MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY

Issues with employment, housing and policy-induced stock market volatility continue to weigh on economic growth and our overall prosperity.  Consumer confidence also is a problem, as current levels of confidence indices are more supportive of a recessionary environment than of recovery.  Retail sales figures released today certainly imply a healthier consumer in September than the confidence numbers do.  If more credence is lent to the sentiment picture, it would seem appropriate to assume that a slowing in spending from here is likely, which would support our bearish view on the economy.

 

MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY - umich sentiment oct

 

MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY - umich expectations

 

MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY - umich current

 

 

Today, the preliminary University of Michigan consumer sentiment index declined 1.9 points, with consumer expectations leading the way day (although both components declined).  The index came in at 57.5, compared with September’s 59.4.

 

As we have said repeatedly, the economic drivers of confidence remain very mixed, and we do not expect significant improvement any time soon.  The most pressing concern is continued labor market weakness, specifically the large number of discouraged workers that remain out of the labor force.  This is evident in the chart below, showing the labor force participation rate declining precipitously throughout recent years.  This week, jobless claims came in this at 404K (backing out the revision to last week's data, claims moved higher by 3K).

 

MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY - lfpr oct

 

MIXED MESSAGES ON CONSUMER SUSTAIN UNCERTAINTY - initial claims 1014

 

 

Our Financials Team continues to point out that the spread between claims and the S&P remains as wide as it's ever been in the last three years.  If claims move to the level implied by the S&P that would be roughly 475k.  Our Financials Team’s model indicates that a 475k claims level would be consistent with 0% GDP growth.

 

On the positive side, debt levels have been reduced substantially over the past two years and there are small signs that credit is very gradually becoming more available.  This, along with the help of the federal government, is helping the outlook for spending on the margin.

 

It appears from the data that consumer spending finished 3Q11 on a positive note. The Commerce Department reported that retail sales rose 1.1% in September, its largest monthly gain since February 2011.  While autos provided a boost to the overall figure, there was strength across the board, as the increase beat the Bloomberg consensus by 0.4%.  Non-auto retail sales rose 0.6%, a modest acceleration from August’s 0.5% (was revised up from 0.1% last month).

 

Despite the disappointing consumer confidence levels, retail sales data suggests that consumers are finding a way to finance consumption despite the weak job and income headwinds.  If savings are being sacrificed and this is a significant reason behind the strong numbers this month that clearly doesn’t bode well for the continuation of the improving consumption picture that we saw last month.  In the end, the data is prolonging an environment of uncertainty. 

 

Expectations are mounting for a “bazooka” bailout from Europe which, if less substantial than the market is hoping for, could be a catalyst to the downside.  Hope is not, after all, an investment process.

 

 

Howard Penney

Managing Director

 

 


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more