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Home prices down, the market down, the European debacle, a massive natural disaster and the no confidence vote for incumbents is in the books.  Are you feeling any better about the world?

After the close last night the ABC consumer confidence index rose to -44 in the week ending May 16, up 3 points from last week; this came as a surprise given the increase volatility in the markets. 

According to the consumer survey firm BigResearch, 55.8% of Americans are somewhat/very concerned that the financial problems in Greece and the instability with the Euro will trigger more financial fallout for America.  Only 16.8% aren’t very concerned or not at all concerned (27.4% are neutral).

As we witnessed in yesterday’s primaries, anxiety over global markets and their effect on the U.S. market can’t be good for candidates seeking re-election, as most Americans appear to have little-to-no confidence in the current government’s economic policies.

According to the Mortgage Bankers Association, a record share of U.S. mortgages was in foreclosure in 1Q10.  The inventory of homes in foreclosure rose to 4.63% from 4.58% in 4Q09.  The combined share of foreclosures and mortgage delinquencies was 14%, or about one in every seven U.S. mortgages.    

Next week we will get the Conference Board’s latest Consumer Confidence Index.  It will be the first time we have heard from the Conference Board since the attempted Times Square bombing, which may have shaken consumer sentiment, and the recent downturn in the markets.  The decline in financial markets has been confirming the “April Flowers/May Showers” Hedgeye Q2 Theme.  The latest Bloomberg survey has the conference board number at 58.5 vs. 57.9 last month.  I would not be surprised to a see print below 57.9.

Lastly, we are starting to see a big divergence between home prices and consumer confidence.  The Case/Shiller (non-seasonally adjusted) home price data has declined for the past 5 months (at an accelerating rate).  This trend has been contrary to the most recent readings on consumer confidence, which has been to the upside. 

In the US Strategy note today I said that “from a fundamental stand point the Consumer Discretionary (XLY) looks to be most vulnerable.”  A declining trend in consumer confidence will play into how the consumer spends his/her discretionary income.  Coming into today the XLY is the second best performing sector up 9.6%.  If you are looking for other shorts as the markets break down, the XLI and XLP could see a reversion to the mean. 

Howard Penney

Managing Director