Freeze(r)-Frame

VIPs

• Domestic chest freezer shipments catapulted to 883,000 in Q4 2020 before leveling off in Q1 2021, vs. a long-run rate of 296,000 since 1996; these shipments have a negative correlation with large household durable buying conditions, which have grown tighter post-pandemic

• As freezer shipments ebbed with the vaccine rollout, the insider transactions ratio has spiked as re-opening brings whispers of monetary tightening; insiders are keenly aware that, at 37.4, the Shiller CAPE ratio is within just 6.8 points of its record high of 44.2 hit last December

• The latest run of PCE durable goods inflation has been unusual vis-à-vis the last 25 years of deflation; expect this part of the inflation narrative to fade as the year unfolds, as consumers rotate away from retail spending on goods after a year of spending on household durables

Strike while the iron is hot. That describes Boston-based J. Geils Band’s second song off the 1982 number one album Freeze-Frame. After “Centerfold” topped Billboard’s Hot 100, “Freeze-Frame” was the next single released at the band’s peak popularity. Thirty-nine years ago this month, the second straight million-selling Gold hit peaked at No. 4. Written by lead singer Peter Wolf and keyboardist Seth Justman, the former delivered energy and swagger while the latter was the creative engine, innovating with various keyboard sounds. The electronic black-and-white keys’ role set the stage for the traction the band couldn’t gain in the 1970s. Newfound fame catapulted the group from intimate clubs to sold-out large arenas. Eventually, they opened for The Rolling Stones. The burst to stardom was sudden, and few outside Boston knew that the band had been around since 1967.

Speaking of sudden bursts, the COVID-19 shock generated spikes in demand for certain products at the pandemic’s onset that led to immediate shortages. March 2020’s Institute for Supply Management (ISM) Manufacturing and Services Reports on Business flagged commodities in short supply including cleaning wipes, disinfectants, hand sanitizer, paper towels, personal protective equipment gloves and masks and, of course, toilet paper.

Since then, shortages have become a mainstay of the global supply chain, rotating through different industries based on consumer behavior’s evolution. Two months ago, the February ISM Services survey noted a dearth of ammunition, COVID-19 vaccines and shipping containers as well as appliances and refrigerators.

Freezer frame. One of the appliances not on ISM’s list this year: freezers. In COVID’s early days, homeowners with the space to store and stockpile food caused a run on chest freezers. Anecdatally, QI’s Dr. Gates was in the market to procure one in the midst of the panic. In a matter of days, the local appliance store’s supply chain went from normal to empty with no known restocking date. A detour to Home Depot as a Plan B required paying through the nose before a delivery date can be scheduled. That worked out…not so well. The home improvement giant circled back shortly thereafter with the news that the product was no longer available.

The sheer level of hysteria among investors might suggest otherwise. But the reality is, supply chains always catch up. The Association of Home Appliance Manufacturers revealed domestic shipments for chest freezers rocketing to never-before-seen heights. For perspective, since 1996, the long-term pre-COVID average for chest freezer shipments was 289,000. In the four quarters that comprised 2020, shipments sequentially rose from 183,000 to 379,000 to 640,000 to an all-time high of 883,000. A normalization to 459,000 began in the 2021’s first quarter.

Today’s left chart illustrates the post-COVID quarters only against the long-run trend and juxtaposes it against insider selling in the equity market. It’s no coincidence that the vaccine rollout and a cresting in chest freezer shipments occurred simultaneously in the winter quarter. Being inoculated is a green light not just to venture outdoors but to eat out, an essential step to achieve a full reopening. As the economy tracks that path, financial conditions that are the easiest in the history of mankind would tighten, an unwelcome development for stock investors.

Insiders are also keen to the valuation curve. They see that at 37.4, Shiller CAPE (cyclically adjusted price earnings ratio) is within 6.8 points of its December record high of 44.2. Insiders know they are proverbially “selling the news,” which is equally evident in Americans not needing to hunker down any longer.

The rub is no one can definitively quantify what “venturing out” looks like because of the jaggedness of retail sales around stimulus check disbursement. A peak in freezer shipments, as in a reduction in at-home kitchen operating hours, qualifies. In the ‘something-funny-happened-on-the-way-to-the-forum’ department, the long-term trend in freezer shipments revealed a counter cyclical relationship with consumer buying conditions for large household durables (right chart) as conveyed by the University of Michigan. It wasn’t the moonshot in 2020 (green line), it was the rising tide in the last two recessions as well that begs the question: “Is this more than just fallout from COVID?”

An inverse association between the green line and yellow bars has been consistent over time. For the whole timeframe illustrated, from 1997 to present, the correlation was -.42. From 2010 to present day, it was -.61. Since 2016, it became even tighter at -.73, and hit peak prominence post-pandemic.

Freezers no longer hot. Late last week, QI friend and housing guru Ivy Zelman shifted her bullish call on big box home improvement retailers, Home Depot (ticker HD) and Lowe’s (ticker LOW) from buy to hold. Her reasoning: “Although home improvement spending growth remains extraordinary and our 2021 forecasts are firmly ahead of printed sell-side expectations, we believe that investors have already adjusted. Furthermore, we remain concerned that lapping government stimulus and pandemic benefits will be challenging next year, which limits further relative valuation expansion.”

Take a picture, it lasts longer. Today’s snapshots speak to rotation away from retail spending on goods and it’s just the start of the process. The latest run of durable goods inflation of the PCE (personal consumption expenditures) variety has been unusual relative to the prior 25 years of deflation. The spending shift suggests that the run of goods inflation should not persist. This part of the inflation narrative should fade as the year unfolds.