Rebel Traders – Analysis Without The Hype

Consumer confidence plunges in February

In January the confidence index, collected by the ‘The Conference Board’, stood at 56.5. In today’s latest data release that figure dropped to 46.0. Additionally, the ‘present situation’ index dropped to a 27 year low.

The Conference Board Consumer Confidence Index®, which had increased in January, declined sharply in February. The Index now stands at 46.0 (1985=100), down from 56.5 in January. The Present Situation Index decreased to 19.4 from 25.2. The Expectations Index declined to 63.8 from 77.3 last month.[…]

[…] Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (Feb. 1983, 17.5). Consumers’ short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending." […]

We are just about done with this quarters ‘earnings loss reports’ and the tally is looking rather bleak for corporate sales and revenues which are averaging about 20 to 25% down from the same period one year ago. Remember it is not EPS that matters for gauging the economy, it is sales and revenues, period.

Retail stocks have surged in this bear market rally like so many other sectors on ‘anticipation‘ that conditions have improved, or will significantly improve in the next quarter. This is what makes bear market rallies, anticipation followed by reality.

Analysts have been coming out of the woodwork to proclaim that the recession is over (never mind that the head of the National Bureau of Economic Research said the recession might last an additional 18 months). And the proclamations of the analysts is that consumers have ‘pent up’ demand. In other words they are eager to go shopping, but with what!

Consumer spending over the past 15 years or so has been credit spending, not cash for the most part. Homes were being used as ATM machines, credit cards were being issued to everyone (including deceptive advertising practices to college kids), and the American shopper was flooded with television commercials from credit card companies to just ‘charge it’.

But all of that has come crashing down in what resembled a disaster movie. Credit is now being pulled from the very same people the companies were once pushing credit to. Home values have dropped significantly and the mortgage industry who created all kinds of ‘no income, no problem’ loans are now having to face reality that the home owners can’t afford the mortgage. Any time an economy becomes addicted to ‘credit’ it is a disaster in the making. And a disaster is what we got. And now the U.S. Government is having to utilize ‘credit’ just to keep the lights on. We saw how well that worked for the consumer, I wonder how well it will work out for the Government to now be addicted to credit. I have a guess and it is not a pretty picture.

Back to tax receipts. Every state in the nation is experiencing rapidly declining tax receipts. Be it from sales taxes, property taxes, or from payroll taxes…  the necessary funding to keep state and local governments operating is being depleted. In turn this is what will lead us into the next leg of unemployment when the state and local governments have to lay off even more employees due to the depleted revenues.

And for our ’shopper’ who analysts claim have ‘pent up’ demand to go out and shop I say “bullcrap’. There is a difference between pent up demand and a need to eat and pay the electric bill, which more and more families are being faced with. Remember that the number of families now on welfare, food stamps, and bankrupt is at historic levels. Is this what analysts call pent up demand? A homeless person on the street may have ‘pent up’ demand to shop, but that does not mean he has the means to do so.

And for actual retail sales data one only has to look at the tax receipts from around the nation to see the bigger picture…

(hat tip Butch)

Texas’ sales tax collections declined for the sixth consecutive month in July, as revenue dropped 11.6 percent from July 2008, the steepest drop so far in the recession.

The state collected $1.7 billion in July, which reflect sales in June, the Texas comptroller’s office reported Friday.

Comptroller Susan Combs said “major sectors of the economy, such as retail trade, oil and natural gas, and construction remain weak.”

Last month’s figures showed a similar decline, with $1.6 billion collected in June, which was 11.2 percent less than the same month a year ago.

In at least three years, there hasn’t been a double-digit drop in monthly sales tax revenue until the past two months, said R.J. DeSilva, a Combs spokesman. [...] (Source: Austin Statesman)

Getting better? I think not. Better light up another green shoot.

There are numerous way to measure consumer spending. Some sources adjust for seasonality, some measure by the amount of foot traffic, and some measurements are so complex that they attempt to analyze the spending on high priced items vs low priced items.

Sometimes it always comes down to “keep it simple” in order to gauge what is going on.

The following graph is consumer spending based on data collected by Gallup polls each day. The poll is extremely simple:

Gallup’s consumer spending measure tracks the average dollar amount Americans report spending or charging on a daily basis, not counting the purchase of a home, motor vehicle, or normal household bills. Respondents are asked to reflect on the day prior to being surveyed.

As many of you know I am concerned with long term trends when it comes to economic analysis. The chart below reveals that the consumer is in hibernation.

Consumer Spending - Gallop Poll Data

Another one of the very few analysts who correctly called the problems would get worse two years ago says today “We’re in a complete mess and the consumer is smart enough to know it”.

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was “preposterous” to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

“We’re in a complete mess and the consumer is smart enough to know it,” says Davidowitz, whose firm does consulting for the retail industry. “If the consumer isn’t petrified, he or she is a damn fool.”

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: “The worst is yet to come with consumers and banks,” he says. “This country is going into a 10-year decline. Living standards will never be the same.”

This outlook is based on the following main points:

• With the unemployment rate rising into double digits – and that’s not counting the millions of “underemployed” Americans – consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.
• Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.
• More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a “depression” in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.

As for all the hullabaloo about the stress tests, he says they were a sham and part of a “con game to get private money to finance these institutions because [Treasury] can’t get more money from Congress. It’s the ‘greater fool’ theory.”[...]

Source: Yahoo Finance