instance, instead of REITs that own shopping malls, favor REITs that own warehouses. Look for themes like electronic payments. And of course, trends toward local, organic, fair trade, reclaimed, and other sustainability themes are driving retail flows and even countering the race to the bottom in pricing.

According to the New York Times, more than 90,000 packages a day go missing daily in New York City, and 1.7 million daily nationally. That is clearly a problem on a massive scale. But if that much can go missing or be stolen daily and not break the system or materially drive up costs, the scale of consumption outside of traditional retail store fronts is extraordinary. Maybe this number more than any other is the bellwether indicator we need to watch.

WCM Chart of the Week for November 25, 2019

Christine Lagarde has taken the helm at the European Central Bank from the highly regarded yet somewhat controversial Mario Draghi at the beginning of November.  While many view Draghi’s leadership as forcing the ECB to the limits of monetary policy, he was successful in maintaining the monetary union and the single currency at several critical points in time over the past decade.  Lagarde faces a formidable challenge inheriting a central bank that is divided in the direction of policy. Her legacy as a consensus builder may prove invaluable at this pivotal point in time.  In her debut speech last week, she emphasized the need for stronger domestic demand and fiscal policy in order to counter the evolving global trade balance.  If she is successful in convincing countries with budget surpluses to spend and invest through fiscal stimulus, the region may see stronger economic activity and a firmer Euro which has been in a downtrend versus the US Dollar since the financial crisis.  The world needs a stronger, more resilient Europe and we believe Christine Lagarde will be an ideal leader of the ECB. [chart courtesy Bloomberg LP © 2019]

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