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For the times they are a-changin'.
Bob Dylan

The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 

How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!

All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 

Right now as I look at my screen the S&P 500 is at 839 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.

Howard Penney