Jobs and Consumer Credit Tell the Same Story

Includes: AGG, DIA, KBE, QQQ, SPY, TLH
by: Carlos X. Alexandre

Everyone is certainly dismayed at the latest job creation data, and it appears that we just can’t catch a break. Reality is that the number in itself wasn’t horrendous, and the true disappointment lies in our expectations. The core issues are still unresolved and the economic optimism emanating from many fronts often misses the cruel reality that we cannot move forward until true debt destruction takes place. Then we shall start fresh.

We can play around, ignore the fact that bad credit obligations keep on mounting across the globe, and pretend that this time around is just another typical, fragile economic period. Well, it isn’t!

Once again, U.S. consumer credit grew and the magic number showing an increase of $5.1 billion would be wonderful if that pesky student loan line didn’t have an increase of $5.5 billion. Thus, the overall credit contraction continues.

I agree with Reuters' characterization of the increase in credit card debt, and if true, it's only an indication of what's to come.

The key change in May came in a category called "revolving credit," principally credit-card debt, that shot up by $3.36 billion in May after declining by $876.7 million in April. That was the biggest increase in credit-card debt for any month since mid-2008, when the economy was in the midst of the 2007-2009 financial crisis. The Fed provides no commentary with its report to help understand the big monthly shifts. One possibility is that consumers facing limited job prospects were forced to turn to credit cards more frequently to pay bills.

Another item out on Friday was the report on wholesale inventories, and the headline number showing an increase of 1.8% may not mean a lot at first. Bloomberg published an article on the subject, and pointed out that “sales decreased 0.2 percent in May, the first drop in three months and also reflecting a slump in vehicle demand,” further questioning the ISM numbers that exhibit contracting order backlogs, which I examined in a previous post.

Slowing purchases may prompt distributors to keep a tight rein on inventories, a sign orders to factories may diminish as companies gauge the sustainability of the expansion. At the current sales pace, wholesalers had enough goods on hand to last 1.16 months, the most this year.

Although overall sales increased 14.5% year-on-year, two items that reflect price over quantity are farm products and petroleum, with seasonally adjusted increases of 67.6% and 39.4% respectively, and non-adjusted values of 73% and 43.6%.

But in view of the current data, the song hasn’t changed, and I read plenty of opinions on how manufacturing, services, and a host of other sectors “appear” to be doing better – and next month will be different. Here it goes again: Consumers are not consuming the way we would like them to consume.

Reuters' article "Belt-tightening may squeeze economy, markets" is what nobody wants to hear or face, and everyone is looking for that magic potion to resume economic growth as if the past didn't happen. I'm always amazed by those that speak of a recovery as if the past private and public credit splurge was a normal event. Credit Suisse U.S. equity strategist Doug Cliggott summarized it well.

"We really are in a bind here," Cliggott said, "We have to start addressing the deficit, and if it means a rough stretch for corporate profits and the equity market, then they go through a rough stretch. Putting it off is not the answer."

However, and to extract a few percentage points off the market, one is better off not trading – or investing -- on one’s fundamental opinions or views, but rather on the perceptions of others as dictated by the "technicals," just like the owner of a clothing store looks for seasonal trends, and what is on display is not necessarily what the storekeeper will wear.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.