Improved Sales Growth
An ongoing thesis in the past month has been that the consumer is bumping along the bottom in terms of RedBook same store sales growth. The consumer isn’t taking a tumble to the negatives. But spending growth isn’t going to go back to the mid to high single digits which is normalcy.
In the week of October 31st, RedBook same store sales growth was 3.2% which was up from 1.2% the week prior. That’s a nice increase. If there is another increase next week, we could be in a normal environment which would be great for the holiday shopping season. However, it's doubtful that will occur because COVID-19 cases appear to be ramping.
It’s possible this report means there was an increase in Halloween related spending, but that’s tough to judge because that’s only a small portion of spending. Obviously, there weren’t as many parties, but there was more ‘at home’ consumption of candy. It will be interesting to see if the holiday causes COVID-19 to spread. We might not be able to tell because cases are already rising.
One of the biggest narratives on Wall Street is that physical retail stores are dead. That’s not the case because some goods are too large to ship and some goods spoil too easily. For example, shipping a 2 by 4 or ice cream still isn’t efficient.
As you can see from the chart below, some retail employment categories have increased since the recession started. 80% of jobs lost in March and April in retail have been recovered which is better than the overall rate which is 52%.
The chart shows building materials and garden supply added about 10% to its employment. People worked on improving their house and garden instead of going on vacation. Food and beverage also added workers because people had to make their own food instead of going out to eat.
On the other hand, clothing and accessories have lost about a quarter of their workers. This is due to a combination of people needing less clothes because they are going out less and shifting to spending money online. The entire industry benefited from the fact that early on in this pandemic we realized shopping in stores isn’t that dangerous.
Oil Bull Thesis In 2 Charts
Energy bull thesis is pretty simple. You can worry about OPEC all you want, but recognize that without investment in oil production outside of OPEC, oil production will crater in the next few years. Banks haven’t been lending to energy companies for a couple years and the ESG focused stock market isn’t interested in the sector either. Ironically, this hatred leads to less investment in production which leads to a spike in prices.
It would be smart to invest in production now even though prices are low because we know prices will be higher in the future. This problem is even the biggest oil companies can’t afford to do so. Furthermore, companies like BP are trying to become green. Energy sector is doing so badly an oil company is pretending to be green.
As you can see from the chart above, this situation has led to massive declines in R&D and capex which will limit future supply. If oil prices were to spike to $60 next year, we wouldn’t see a spike in supply other than from OPEC for a few quarters.
Fracking wells have very quick decline rates. Fracking won’t cause the same spike in supply that it did in the 2010s because investors only want free cash flow from energy firms. They have been burned too badly by the sector in the past, so it has changed its ways via market forces.
With demand so low, OPEC easily has the ability to squash prices. However, in the long term when demand comes back fully and exhibits growth, it won’t be able to keep up. Investors forget that without fracking, oil would be in the $100s.
As you can see from the chart above, developed markets haven’t increased their demand for oil since the financial crisis due to low growth and higher efficiency. Demand will recover from this recession though. Growth is coming from emerging markets such as China and India.
Interestingly, the bullish thesis for energy in the late 2000s ended up bearing fruit as we have seen an explosion in demand for the commodity. Fracking caused the bulls to go wrong because it flooded the market with supply; this didn’t allow frackers to make a profit. That won’t be the case in the next cycle. Investors have no appetite for such shenanigans.
Europe Looks Weak
An apparent peak in European cases is in for most countries. The problem is at what cost? As you can see from the chart below, the economic recovery in Germany, France, Spain, and Italy has reversed in the past month. 7 day moving average of cases in the U.K. peaked about a week ago.
Spain is closing in on a peak now that it has locked down. The Netherlands peaked a week ago without a lockdown. Sweden doesn’t have a lockdown, but its case count is still exploding. Ireland’s case count peaked about 2 weeks ago.
Cases in the Czech Republic peaked after its lockdown. France looks to be in the process of peaking. Next question is when these countries open back up. Markets will probably price in a reopening now that cases have mostly peaked. We can see a partial reopening in December if leaders act smartly. The most cautious leaders will keep their countries closed until the end of the winter.
When Will COVID-19 Peak In America?
We will likely see a peak in COVID-19 cases in mid-November in America because the first hotspots are seeing peaks. That means hospitalization still will increase for another 3-4 weeks.
As you can see from the chart below, this wave has come on slower than the prior 2. So far, the peak is lower, but it can easily get above 55,000 in the next few weeks before the wave ends.
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