Confidence Has Peaked!

06/30/09 12:30PM EDT

"Confidence has peaked!"    
 Early Look - 6/12/09

 On 6/12, I wrote the Early Look for Keith and the title was CONFIDENCE.  Our call on consumer confidence is a very important call for Research Edge, given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did (see chart below). As always, what matters most to our macro model is what happens on the margin (red circle on the chart represents the 1st sequential deceleration).

Today, the Conference Board Consumer Confidence Index in June now stands at 49.3, down from 54.8 in May.  Most Economists surveyed had projected confidence would be virtually unchanged at 55.0 or slightly better.

Coming into today's confidence reading, we are short both Consumer Staples (XLP) and Consumer Discretionary (XLY) - the only time in 2009 that we have been short both ETF's.  The underperformance in consumer related names is pronounced, despite yesterday's move.  The Consumer Discretionary (XLY) has been underperforming on an absolute basis for the past month, and is down 0.7% over the past week while the S&P 500 is up 2.9%.   We have been citing the continued job losses, the increase in interest rates and higher gas prices as three reasons for the underperformance, and the consumer confidence number today is the river card.  

The decline in confidence is suggesting only the obvious, the reality that we are not in a depression, but the "Great" recession.  The stock market is up significantly from the lows, lessening consumers' pain, but an unemployment rate that is headed to 10% or higher will definitely continue to cause some angst. 

Howard Penney

Managing Director

Confidence Has Peaked! - Confidence2

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