2008-08-25 10:22:44.120 GMT
By Fabio Alves and Michael Tsang
Aug. 25 (Bloomberg) — Just because consumer stocks are
staging the biggest rally in five years doesn’t mean the economy
is about to recover.
As Lowe’s Cos., Wendy’s International Inc. and Starwood
Hotels & Resorts Worldwide Inc. led a 7.6 percent advance in
consumer stocks this month, the extra yield bond investors
demanded to own the industry’s debt rose to 2.5 percentage
points over U.S. Treasuries. Every time bondholders sought that
much compensation to guard against default, shares of retailers,
restaurants, and hotels slumped an average 16 percent, according
to data compiled by Bloomberg.
Standard Life Investments, Harvard University’s endowment
and hedge fund Appaloosa Management LP, which manage almost $300
billion, are avoiding the shares as Americans rein in spending
to cope with the highest unemployment rate in four years and
faster inflation. Profits at consumer discretionary companies
are forecast to be the worst since 2001, Bloomberg data show.
“It’s a rally that we think will inevitably roll over,”
said Andrew Milligan, the Edinburgh-based head of global
strategy at Standard Life Investments, which oversees about $242
billion. “Investor confidence has started to ease back and
earnings numbers have generally been negative. The credit side
just reinforces our downbeat views.”
Stocks Versus Bonds
Consumer shares have risen almost four times as fast as the
Standard & Poor’s 500 Index in August, sending the S&P 500
Consumer Discretionary Index toward its biggest monthly advance
since an 8.9 percent increase in October 2003. A 22 percent drop
in oil since its July peak and speculation the Federal Reserve
will hold off raising interest rates after seven cuts in the
past year improved prospects Americans will spend more. Consumer
stocks in the MSCI World Index are up 1.8 percent this month.
Futures on the S&P 500 lost 0.4 percent at 11:14 a.m. in
London as oil’s climb above $115 a barrel sent retailers lower.
This month’s gains in consumer stocks coincided with an
increase in the difference between yields of U.S. retailers’
bonds and those of government debt to 2.47 percentage points as
investors demanded more protection against the likelihood of
default, according to data from New York-based Merrill Lynch &
When the gap exceeded 245 basis points in 2000, 2002, 2005
and March of this year, the consumer discretionary gauge lost an
average of 16 percent over the same span, the data show. A basis
point is equal to 0.01 percentage point.
Shares of Mooresville, North Carolina-based Lowe’s, the
world’s second-largest home-improvement retailer, surged 22
percent this month as the extra yield investors demanded to own
the company’s 5.6 percent bond due in 2012 widened 23 basis
points over U.S. Treasuries.
`Voting With Bondholders’
That’s more than three times the average increase of A-
rated corporate bonds over the same period, Merrill’s data show.
The premium on Wendy’s 7 percent bond due in 2025 climbed
as much as 33 basis points above U.S. government debt this
month, almost triple the gain in spreads of similar BB-rated
debt. The Dublin, Ohio-based hamburger chain’s stock added 16
The disparity between the stock and bond markets comes as
analysts are forecasting the industry’s biggest full-year profit
decline since the last recession in 2001. Earnings at S&P 500
consumer-discretionary companies will drop 22.9 percent this
year, data compiled by Bloomberg show.
“I would be inclined to vote with the bondholders,” said
Jack Ablin, who oversees $65 billion as chief investment officer
at Harris Private Bank in Chicago. “They’re sensing there’s
still credit deterioration going on in the group.”
Lowe’s, Wendy’s and Starwood, the White Plains, New York-
based company that runs the Westin, St. Regis and W hotels, all
reported lower earnings for the second quarter. Industry profits
have dropped 54 percent on average, the highest on record for
Bloomberg data that started in 2001.
LPL Financial’s Jeffrey Kleintop expects consumer stocks
will continue to do well as profits decline less than analysts
estimate. More than 91 percent of the S&P 500 retailers that
have reported second-quarter results so far topped Wall Street’s
consensus forecast, data compiled by Bloomberg show.
“The outlook isn’t rosy, but certainly better than what
had been priced into those stocks,” Kleintop, the Boston-based
chief market strategist at LPL, which oversees $273 billion,
said in a Bloomberg Television interview.
Fed Rate Cuts
Consumer stocks in the U.S., where the Federal Reserve cut
its benchmark interest rate to 2 percent from 5.25 percent in
the past year, are outperforming the rest of the world. The MSCI
Brazil Consumer Discretionary Index lost 9.8 percent in August,
while retailers, automakers and electronics makers in the MSCI
Asia Pacific Index fell 2.3 percent.
To maintain the advantage, U.S. retailers will have to defy
an unemployment rate that rose to 5.7 percent last month and the
fastest inflation in 17 years. The economy, buffeted by the
biggest U.S. housing slump since the Great Depression and more
than $500 billion in bank losses, may grow 0.45 percent next
quarter, or about a third the annual rate of 1.2 percent
forecast this quarter, according to data compiled by Bloomberg.
“You only have so many dollars or francs or euros in your
pocket,” said Robert Weissenstein, who helps oversee $1.3
trillion as chief investment officer at Credit Suisse Private
Bank. It’s difficult to turn bullish “as long as you get mixed
to negatively biased jobs data,” he said from Tucson, Arizona.
Harvard’s $34.9 billion endowment, the biggest of any
university, sold its holdings in 79 of 92 consumer companies
including Lowe’s, Wendy’s and Starwood, during the second
quarter, the Boston-based college fund’s filing with the U.S.
Securities and Exchange Commission compiled by Bloomberg show.
Appaloosa, the Chatham, New Jersey-based hedge-fund firm
run by former Goldman Sachs Group Inc. bond trader David Tepper,
held 10.4 percent less in consumer stocks at the end of the
second quarter, partly after selling its 175,000 share stake in
Starwood, filings compiled by Bloomberg show. Appaloosa, which
owned equities valued at $3.1 billion as of June 30 and also
invests in bonds, has posted average annual returns of about 25
percent in its Palomino Fund since the beginning of 1995.
“The corporate bond market has sold off first, fastest,
and then equities follow after,” said Standard Life’s Milligan.
“What the credit markets are telling us is that we need to
still be cautious.”