We have put together a slide deck that illustrates my outlook on the consumer.
The consumer's propensity to spend has exceeded expectations over the last nine months even as underlying fundamentals such as housing and confidence that have flat-lined. Income has improved somewhat, albeit artificially, while the jobs picture has been moving in the wrong direction for weeks now.
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The slow improvement in employment levels in the U.S. since 2009 has almost become ingrained in people's economic analysis. However, what many analysts seem to ignore is the established reversal in this trend that has been in place for much of 2011. Without initial claims declining to approximately 375k, according to Financials Sector Head Josh Steiner, we cannot expect material improvements in the unemployment rate. Despite a labor force participation rate at record lows, the unemployment rate has not meaningfully declined and even ticked up in March to 9%.
The consumer's appetite for credit is not what it used to be. Households are retrenching in order to build up savings and pay off debt. While the consumer is deleveraging at a slower rate than before, the year-over-year growth in revolving debt outstanding remains negative.
Spending data has been strong of late with PCE trending higher over the past nine months. However, a sharp increase in gas prices is negatively impacting consumer spending and S&P revenues. While temporarily reduced payroll tax withholding is buttressing income for now, wage income needs to pick up the slack in order to make the trend sustainable. Recent ISM manufacturing employment indices' data has pointed to a slowdown in growth.
Retail sales are showing signs of fragility as April retail sales recorded their slowest pace of growth this year as sales outside of gasoline stations increased a meager 0.2%. Higher energy prices are weighing on retail sales and chain store sales, according to recent releases.
Consumer confidence has been soft following an upward trajectory that began in 4Q10 abruptly ended with the March disappointment. In general, the rebound in consumer sentiment has been driven by expectations while current attitudes have remained depressed. In the absence of a pickup in wage income and hiring levels, expectations may decline. Small businesses' confidence levels are also low at present. Importantly, as the NFIB Small Business Optimism survey reveals, expectations among small businesses for economic improvement have been declining.
House prices have been an important metric for consumers but, of late, the impact of housing market jitters has not manifested itself strongly in consumer behavior. That said, we believe that it is early days in this regard, and the consumer is far from immune from the ongoing slide in property prices. Hedgeye's Financials team, in mid-2010, was out with a call for a decline in house prices of approximately 20% in 2011. The data continues to corroborate with that thesis, this morning's housing starts and permits numbers being the latest confirming data points. When this begins to matter for the market, the impact should be significant.
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POSITION: Short SPY
While it’s difficult to quantify how many people agree with our outside-of-consensus view of US Growth Slowing, we are certain that the percentage of people coming into our camp is rising.
Time and price tend to do that, particularly when the most immediate-term data points start to positively correlate with the most immediate-term price reaction.
DATA: This morning’s US Industrial Production print coming in FLAT (0.0%) sequentially for April (versus May) has the Industrial stocks getting slammed (XLI = -1.6% on the day as of 1PM EST), and people asking themselves if the “earnings” of cyclicals are indeed cyclical.
PRICE: Across our core 3 investment durations (TRADE, TREND, and TAIL), this is what Mr. Macro Market is telling me today:
- The long-term TAIL of resistance = 1377 remains intact (lower-long-term highs in the SP500 are no different than the Nikkei’s).
- The intermediate-term TREND line of support = 1319 is finally under siege.
- The immediate-term TRADE line of resistance (was support) = 1340 has people worried – and rightly so – May is a mess.
Provided that 1319 can hold for a few days, we’ll call this Drawdown Risk for what it has been – a -3.2% correction. If 1319 doesn’t hold, I think 1207 for the SP500 sometime this summer comes into play.
That would be a very different scenario than the sellside consensus view about US Growth and SP500 returns for 2011 - and that’s precisely why you should start thinking about it.
Remember, Big Government Intervention A) shortens economic cycles and B) amplifies market volatility.
Keith R. McCullough
Chief Executive Officer
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.52%
SHORT SIGNALS 78.68%