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With Thanksgiving upon us and the Holiday season right around the corner, there are many challenges and distractions ahead.  With 2009 looking to be a much better year for most market participants versus 2008, it does not feel like there is going to be a melt-up or down in the market before year-end.  Feelings are not an investment process, but everyone has them.

Confidence is falling…  How many times have you read over the past two months that “job losses threaten to limit spending heading into the holiday shopping season”?  Today it was reported that the University of Michigan “final” index of consumer sentiment decreased to 67.4 in November from 70.6 in October.  The final reading was slightly better than the preliminary reading of 66 reported in early November.

Another smaller but equally important measure of consumer confidence is how people feel about treating their families to a night out to eat.  On this measure, things are not improving either.  Malcolm Knapp reported that October casual dining same-store sales declined 4.9%, with traffic down 4.4%.  Given what we have from a handful of casual dining restaurant operators about trends in October, it’s not surprising that October improved sequentially from September when comparable sales declined 6.4% and guest counts came in -5.3%.  

If you look at 2-year average trends, however, the October numbers do not provide any reason to be optimistic as both same-store sales and traffic trends continued to decelerate from September.  Demand in October was not as bad as last December when trends bottomed, but on a 2-year average basis we are not that far from it with the October comparable sales 2-year trend down 5.5% relative to -6.7% in December 2008. 

The two best performing sectors over the past month have been defensive ones - Health Care and Consumer Staples - rising 7.7% and 4.3% respectively.  This compares to the S&P 500 up 2.4%.  Research Edge’s Healthcare maestro, Tom Tobin wrote today.  “If the outperformance in Healthcare has been due to the fading regulatory threat, the most interesting chart is in the Kaiser Family Foundation Poll on Health Reform.  It appears the public is losing interest, or sees what Wall St. sees.  Maybe it’s like turning off the game when your team is down and the clock is ticking down.  Do the people polled simply have other things to worry about like Thanksgiving dinner and keeping a job?”

Consumers are feeling the pinch in a number of ways and it’s hard to see a light at the end of the tunnel.  While I always look forward to the start of a new year, I’m nervous about what 2010 has in store for us.   

Howard W. Penney

Managing Director