Common Cents for January 5, 2018

January 5, 2018, by John Norris

Section I

Everyone knows the old adage: “the more things change, the more they stay the same.” This was particularly true in the markets this week, as stocks just kept on climbing after we changed the calendar on the wall. 2017? 2018? What difference does a man-made concept like a calendar mean when there is money to be made?

To be sure, there is nothing in the recent economic data to suggest anything other than continued economic growth. Intuitively, this bodes well for corporate profits and, therefore, stock prices. Shoot, I feel like a broken record; however, it is what it is.

This morning, the Bureau of Labor Statistics (BLS) released the Employment Situation report for December 2017. I will cut to the quick: it was good enough to keep the party going a little while longer. While far from the best jobs report I have read, it was still pretty decent. The economy created 141K net, new payroll jobs; the Unemployment Rate stayed at 4.1%, and the Employment to Population ratio remained above 60%. These things bode reasonably for consumer expenditures, which make up the largest part of the Gross Domestic Product (GDP) equation. In so many words, it was more of the same.

If there was ONE interesting thing in the report, it was: retail employment was weak (on a seasonally adjusted basis) during December. Intuitively, this doesn’t make any sense during the holiday shopping season. However, the hardest hit segment within retail was/were ‘General merchandise stores.’ Hiring here was much less than the historical average for the month. Hmm. Intuitively, that ALSO makes sense, as consumers are buying more stuff online and in certain special stores.

Combined, you can conclude bricks & mortar retailers just aren’t feeling the love/profit enough to hire a bunch of folks….and so it continues.

Yesterday, I found myself approaching Clanton, Alabama, headed north on I-65 around lunchtime. So, I got off at the exit, and crossed back over the interstate. I passed the Burger King, and turned into the parking lot at the New China Buffet. No, this wasn’t the first time I had, um, dined there. It won’t be the last either.

You see, I like Chinese food, a lot, and I don’t much care for fast food burger joints. A Chinese buffet allows me to get up & down and in & out in about the same amount of time as eating in Whataburger for only slightly more money. So, while the New China Buffet in Clanton, Alabama, isn’t the best food (or healthiest) I will ever eat, I find it a lot more satisfying than the #2 extra value meal at McBurgerWorld.

In case you didn’t know it, the ownership of these small town Chinese restaurants changes hands relatively frequently. The cooks in the back rotate out even more. As a result, the experience at the buffet in some burg for the highway traveler might be completely different from visit to visit. Such was the case yesterday.

I will stop way short of saying what I had was worthy of a Michelin star, however, I will tell you this: the food at New China Buffet in Clanton has improved dramatically, as has the service. Now, buffet food, regardless of cuisine, is ordinarily average at best; it gets the job done relatively efficiently and inexpensively. Yesterday, the place had upped its game to the rarefied air of ‘pretty good’ and ‘much better than you would expect.’

Believe it or not, this has a point.

As I was reading this morning’s labor report, I couldn’t help but make the analogy in my mind to a buffet. The numbers were much like steaming portions of General’s chicken on a steamtable somewhere, and virtually indistinguishable from any number of previous monthly reports. The same could be said of just about any economic release. I got the feeling I had already seen this report; that the folks in the ether who put out the economic releases have forgotten to turn the page or flip the record or something. It all feels vaguely familiar.

My comments about the New China Buffet aside, let me ask you this: what do pretty much all Chinese buffets have in common? Perhaps a feeling of déjà vu? Like you have been to a particular one when you haven’t? That they are all ‘pretty good if you like that type of thing’? That you could close your eyes in Clanton and imagine being in Athens or Greenville? That the more they change, the more they stay the same? Yeah, that about sums it up.

This might sound a little crazy, but what is concerning about the US economy is there doesn’t appear to be anything to be seriously concerned about, in aggregate. There might be a question mark here or there, but, where the rubber meets the road, there isn’t a good reason why ‘this’ can’t last a little while longer yet…and it has already lasted a pretty long time.

In the end, this year has started where the last one left off. The economy is hitting on enough cylinders and investors are pretty sanguine about things. It feels comfortable and familiar, kind of a like a, well, you know.

 

Section II

While I can’t forecast a repeat of 2017, although it would be great, let me give you a few comments I gave a client this morning:

  • There is nothing in the data to suggest either a sharp, sustainable spike in overall economic activity or a meaningful downturn. Everything points to continued reasonable, if unspectacular, GDP growth. If you have to budget a number, throw 2.50-2.75% into your equation. This type of growth coupled with a 2.2% CPI and a 2.0% dividend yield would suggest a market return of around 7% or so.
  • Last year’s acceleration in earnings was in large part due to a decline in the US dollar relative to other major trading currencies. This allowed large, multinational corporations to translate their foreign earnings back into a larger amount of US dollars, the reporting unit. As such, earnings (and therefore earnings per share) last year were augmented through GAAP accounting. As I type, it is extremely hard to forecast another year of US dollar weakness to that degree or magnitude.
  • The reduction in the corporate tax rate will certainly help EPS in 2018, but it remains to be seen just how much of that has already been ‘built into’ stock prices and valuations. Right now, that is the biggest wildcard I see out there.
  • The end result is: we are telling clients to expect positive returns this year, but more in keeping with a 7-9% domestic equity return. Unless we start lobbing missiles at Asia or doing something else really stupid, this would be my over/under. IF you were betting me a beer, I would take the over as I type.

 

Have a great weekend.