“It rains on all of us during these tougher times, particularly with bigger ticket discretionary items.” said the CFO of Costco in last night’s earnings call. He noted particular weakness with consumer electronics and appliances.
On inflation he said this, “a little light at the end of the tunnel, but it’s still little. Recall last quarter, in fourth quarter, we estimated that y/o/y price inflation was about 8%. In the first quarter, we estimate the equivalent y/o/y inflation number in the range of 6% to 7%. Food and sundries is still up more than nonfoods, but overall, a little better level than a quarter ago for the company. And commodity costs are mostly coming down, whether it’s corn flour, sugar, and butter or even some things like steel. A few things are up, but overall, we’re seeing a little bit of a trend, but we’ll keep you posted.”
He said “good progress was made during the first quarter of this fiscal year” on inventories. We heard that from others and thus a lot of the discounting seen broadly to clear out the excesses has mostly run its course in some product lines.
And there is the always colorful Gary Friedman, the CEO of RH to inform us on the housing and home furnishing markets in his earnings call last nigh. “As noted in our previous shareholder letter, we expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve’s anticipated monetary policy and the cycling of record Covid driven sales and backlog reductions.”
“I mentioned at the start of this year that, in over two decades leading RH, I’ve never been more excited about our future, and I’ve never been more uncertain about the present. Although my uncertainty regarding the short term has expanded due to a complete collapse of the luxury housing market, my excitement for our long term opportunity has grown exponentially.”
“The housing industry is in a free fall. I think the NAR just reported that housing demand was down 37% in October. We’ve never – at least in my lifetime, I’ve never seen interest rates rise so quickly…And the luxury market went up faster and higher and the luxury housing market is going to go down faster and lower.”
“The Fed pumped so much money into the economy. They created inflation. They held interest rates at such low levels, they made it easy for people to buy homes. Now we’re on the other side of that. QT, interest rates are up. We’ve got inflation. Who’s seen this game before? Anybody on this phone, not unless you were in the market in 1975-1982. This is a whole new ball game that no one’s even seen.”
“So, it’s just a lot of uncertainty right now. But one thing I’m certain of, the housing market is collapsing at a level I haven’t seen since 2008. I haven’t seen this kind of drop since 2008. So go look at how far housing dropped in 2008 and 2009 because these numbers look just like that.”
These following comments are a bit off topic in terms of macro economic trends but highlights the entertainment too of Gary’s calls, “Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and, by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermes, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the brands want you to. We are not from their neighborhood, nor invited to their parties. We do have a deep understanding that our work has to be extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart, and as we continue our ascent the air gets thin and the odds become slim.”
Now with respect to the consumers now 2nd lowest savings rate (a flow stat rather than a stock one) going back to at least 1959 as seen for October, my good friend David Rosenberg said this in his piece yesterday, “It is absolutely incredible that through the first ten months of 2022, the household sector has tacked on nearly $130 billion of additional credit card debt – at 22% interest rates! – which is about double what it took on in all of 2021!”
I include this chart overlaying the 2s/10s spread in white and the price of oil in orange and you can see that when the inversion started to pick up steam in June, it correlated with the drop in oil as demand worries offset the supply ones. We remain bullish on oil stocks but there has been a clear discrepancy between energy prices and stock prices. Keep in mind though, energy stocks never assumed $100+ oil was going to hold anyway in terms of their valuations and embedded earnings assumptions.
Yesterday the Atlanta Fed released its November wage data and the overall ‘Growth Tracker’ saw a 6.4% y/o/y increase, no change from October. While many are quibbling about whether its peaked or not, or what this means for inflation, the pace is almost double the 3.4% average in the 20 years leading into Covid. It’s clear that we are in a new wage growth situation, something we now Powell is now keyed on but I again want to bifurcate the market between those jobs where people physically need to be on cite, they have a lot of leverage and those that are white collar, can do their jobs anywhere but are losing some leverage.
Wage growth for the ‘job switcher’ rose 8.1% y/o/y, up from 7.6% in October. This stat peaked in July at 8.5% but is still pretty robust. It averaged 3.7% growth in the 20 years leading into Covid. For the ‘job stayer’ was up 5.5% y/o/y vs the pre Covid average of 3.2%. That is up one tenth m/o/m. All this is another reason why profit margins will continue to deteriorate in 2023.
Atlanta Fed’s Wage Growth Tracker