Consumer Spendables Indicator

by: Barry Ritholtz

I'll give TrimTab's Charles Biderman credit: He is not the one trick pony I previously pegged him as.

To review: Back in August, I read this horrifically ugly quote from Biderman in Marketwatch:

"Fear and ignorance seem to be gripping retail investors these days," said Charles Biderman, chief executive of Santa Rosa, Calif.-based TrimTabs on Thursday. "There's no credit risk; no bank is going to lose money on this subprime fear," he added. "Income-tax collections are strong, and you don't have a housing collapse when wage income and job growth are surging. This is a complete panic by individual investors," he commented. "They just don't know what's going on."

That was a stunningly ignorant comment, and I was set to write off both Biderman and TrimTabs.

Bidderman proved skeptics like me wrong. Instead of merely remaining in consumer weakness denial, he went back to the drawing board to create a "by-the-numbers" quantitative method of tracking consumer spending. The NYT's Gretchen Morgenson discusses the details:

"TrimTabs calls its new measure the Consumer Spendables Indicator, and it sensibly includes these crucial sources of consumption cash: after-tax wages; after-tax income from nonwage sources, like capital gains, dividends, pensions, partnerships and self-employment; and net equity extraction from consumers’ homes, either through property sales or mortgage refinancing.

For the first time since the fourth quarter of 2003, TrimTabs estimates, consumers will have less money to spend this quarter on a year-over-year basis. The firm expects this figure to fall 0.6 percent from the same period in 2007.

While that may not seem like a meaningful decline, it becomes more significant when compared with the increases the index showed during the real estate boom.

Back when homes were everybody’s favorite A.T.M., mortgage equity extraction propelled the TrimTabs consumer indicator. Beginning in late 2004, quarterly comparisons with year-earlier periods shot up; they peaked at a growth rate of 17 percent in the first quarter of 2006. During that period, consumers had $1.69 trillion to spend; equity extraction accounted for $191 billion then, TrimTabs said, its peak amount."

That sort of intellectual flexibility is worth noting.

Biderman believes the recession has already started, and will not last much longer than the end of 2008. Quote: “I see this thing lasting longer than the bulls think but not as deep as the bears expect.”

I may not necessarily agree with that, but it is an intellectually defendable position. If Biderman's forecast turns out to be true, then the window for your ideal equity buying opportunity will open up sometime between May and July...

Blaming the Retail Investor
Wednesday, August 01, 2007 | 11:45 AM

The Buck Has Stopped
Gretchen Morgenson
NYT, March 2, 2008