Forget Green Shoots: These Are the Brown Shoots Turning Black

Includes: EXPE, HLT-OLD, MAR
by: Michael Shulman

I never believed in green shoots - they were always brown at best - and now they are turning black and will stay black through 2010. As I write this Larry Kudlow is screaming, telling viewers and suckers to essentially ignore very disappointing retail sales data and invest based on consumer confidence. Well, pal, consumer confidence is still negative - just not as negative as it was - we all know that - but it is headed south again. C'mon, Zucker, do you really want ratings that badly? Remember what you want badly, you get badly.

Where was I? Oh, black shoots. My newsletter, ChangeWave Shorts, is published by Investor Place Media and we have an in house brand - ChangeWave - and in house survey group that has been doing sentiment surveys on everything from consumer purchases to oil exploration budgets for eight years plus. And they survey the same people, enabling them to create and use great baseline data. And they are never wrong - truly - my interpretation of their results may be wrong, but the data is always spot on and typically weeks if not months ahead of other data gatherers.

The last consumer survey, finished up earlier this week, tells us the slight uptick in some categories of consumer spending and the rebound in confidence was a head fake. My interpretation - brown shoots turning black. Simply put, consumers continue to spend less and plan to spend less heading into the rest of the summer.

Let me quote the report:

The mixed picture we reported back in June has worsened in ChangeWave's July consumer spending survey. And for the first time in four months we're seeing an actual pullback in the 90-day spending outlook going forward. The ChangeWave survey of 2,681 U.S. consumers, completed July 6th, has also picked up a significant worsening in consumer sentiment and expectations. Spending on travel/vacation, durable goods for the home, and consumer electronics all edged downward in the current survey, even as automobile and restaurant spending stayed flat.

After three consecutive months of improvements, our July survey has registered a setback in U.S. consumer spending. Better than two-in-five U.S. respondents (45%) now say they'll spend less over the next 90 days - 2-pts worse than the previous survey in June. Only 22% now say they'll spend more - 3-pts worse than previously. The spending outlook is down across all income categories, with lower income households (under $50,000 per year) particularly hard hit.

The travel/vacation category was the biggest loser - only 26% of respondents are spending more and 35% less on these products and services - a six point shift, more versus less, in the past month.

I got these results on Tuesday and look what we saw Friday morning - very weak retail sales data from everyone from Macy's (NYSE:M) to Costco (NASDAQ:COST) - data Kudlow continues to scream at me to ignore. I guess the desire for celebrity and rankings is stronger than his ability to do third grade math. And that math says the consumer is dead and getting deader. At a macro level, let me summarize what you hopefully already know.

Housing: Dead and believe it or not, getting deader. Forget historical norms - the 2.6 million peak was fueled by funky mortgages and investors, perhaps 60% or more of demand - and 500,000 starts is still too many with 11 months inventory and more than two million foreclosures on the horizon. Maybe more. Home prices will not stabilize, nationally, until 2012 at the earliest - when foreclosures peak - and consumer confidence cannot seriously until that happens.

Consumer Spending: Dead, deader, dying again - besides the loss of wealth - housing and stock market crashes - take away more than $4 trillion in credit and more to come. No wealth, no cash due to falling incomes and unemployment, no credit - ain't no meaningful consumer spending rebound for as far as the eye can see. Don't believe me? I vacation midway between Myrtle Beach and Wilmington every year for a generation and take, excuse me, took the kids for a movie, an ice cream and some shopping at a large enclosed mall - several department stores, food court, the works - in North Myrtle Beach. Wanna buy that mall? It is empty and on the market for $3.3 million - not $33 million, $3.3 million.

Banks: On the mend in the headlines, the big ones - Citi (NYSE:C), Wells (NYSE:WFC), BOA (NYSE:BAC) - broke and getting broker as delinquencies and defaults climb faster than anticipated - well ahead of reserves - and toxic assets sit there like a vacant lot in New Jersey. Citi keeps comparing its performance and capital to its $2 trillion dollar balance sheet - what about the $1.2 trillion in off balance sheet assets (last November's count) that are off balance sheet for a reason? Wells says it is fine, yet it has almost $350 billion in commercial real estate loans not to mention more than $90 billion in option ARMS on its balance sheet. And BOA still has Ken Lewis, a blind, deaf and dumb board, and unknown liabilities from its purchase of Merrill. For purposes of full disclosures, most of my assets are at Citigroup and I bank at BOA.

Credit Markets: What credit markets? They do not exist for all but a couple of investment banks and AAA rated companies. Otherwise, it is all government backed borrowing. Trillions backed by Uncle Sam - and a few billion in private transactions.

I know you know all this - but I put it together with new consumer spending data to prove a point - optimistic anchors and pundits can talk up the market or the economy and Congress can re-write laws but no one can change the laws of math. And those laws tell me, and should tell you, consumers are right to pull back and they will do so throughout 2010.

So what to do now? The crazy value investors are looking at hotels - hotels! I just stayed at a great Hilton (HLT-OLD) in New York for less than half what I paid 20 years ago. Look at shorting hotels - Starwood (HOT) looks ripe to see continuing problems in bookings and revenue - and maybe the booking sites like Expedia (NASDAQ:EXPE) - they are going to take another hit this quarter and be in the doldrums for at least another 4-6 quarters.