Consumer-Led Economic Recovery? Think Again

TARP money was repaid this week - the FDIC said the purchase of toxic assets from banks is on hold - health care reform is now going to be built around mandatory health insurance - Hezbollah was defeated in Lebanon, perhaps foreshadowing a change of tune from Iran - gasoline hit $2.85 a gallon in my neighborhood - national chain store sales fell 4.4% last month - Obama said the stimulus was working too slowly and now he wants to create 600,000 more jobs on top of the jobs that have yet to be created -- mortgage rates climbed a full point over two weeks ago -the Supreme Court suspended, for a bit, the purchase of Chrysler by Fiat - and with all of this the market went sideways. Just another week in The New Normal. The equity markets sighed, then yawned, and action moved to commodity markets - especially oil and gas - then to government bonds. The markets must have known I am trying to get to London this summer and bid down the dollar against the pound.

Think about it - all this news, any of it mind-blowing and market-cracking a year ago - and now we accept it, reminding of something a science teacher taught me way back when. If you put a frog in hot water, it jumps out. If you put a frog in room temperature water, and slowly heat it up, the frog stays there and boils to death. The markets are behaving like frogs right now - each week, news gets hotter and hotter, worse and worse about the economy, but it does not seem so bad, so the market either stays put or goes up.

Is the water eventually going to boil? Ask the consumer.

They will tell you - we are broke. And getting broker. And consumers that are broke, feel broke or afraid of going broke, do not spend money - or as much money as they used to. Given that 65% to 70% of the US economy depends on consumer spending, the broke consumer means a broken economy.

In the 1970s, federal law changed and said banks could charge interest in credit cards up to the rate allowed in the state where the bank ostensibly did business. In a nanosecond the banks found high interest rate states - ever wonder why your Citibank Mastercard is issued in South Dakota? - and the credit boom was on. Fast forward to 9/11 and the president, rather than raise taxes to pay for a war or two, told us to go shopping, with credit of course. To buy stuff probably made in China. And by the end of last year the American consumer had amassed more than $13 trillion in debt - or more than 130% of disposable income, on average.

Well, if you don't want to use credit, spend some of your accumulated wealth. What wealth - the recent meltdown in housing and equity markets has reduced personal wealth by roughly $13 trillion and the number is climbing. The psychological toll is greater - you feel poorer because you are, and you probably feel worse than you really are, and you pull back on spending.

Well, if you don't use credit or wealth, use your current income. What current income? Unemployment is 9.4%; real unemployment, including the discouraged and part timers wanting to work full time, is almost 20%; hours worked per week are falling; and after-tax personal income, or the nation, is falling.

Well, get some more credit cards and hope for the best. Not an option - banks are on pace to pull back more than $2.5 trillion in credit lines this year. Re-finance or increase that home equity line. Nope - 67% of mortgage holders have less than 15% equity in their house and that number is falling alongside home prices.

One last note -- gasoline hit $2.62 nationally this week, up a buck in the past 12 months.

OK - no credit, fallen wealth, falling incomes, rising gasoline prices. And in the face of all this, what has Wall Street done? The XLY - the Exchange Traded Fund representing consumer discretionary spending -- and the RTH - the Exchange Traded fund representing retailers - are both up year to date. The Street is expecting and pricing in a recovery from the bottom - which we have not reached - and I cannot tell you where they think the consumer will find money to spend.

Think head fake - momentum feeding momentum - and a bear trap if ever there was one. Is there a trade here? An investment? Not yet - the momentum has slowed down but this trade - consumer led economic recovery - is still in play, a game for very short term traders. Stick with fundamentals and wait - when the Street wakes up, there could be a great opportunity on the short side to make money on the whole segment through an ETF or the purchase of puts on the ETFs mentioned, the XLY and the RTH.

Specific names? Look for companies that were in deep yogurt before the consumer went broke. Two come to mind -- classic, long term shorts - Sears (SHLD) -- and the GAP (GPS). Been in a Sears lately? Been in a Gap lately? Even a consumer rebound -- the one that is not coming -- will leave these two gasping for air. Sears will spin off or sell K Mart, Gap will spin off or sell Old Navy, in last gasp moves, perhaps one to two years from now and then, nothing.

Among the luxury retailers, check out Coach (COH) -- good managment, too many stores, not one product anyone has to buy.

Comments

[Larry House:]

You are absolutely right. Consumers are down for the count, and the ref has just said "1". Long way to go before the consumer gets up to fight again.

Jun 10 01:55 PM

[sharonsj:]

Actually I have been in Sears lately. I get a lot of appliances and tools there because I still have a working credit card with them. But the store is fairly empty--as are the other stores in the Scranton, PA mall.

This article is right on. The author is one of the few to say what the mainstream media will not: you cannot spend what you do not have. This country is toast and you cannot have a recovery if there are no jobs.

Jun 20 07:22 PM

[mrottersman:]

And now the retailer insiders are big-time sellers. I'd say we fall off the cliff sooner rather than later.

Jun 28 12:01 PM