One of the more interesting issues facing investors is what I call the Bifurcation Quandry: It seems where ever you look, everything has become a duality:
• Retail? High end good, low end poor;
• Advertising? US slowing, Global booming;
• Income? Upper 10% great, most of the rest mediocre;
• Economies? Asia, Europe Strong, US much less so.
Even the ISM number yesterday was helped dramatically by those sectors that are exporters to Asia and European corporate customers.
In the U.S., those firms that have been relying on the consumer have been feeling the pressure. Consider the revenue, earnings and guidance we heard from the following:
• Best Buy: Wall Street took Best Buy to task for missing its first-quarter
earnings forecasts and lowered 2007 guidance. "There is very little to
be encouraged about in the quarter," wrote Bank of America analyst David Strasser in a research note.
• Circuit City: Electronics retailer Circuit City, which earlier this year cut jobs and restructured in an effort to keep up with competitors, reported a $54.6 million quarterly loss Wednesday and withdrew its financial guidance for fiscal 2008.
• Starbucks: Starbucks Corp.’s chief financial officer on Thursday said meeting the high end of the
coffee shop chain’s 2007 earnings forecast will be "very challenging"
due to rising dairy costs and slowing sales growth in its U.S.
business, sending shares to a 20-month low.
• Home Depot: Home Depot reported sales at
established stores fell 7.6 percent.
• Target: expects same-store sales for June
to increase near the lower end of its planned range of 3% to 5%,
according to a prerecorded conference call.
• Bed, Bath & Beyond: earlier this month offered what was reportedly
its first-ever warning that quarterly results might be lower than
• Federal Express: FedEx earnings increased 7.4% due to increased traffic in the UK, China and India. However, the company said earnings might decline this quarter due to US economic weakness. FedEx validates the theme that the US economy is slowing while other countries’ economies remain firm.
Then there was the Durable Goods number, The WSJ reported:
"Orders for durable goods — big-ticket items meant to
last three years or more — fell a seasonally adjusted 2.8% in May
after a revised 1.1% increase in April, the Commerce Department said.
The May decline was led by a 22.7% drop in aircraft orders.
But even excluding the volatile aircraft sector and
other parts of the transportation industry, orders were weak, falling
1% after gains of 2.5% in April and 1.6% in March. Orders for capital
goods excluding aircraft and defense, a closely watched barometer of
business investment, fell 3%, tempering the widely held notion that
business spending is accelerating."
Lastly, the Advertising outlook is weakening in US: “Advertising forecasters have downgraded prospects for the US, challenging expectations of a boost to the marketing industry from the presidential election race and the 2008 Beijing summer Olympics.
Advertising forecasters have downgraded prospects for the US, challenging expectations of a boost to the marketing industry from the presidential election race and the 2008 Beijing summer Olympics.
The US is the world’s biggest advertising market and the key profit territory for the world’s two largest marketing services groups – Omnicom of the US and UK-listed WPP.
Worldwide, the industry would normally expect a jump in expenditure during a period which includes the run up to the US presidential elections, the Euro 2008 football championships and the summer Olympics in China.
The current downgrades for the US contrast with upbeat assessments from Zenith and others of prospects for global advertising, especially internet marketing.
This explains why I have been in favor of any of the firms that are
major exporters — the big cap, multi-nationals not only have the weak
US dollar helping them, but they also have the robust Asian and
European demand as a wind at their backs.
UPDATE 3: July 8, 2007 8:02am
I see Marketwatch’s Rex Nutting has a good preview of this weeks retail related data:
Retail sales sputtered in June
Investors who’ve been worried about U.S. economic growth being too strong will get a reality check in the coming week from the retail sales figures for June.
Retail sales are projected to fall 0.3% in June in nominal terms, with weaker spending on vehicles, gasoline, building materials and clothing, according to a survey of economists conducted by MarketWatch. See Economic Calendar.
Sales increased at a 16-month high of 1.4% in May, a figure that some economists expect to be revised down.
The June retail sales report on Friday is the highlight of relatively light week for economic data.
UPDATE 2: July 2, 2007 9:22am
Peter Bookvaar tells us:
Two weekly data points out this morning highlight a still
sluggish retail sales environment. The Int’l Council of Shopping Centers (ICSA)
lowered its June sales expectations to a 1.5-2% range from 2%. They said in its
release, "over the course of the fiscal month, the June sales pattern has
been slow, choppy and uncertain. Moreover, the breadth of that experience
seemingly is widening among retailers." Johnson Redbook today said sales
fell 1.1% month to date for the week ended June 30th and are up 1.6% month to
date y/o/y, a 2 year low if you take out the weather induced weakness in late
May, early April.
UPDATE: July 2, 2007 8:32am
I see Calcualted Risk has addressed a similar issue: The Q2 Consumer Slowdown
Durable-Goods Orders Tumble 2.8%
WSJ, June 27, 2007 9:09 a.m.
U.S. Economy: Spending Increases Less Than Forecast
Bloomberg, June 29 2007
Advertising outlook weakens in US
FT, July 2 2007 12:13