Now that there is a hint of war in the air again, with rumors that the U.S. may intervene directly in the Syrian civil war to battle the Sunni extremist group known as ISIS, the Pentagon contractors in the iShares Aerospace/Defense (ITA) exchange traded fund are roaring back. If it weren’t for the persistent weakness of Boeing (BA), in fact, that fund — which performed so well last year — might be back at recent highs.
It had been worrisome that the jet-fighter, aircraft carrier and ammo makers were lollygagging earlier in the summer despite war drums beating. The lack of response by Lockheed Martin (LMT), General Dynamics (GD), Raytheon (RTN) and Northrop Grumman (NOC) gave the appearance of a group that had been abandoned by bulls.
But now the world of warcraft is back in gear. The cavalry is here. Not saying that’s a good thing on a moral ground, but it helps many investors. They are all fairly cheap, and tend to do well at this time of year anyway. GD and LMT are the leaders; RTN is the laggard with the most catch-up to do; NOC is in the middle, and should follow its peers to new highs soon.
Smarter Consumers are a Drag on Retail
Cornerstone Macro analysts were out with a fascinating report this week that tries to explain why retail sales growth is stagnating despite the improvements in hiring and the economy. The short version is that consumers feel so burned by debt over the past 20 years that they are finally taking steps to reduce it in persistent ways.
CM analysts note that the New York Fed’s Household Debt and Credit Report shows that consumer debt fell at a $72 billion annual rate in the second quarter, following three quarters of modest debt growth. The decline was driven by a whopping $328 billion decline in mortgage debt. The analysts conclude that consumers in the current cycle are reluctant to amass debt and are increasingly sensitive to the cost of credit. As a share of disposable personal income, consumer debt has dropped to 89.7 percent, down from 115 percent just six years ago, as you can see in the chart below.
The CM analysts observe that since nominal retail sales in July were flat month over month and real sales (i.e. inflation adjusted) were down 0.1 percent, no one should look to the consumer as the driver of new growth for the U.S. economy. Household spending is being restrained by consumers’ reluctance to lower their savings rate and borrow as excessively as they did in the past.
The analysts note that during the last expansion, 2003-07, total consumer debt increased $1.079 trillion per year. So far in this expansion, consumer debt has declined $156 billion per year!
This downshift in borrowing is creating a lot of turmoil for many consumer-focused businesses, including old stalwarts like McDonald’s (MCD), Nike (NKE) and Best Buy (BBY), though some businesses that are especially service-oriented or have special niches are still doing well, such as Amazon.com (AMZN), Chipotle Mexican Grill (CMG) and Skechers (SKX).
Two other categories of strength: Autos, due to auto loans that are much lower than credit card loans, and furniture and home building/remodeling material. Apparently consumers are buying fewer homes and are instead fixing up the ones that they have. That’s bad for companies like Beazer Homes (BZH) but good for companies like Home Depot (HD).
The analysts conclude that the “smarter” consumer who is borrowing less and shopping for rates is here to stay, and will be a drag on lofty expectations for a retail sales pickup.
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P.S. This is still a great environment for tech investors as software, networks and chips remain the key routes for companies and countries to pull themselves forward efficiently and productively. And for some of my favorite recommendations you shouldn’t miss, I want to give you my report, New Technology Superstars for 2014.