The Day that Was - December 21st 2007

Recession or no Recession… the battle rages on…

The debate over the health of the economy rages on each and every day. Some financial analysts say the economy is strong and vibrant, while others say that the signs are already present of a declining economy. The debate between those who believe there will be (or already is) a recession and those who say the opposite is true has ramped up in intensity over the past month.

‘Headlines’ continue to impact investors and traders who only take the headline at face value and don’t dig for the facts. Many investors and traders over the span of the existence of the stock market have been trapped by someone’s headline. Emotions are easily manipulated by a headline or a rumor and basing ones stock investments on emotions have caused the most losses in the stock market over time.

This morning we awoke to the headline "Consumer Spending has Soared 1.1%", "Consumer Alive and Well", and "Consumers Say no to recession". Where ever one looked this morning it was one headline after another and unfortunately the press does not do proper justice to economic data, they just want the headline to catch attention and usually leave the details or facts buried far down in an article, if at all. So let’s take apart this morning’s headlines…

The top line consumer spending for November was 1.1%. But in the details of the report it said that much of that growth was due to energy prices, if we remove the energy component then we are left with a real growth of 0.5%, over 50% less than the headline. It should be noted that this data is for November and we posted our thoughts on the retail spending data for November on December 13th. And this week retailers such as Best Buy and others warned of a slump in purchases in December. We still believe that when the data is all added up in the end it will show weaker holiday spending this year. And the Governments data on personal consumption (spending) is very erratic so this needs to be taken into account as well. The Excel chart below I created from Government data going all the way back to the 1960’s shows just how erratic the data is, which is difficult to gauge the real of sense of consumer spending. If I apply a moving average to this data the trend has been declining in 2007.

 

 

 

 

 

 

Another headline this morning was that personal income rose 0.4% in November. But again, snapshot numbers mean nothing to us. We want to see the trend and the trend is shown below. The trend is still down for 2007 and the 1/10th tick upward for November is hardly anything to write home about, but the media made a ‘headline’ out of it.

 

 

 

 

 

 

Do you know what was the largest influence on the increase in personal income? It was an increase in rental income, as more and more people can’t buy homes and are becoming renters along with the cost of apartment and house rentals increasing it is skewing the data on personal income. After you examine the details it no longer looks as good with regard to the overall economy.

The next headline that came out in this mornings data was that wages and salaries had increased 0.6%. Again, to us this is rather insignificant and when you examine the wage and salary increases year over year it looks a bit more ‘uneventful’, see chart below of wage and salary increase percentages on a year over year basis. Show me a number that approaches 9 or 10 % increase y/y then I will be impressed, until then the 0.6% increase in November is meaningless.

 

 

 

 

 

 

 

The last chart I want to show you tonight is the most striking and reveals just how tight money continues to get for the average American. This chart shows the personal savings rate, in other words, how much of their income are they able to save.

 

 

 

 

 

 

Rather shocking…

Today’s advance in the markets was all due to options expiration, end of year short covering, and bulls buying on the ‘hope’ that the worst of the credit crisis is over with. So although the DOW gained 1.5% and the S&P gained 1.6% we still have a very long way to go before the market returns to health, if at all. The debate on the economy and where our markets are going continues. We could be the type of people who never have any opinion or change our opinion as often as people change their socks, but that is not our style. We don’t give in to emotions and hope, we stick with the data and the facts. And the data still tells us that trouble lies ahead!

Over the weekend we will post some items on what is coming up next week as well as what our plans are for 2008. Even with all of this market turmoil Lisa and I have been working on the final RebelTraders Web site. And this weekend I will give you a peak into what you will be able to do on our new web site.

Have a great weekend and if you are using this weekend to travel for the holidays Lisa and I wish you a wonderful, happy, healthy, and prosperous holiday and New Year.