The Inoculated Investor http://inoculatedinvestor.blogspot.com/
The Keynesians never get tired of telling us that 70% of GDP is consumption. This is obviously amisleading statement as if we can consume ourselves rich.
If we want growth in the Western economies,this percentage has to come down and investment and savings should be higher. This is the only long-termsolution to the extreme difficulties that we are confronted with. Only by growing our capital base will we be able to increase production and growth. It is time we learn from the Chinese or simply look in thehistory books and be inspired from how the economy of our ancestors could grow even though they didn’tconsume 70% of their income immediately. (Emphasis mine)The future economy of the Western countries will be investment-driven if driven at all. Unfortunately, italso means that the companies that are most dependent on consumption will be underperforming in theyears to come. Demand is permanently impaired and will not come back to 2007 levels soon.What this implies is that the underlying demand for consumption that existed during the boom years may be reducedor limited for a long time as people repair their balance sheets. As I continue to stress, the US has an incredibleamount of excess capacity of businesses that depend on an unsustainable amount of spending. We built too manymalls, too many restaurants, too many drug stores, and made the conscious decision that convenience trumpedeconomic realities. Why else would there be a drug store, bank, nail shop, and convenience store on every singlemajor intersection of every city and town in the US? These amenities were built to cater to peak demand (that maynever be revisited) and were based on the idea that supply and demand did not matter because the consumer wasalways willing to spend for proximity and convenience. Now these ideas are being turned on their heads as peopleare forced to spend less, eat at home more often, eliminate discretionary purchases and go out of their way to savemoney. This is a particularly toxic combination of incentives from the perspective of those companies that relied ona complete lack of fiscal restraint in order to prosper.Based on all of this, what can we conclude about the potential impact on stocks of this excess capacity and reducedconsumption? Well, it can’t be good for restaurants that need people to eat out as opposed to cooking at home or for retailers that offer goods whose purchase can be foregone without much of a detriment to an individual’s lifestyle.Powershares Dynamic Leisure and Entertainment (PEJ) is an ETF that holds stocks such as Carnival Corp (CCL),Darden Restaurants (DRI), Cheesecake Factory (CAKE) and Starbucks (SBUX). From a low of $6.15 in November 2008 this ETF has just about doubled and trades around $12. Call me naïve, but based on the evidence of anincreasing and perhaps prolonged consumer retrenchment, the recent appreciation of this stock seems a bit out of line with the fundamental realities. Or how about Powershares Dynamic Consumer Discretionary (PEZ)? Betting oncompanies such as Ralph Lauren (RL), Bed Bath and Beyond (BBBY) and Gap (GPS), this ETF has rallied from alow of $11.79 in March and now trades at more than $18. This is despite the fact that retail sales numbers continueto be absolutely terrible and the number of analysts voicing concerns about the upcoming holiday shopping season isa bit startling.Therefore, for investors looking to profit from the consumer being increasingly tapped out, there are a number of options. Here are a few that make sense but of course involve the risk of the thesis being wrong or for the market toremain exuberant and disconnected from the fundamentals for longer than anticipated. Keep in mind these are justsome suggestions presented in order to stimulate further thought.
SZK is the Proshares Ultra Short Consumer goods inverse ETF. It is levered in that it seeks “dailyinvestment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Consumer Goods index.
The problems with levered ETFs are welldocumented so beware of the possibility that the returns will not track twice the inverse of the index over longer periods of time. Having said that, from a high of over $125 in November 2008 the stock is tradingnot much above its 52 week low of $51. This ETF has been a casualty of the recovery trade and if an whenthe recovery peters out, this one could explode to the upside.
For investors who are inclined to short individual stocks, I would look for companies that offer productsthat are very discretionary in that cash-strapped and over-levered people can live easily without their goods.Specifically, a company such as Pool Corp (POOL) that has more than doubled off of its 52 week low could be compelling on the short side. I know the company derives a good deal of revenue from sales of poolmaintenance supplies but it is easy to imagine homeowners and builders not installing many new pools for years to come and cutting back on maintenance expenses. Or what about ATV and snowmobile supplier