Seeking Alpha
Long/short equity, special situations, growth at reasonable price, deep value
Profile| Send Message|
( followers)  

As retailers report earnings, some are doing well like TJX Companies (NYSE: TJX) and Wal-Mart (NYSE: WMT), while others are doing poorly, like J.C. Penney (NYSE: JCP) and Dollar Tree (NASDAQ: DLTR). Thus, it's somewhat difficult to discern the shape of consumer spending from the mass of corporate reports. The U.S. economy is in better shape than it was a few years ago, and an improved consumer mood has tracked fading panic over the years. Yet, one tracker of the shopper mood is saying consumers are increasingly uncomfortable again, and all of a sudden. In fact, it could be signaling recession.

As the European economy flirts with recession, having just reported flat GDP activity in Q1 after a contraction in Q4 2011, the decisions of Greek voters may be about to unravel the region. Thursday, the ramifications of that highly possible disaster were striking Spanish banks, which faced ratings downgrade by Moody's (NYSE: MCO). But value destruction probably will not be limited to Europe, especially considering that 20% of American exports sell into the region. We noted an interesting expansion of the trade deficit with Europe earlier this month. We also noted signs of European infection of U.S. business sectors including manufacturing. The region seems to be impacting the global market, with Chinese data softening as well. Greek election chaos and European concerns have now reached the front page of the newspaper, and so American consumers are certainly aware and likely worried about it all.

Thus, it makes sense that the Bloomberg Consumer Comfort Index has dramatically retraced ground from its April 15 high point of minus 31.4. In just a short period of a month's time, it has consistently deteriorated, reaching negative 43.6 in the just reported week ending May 13. Bloomberg and Langer Research Associates, which compiles the index, said the current mark reflects territory consistent with recessionary periods. So, the Bloomberg Consumer Comfort Index, which is a more regular measure than the Conference Board's Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index, may in fact be offering an early signal of recession.

The most recent reading of the Consumer Confidence Index was in April, measuring a period through April 12, and so wouldn't reflect what we are seeing in the Consumer Comfort measure until it is reported again later in May. The Reuters/University of Michigan Consumer Sentiment Index, reported just last week, marked a four-year high in mid-May. Yet, this latest Consumer Comfort reading dropped to near a four-month low. It's hard to say why the difference exists between the two indexes without an intimate understanding of the specifics of, and perhaps proprietary information about, the two metrics.

Consumer discretionary shares performed poorly Thursday on the news, with the Consumer Discretionary Select Sector SPDR (NYSE: XLY) down 2.6%. Retailer shares were also lower, with the SPDR S&P Retail (NYSE: XRT) down more than 3.5%. The shares of some retail store operators have taken a beating this week, including J.C. Penney , which missed the Street's EPS view badly. We recommended investors sell the shares of JCP on a company specific misstep though, not a broad reaching driver. JCP shares were down again Thursday, following a 20% slide Wednesday. Yet, Wal-Mart was up 4.2% on a strong EPS result, and TJX gained strongly earlier in the week on its report.

Company-specific drivers serve to cloud the message perhaps presciently offered by the Consumer Comfort Index. However, the index was lower than its current point back in the fall of 2011, which was not a recessionary period. It's my view that the same concern that struck at the hearts of consumers then is bothering them again today, and it is the unsettled state of global affairs. Of course, stubborn unemployment continues to weigh heavily and slowing domestic economic growth has raised new concerns. Still, the old trend of rising fuel prices has since turned, easing some of the pressure that existed then from consumers.

In my view, this Consumer Comfort Index is but one of many subtle signs of tough times coming. When they arrive, it may be late to hedge given the market's tendency to lead. So consider yourself warned.

Source: Consumers Signal Recession Coming