PowerTrend Brief: Feeling the Impact of Rising Gas Prices at the Pump and in the Pocket

Over the last few weeks, there has been a growing concern about the direction of gas prices and what that means for the consumer and related spending. Over the holiday weekend, Iran cut exports to Britain and France, vaulting U.S. crude for April delivery nearly 2% to $105.08 per barrel, a nine-month high. This advance has reignited concerns over gas prices, which are already 13% higher vs. year ago levels, according to data from AAA’s Daily Fuel Gauge Report. Many a TV pundit dished on prospects for $4 per gallon gas while the stock market was closed Monday for President’s Day, with some predicting $5 per gallon by summer, when gas switches over to more costly blends that cause less smog. In comparison, consumers tend to drive less in the winter months.

Last year, gas prices averaged $3.50 per gallon and the typical American household spent $4,155 filling up at the pump, or 8.4% of what the median family made in 2011. That 8.4% was the highest percentage since 1981 and compares to 4.8% in 2009, according to the U.S. Department of Labor. In early February, before current tension with Iran mounted, the U.S. Energy Information Administration (EIA) expected gas prices to average $3.55 per gallon this year before rising to $3.59 in 2013. Considering the national average for gas is currently $3.52 per gallon, according to EIA data, odds are that the agency will raise its forecast for gas prices when it releases its next update on March 6.

No matter how you slice it, rising gas prices will have a direct impact on consumer wallets at the pump, as well as indirectly as prices for goods and services, including food, move higher in the coming months. With unemployment still high and wage growth constrained, that situation means consumers once again will be looking for ways to stretch their spending dollars. In 2008 and 2009, increasingly frugal consumers opted to eat at home to balance their budgets. As gas prices and food prices likely rise in the coming months, I suspect we once again will see consumers looking for ways to make ends meet and that likely means reduced demand for eating out, particularly for casual dining restaurants such as Red Robin Gourmet Burgers, The Cheesecake Factory, P.F. Chang’s China Bistro and more.

It’s no secret that there is a limited supply of oil. While alternatives exist, near-term moves in this scarce resource suggest The Cash Strapped Consumer PowerTrend will be with us for some time to come.

Rails and Autos Set for New Demand, New Solutions

Investors can fall into a number of camps, two of which include growth or value. The reality is that those labels are misnomers, since most seasoned investors look for well- positioned companies that are poised to grow their revenues, expand their margins and deliver accelerated earnings per share (EPS) growth. That mindset means that demand for new products and services, as well as replacement demand associated with cyclical and capital goods, are all fair game. What makes this situation even better is when new solutions — more efficient materials and technologies — make replacing products even more effective and efficient than previous ones. That is the cornerstone of my New Demand, New Solutions PowerTrend.

For the last several months, railcar manufacturers have benefitted from rebounding freight car demand. Part of the resurgence in freight car demand has been due to an improving domestic manufacturing economy, as well as the need to replace aging freight cars with more fuel efficient ones. The classic example is lighter aluminum coal cars that have been replacing heavier steel coal cars. While the average age of the fleet stands near 25 years, more than 70,000 freight cars have been in service for more than 31 years, according to Rail Solutions. Combine the prospects for significantly higher gas prices this year and it looks to me like railroad utilization levels will continue to climb and drive additional demand for new freight cars.

But the rail industry is not the only one that is facing an aging install base. According to auto data service firm Polk, the average age of cars and light trucks on the road in the United States increased again in 2011 to reach 10.8 years. The average age of 10.8 years for vehicles on the road not only marked the highest level in more than 15 years but is a new record since data first was collected. This achievement is partly explained by new vehicle owners keeping cars and trucks longer than they have in the past. New vehicle owners kept their vehicles an average of 71.4 months, the longest in the eight years Polk has done the survey, and nearly two years longer than the average life of ownership in 2003. For those wondering, the trend was similar for used cars and trucks, which consumers kept an average of 49.9 months, also a record, and up from 32.2 months in early 2003.

Recent data confirms the domestic auto industry is rebounding and the latest Kelley Blue Book Market Report study forecasts that 2012 new-vehicle sales will surpass 13.3 million units, up from 12.8 million in 2011. This forecast is less bullish than the 14 million units AutoNation CEO Mike Jackson expects the industry to sell this year, but bodes well for better volumes year over year.

Factor in the revised thinking that calls for significantly higher gas prices this year, which will force consumers to tighten their belts and choose wisely when parting with their disposable dollars, racking up fresh debt on their credit cards or auto loans, and it bodes well for a faster transition toward hybrid or electric cars. The recent J.D. Power and Associates 2011 US Green Automotive Study indicates consumers indeed are far more open to green cars — including hybrids, clean diesel, plug-in hybrids and pure electric cars. For the next few years, J.D. Powers expects a four-fold increase in the green car units, compared to 2010. That forecast equates to green cars accounting for nearly 10% of vehicle sales by 2016. As I have said before, I tend to eschew the actual numbers associated with such forecasts, but directionally the trend is indeed favorable. From an ecosystem perspective, that forecast bodes well for auto suppliers that offer hybrid or electric drive train solutions. It also is good news for specialty materials companies that offer products used in manufacturing magnets and batteries for hybrid or electric cars.

Industry Conference to Tout Cashless Consumption PowerTrend Next Week

Most investors look for a number of things as they hone in on a potential investment or check in with an existing one. These considerations can come in many forms from a variety of places. Ideas and catalysts are two of those but another can be far more valuable during periods of uncertainty about the overall market, or about a particular company and its shares. What I’m talking about is confirming data points. While there is no short supply of these confirming signals, there are some obvious ones, as well.

One such example is the Mobile World Congress, which is scheduled for next week (Feb. 27-March 1). The Mobile World Congress is the biggest industry trade show to focus in on all-things mobile, with an annual attendance near 60,000 people. With a smattering of keynote talks from executives of ARM Holdings, Best Buy, Cisco Systems, Citigroup and Electronic Arts, not to mention more familiar mobile names such as AT&T, Sprint-Nextel and Telecom Italia, to name a few, the news flow and announcements are bound to be hot and heavy. Normally, we tend to hear about a number of new devices but this year, I will be tuning in with both ears given the show’s theme — Redefining Mobile.

Based on some of the keynotes mentioned above, as well as a number of others, some of the central topics from this year’s event likely will be mobile payments, mobile health, bandwidth and network optimization, as well as the connected home and the connected car. Of those, the one that I will be watching most intently in the coming days is mobile payments, since it touches my Cashless Consumption PowerTrend. In short, the mobile evolution that has transformed the way we buy music, watch TV and movies, communicate and more is on the cusp of changing how we pay, borrow or loan money, as well as manage our accounts and underlying assets. As MasterCard recently noted, “we’re moving toward a world beyond plastic, where consumers will shop and pay in a way that best fits their needs and lifestyles with a simple tap, click or touch in-store, online or on a mobile device.”

That prediction certainly jives with the findings of a recent Javelin Strategy & Research survey that found consumers believe direct carrier-billed mobile payments are more secure than using credit and debit cards for online digital purchases. With a number of key players in the Cashless Consumption ecosystem, including Visa, Pay Pal, Google’s Google Wallet, as well as ISIS, a mobile payment network joint venture formed by AT&T, T-Mobile and Verizon, at this year’s Mobile World Congress, odds are we are going to hear a lot about what the world of mobile payments will look like in the coming year. For those who are unsure of this PowerTrend, I would note that more than 30 merchants and retailers already are using Google Wallet. Those companies include American Eagle, Macy’s, Walgreens and Sunoco gas stations.

I’ll have more on this next week as Mobile World Congress 2012 unfolds.

Next Week
This week was not only a shortened trading week, given the federal holiday on Monday, but it also was a relatively sedate one in terms of economic data. The data we did hear confirmed that the housing market continues to struggle and that it will likely be some time until we see a meaningful rebound. The sparse economic releases will pick up steam next week as we get the latest take on the manufacturing economy, personal income and spending, not to mention the Fed’s latest view via the Beige Book for February. More specifically, here’s what I’ll be tracking next week:

Monday, Feb. 27
Mobile World Congress 2012
Pending Home Sales (January)
Armstrong World Industries (AWI)
Hovnanian Enterprises (HOV)
Lowes Companies (LOW)
Sotheby’s (BID)

Tuesday, Feb. 28
Mobile World Congress 2012
Durable Orders (January)
Consumer Confidence (February)
Autozone (AZO)
Dominos Pizza (DPZ)
Dreamworks Animation (DWA)
Office Depot (ODP)
Universal Display (PANL)

Wednesday, Feb. 29
Mobile World Congress 2012
MBA Mortgage Purchase Index
GDP – Second Estimate (4Q 2011)
Chicago Purchasing Managers Index (February)
Federal Reserve Beige Book (February)
Carter’s Inc. (CRI)
Costco Wholesale (COST)
Joy Global (JOY)
PetSmart (PETM)
Sodastream International (SODA)
Spreadtrum Communications (SPRD)

Thursday, March 1
Mobile World Congress 2012
Weekly Initial Jobless Claims
Personal Income & Spending (January)
Construction Spending (January)
Institute for Supply Management Manufacturing Index (February)
Authentec (AUTH)
Big Lots (BIG)
Foot Locker (FL)
Kroger Co. (KR)
Motricity Inc. (MOTR)

Sincerely,

Chris Versace
Editor, PowerTrend Brief

P.S.Please join me for the Las Vegas Money Show, May 14-17, at Caesar’s Palace. To register, call 1-800/970-4355 and mention priority code 026656 or go to ChrisVersace.lasvegasmoneyshow.com.