Wednesday, February 27, 2013

Just what we need: A stressed consumer

Just as the market has to worry about Italy and the prospect of sequestration, I am seeing signs that the consumer is becoming increasingly stressed and consumer spending is slowing.

Signs of consumer balance sheet deterioration
First, CNBC reports that coupon clipping is surging, which is a bad sign for the strength of consumer's balance sheet:
Consumers are clipping coupons at a rate not seen since before the 2007 recession, and that's a troubling sign, according to CEO Steven Boal.

The website tracks how often people view and print coupons and their redemption rate. Right now,'s Internet Coupon Index, as it's called, shows a spike in coupon offers and demand.

This pattern is almost identical to the one that played out right before the last major economic downturn. The higher the index value, the more consumers are under economic pressure, Boal told

Gallup's consumer spending survey is falling
In addition, Gallup maintains a daily estimate of consumer spending and it has been trending down for most of February. While this data series is noisy, the downtrend in the 14-day moving average is troubling.

For a contrary opinion...
I had been watching for effects of the payroll tax increase on consumer spending. These data points suggest a consumer that is increasingly under stress. To be fair (and to be aware of the reasoning for the other side of the trade), New Deal Democrat at the Bonddad Blog was sanguine in his weekly analysis of consumer spending data:

Consumer spending
  • ICSC +2.7% w/w +1.8% YoY
  • Johnson Redbook +3.1%YoY
  • Gallup daily consumer spending 14 day average at $82 up $14 YoY !
Gallup has been very positive for 3 months, although a little less so in the last week or two.  The ICSC varied between +1.5% and +4.5% YoY in 2012.  This week was again close to the bottom end of that range for the ICSC. The JR report could just be a one week anomaly, we'll see.  Even in the worst case, it still looks like consumer spending has not collapsed due to the  tax withholding increase.  It's worth noting that WalMart is not included in either ICSC or Johnson Redbook.

Risk control is key here
Nevertheless, I remain highly concerned about the ability of the American consumer to significantly contribute to growth in the near term given the data points that I mentioned. Should sequestration hit, the results could be even uglier.

Given these risks and the underperformance of cyclical and consumer discretionary stocks (see my previous post Will the bears get their second wind?), traders who are bullishly positioned should be hyper-sensitive about their risk control discipline.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Mo said...

Hi Cam, love your analysis as always. I think the investors are living in an alternative reality where bad news no longer matters it seems. Are we missing something? Or everyone just running 6 months behind? Sequester, no problem. Europe heading down, no problem. Less money in your paycheck, no problem...