Consistent with our thesis, confidence among U.S. consumers fell more than the consensus forecast this past month, reflecting higher unemployment and higher gasoline prices.  The Reuters/University of Michigan preliminary index of consumer sentiment index for July came in at 64.6 compared the final reading of 70.8 for June (see chart below).  The consensus had been expecting decrease to a reading of about 70.0.


Currently consumers are focused on job security and, if they do have a job, how much it's going to cost to get back and forth to work.

 EYE ON CONFIDENCE - OR THE LACK THERE OF….. - HP mortage data.xlsx

Despite rising prices at the pump, the Michigan inflation survey saw fears of rising prices in the near term decline from last month's levels but longer term inflationary concerns increased marginally, something of a wash.   Meanwhile the current conditions survey declined from 73.2 last month to 70.4. The message from the consumer is clear, the economy may be bottoming, but it's also not really getting much better. 

We are currently positioned to express our belief that confidence has peaked for the intermediate term through short positions in Consumer Discretionary (XLY) and Consumer Staples (XLP).  In addition, Keith recently shorted McDonald's (MCD) and CKE Restaurants (CKR) in the portfolio.  

For the time being, malaise seems to be the order of the day and we will fade the US consumer accordingly.

Howard Penny

Managing Director

Andrew Barber