Sherwin Williams: Short Potential

Each dollar oil goes up, the more the consumer led "green shoot" recovery dies on the vine. If you believed it in the first place. All these consumer discretionary stocks are continuing to suffer... we've noted their weakness for a few weeks.

I asked about 3 weeks ago when does the conversation with higher bond yields turn from 'nascent signs of recovery' to 'uh oh'. That has happened in the past week. I now ask the same exact question for higher oil prices. We can giggle all we want as oil stocks rocket upward and market participants 'bank coin', but there are implications in the real economy. This whole recovery thesis is based on low interest rates and low energy prices so a debilitated consumer can go back to his high spending ways. That's how a country 70% dependent on shopping recovers.

Maybe we are headed back to the market of 1st half 2008 where everything suffered except commodities. Except this time the economy will be in far worse shape - if indeed these commodity prices are "correct" get ready for the 1970s redux folks... except without any wage bargaining power. We've been debating deflation v inflation --- maybe it's more precise than that; inflation in some places, deflation in others. Clearly hard assets are benefiting from paper printing across the globe.

I looked at any number of charts - there are many in the consumer discretionary space - I chose Sherwin Williams (SHW) because it broke below the 50 day moving average today and has a "gap" to fill. Black & Decker (BDK), Harley Davidson (HOG) and Royal Caribbean (RCL) are also charts ready to fall over - I might enter them as well. I listed a handful of others I looked at below it...


I am shorting with a 3% stake around $52.50.

Other candidates for "green shoot" recovery....

Please note that unlike a month ago when durable goods came in "better than expected" (only to be revised down 30 days later - i.e. today) Whirpool (WHR) did not skyrocket. P.S. notice how almost every government report is now revised downward 30 days later? i.e. give a pleasant number at first to get people excited than revise down 30 days later when no one notices... just a grassy knoll observation.



Disclosure: Short Sherwin Williams in fund; no personal position

Comments

[The Hammer:]

Your thesis makes alot of sense. The consumer is toast. Wages are flat and have been flat to down for several years. Most of the increase of the past decade has been to benefits which is included in wages. You can't spend benefits.
Who the heck is going to spend 18k for a hog?
Many of these stocks have had huge moves off the March 9 lows. To much optimism built in to these stock rallies. In addition I think this short term consumer confidence boost will be short lived. People will realize that our country is not going to rebound fast and that the economy must adjust to the new realities. No more free Housing ATM to spend and that one must live within ones income. Thus lower level of consumption going forward.

May 29 08:51 AM

[2houndz:]

I agree with this analysis and with The Hammer. However, I'll sit on the sidelines with position plays until the Fed (or someone) stops propping this market up. There is good price action for daytrading, but this does not look like a freely traded market to me.

May 29 10:35 AM

[TraderMark:]

I am very bearish on the consumer still. Increases in wealth via wages were replaced with increases in wealth via asset appreciation in the 00s. Even using govt understated inflation figures, inflation adjusted wages were flat the whole decade. Now balance sheets have been destroyed and even with rates at all time lows, "affordability" at all time highs things like homes are not even selling at year ago levels.

Remember people get their tax refunds this time of year and we've been bonked over the head to believe the stock market is some "oracle" like thing that tells us if the economy is good or bad. And many people are refinancing and getting one last gasp at house ATM. Reality strikes later in the year... this is going to be a new state of normal ...

2houndz it is hard to short anything now as there is always a 'bid' almost every morning in premarket (futures up nearly every day) and each time we look like we are going to break a technical average 'the bid' comes back.


On May 29 08:51 AM The Hammer wrote:

> Your thesis makes alot of sense. The consumer is toast. Wages are
> flat and have been flat to down for several years. Most of the increase
> of the past decade has been to benefits which is included in wages.
> You can't spend benefits.
> Who the heck is going to spend 18k for a hog?
> Many of these stocks have had huge moves off the March 9 lows. To
> much optimism built in to these stock rallies. In addition I think
> this short term consumer confidence boost will be short lived. People
> will realize that our country is not going to rebound fast and that
> the economy must adjust to the new realities. No more free Housing
> ATM to spend and that one must live within ones income. Thus lower
> level of consumption going forward.

May 29 02:53 PM