Consumer Spending Parasites

consumer spendingIt is very evident by now that indeed the market has been on one heck of a run, for whatever reason that is. At many times, it defied a lot of negative data and crumbling bankruptcies and kept pushing on through. As positive as things look in the stock market, unfortunately, a lot of economic data is not following. This is why I believe that we are currently at the place we are in with stock market, sluggish movements with very little volume. Even market optimists believe a pullback is needed to propel the next rally. At any rate, eventually the stock market and the economy will run in the same direction, that's how it works. It is consumer spending which drives the economy, so I wanted to discuss the new perfect storm that is heading right towards the consumer.

Increasing Oil Prices
With oil prices now above $70 per barrel and climbing, this is quickly becoming a burden on the consumer. We already know consumers are saving more and spending less and the more money getting funneled to energy costs, expenses, and taxes, the less dollars that will be going into retailers, autos, hotels, etc. You can bet that a $70+ cost of oil will have a strong negative effect on the consumer.

crash market stocks podcastsIncreasing Mortgage Rates
Just when everyone thought the bottom of the housing market was in sight, a new problem arises. I have said all along that my belief of the recent activity in the housing market was largely due to extremely low mortgage rates that were available. Also, not only are there federal incentives, but many states are matching federal incentives with state incentives to go out and buy a house. Now, as we see mortgage rates climb, be sure that this will take a toll on demand and when you consider the hundreds of thousands of houses that have been foreclosed on in the past two months (and the thousands of more that will be), we had better hope for a strong demand.

No Money Earned, No Money Borrowed
Although last month's jobless report was significantly better than expected, the unemployment rate was worse. As we continue to lose anywhere from 300-600,000 jobs a month, that's less discretionary income being spent in the markets. On top of that, when you take a $15.7 billion credit borrowing loss, it is obvious that people aren't borrowing much. So, yes, we've been able to see success with the help of a few trillion from the government and Fed, but we're beginning to see the price of taking that road costs, as Treasuries are becoming less and less desired. If there is less money coming into families, as well as less being borrowed, where will consumer spending come from?

These stand out as big concerns for me, as consumer spending makes up 70% of GDP. The stock market can respond whichever way it wants, but obviously there is not much confidence in it, as we have seen record low volume the past week. Until we see more normal, natural movements in the stock market, it's hard to use it as a measure of the state of the economy. Like I said before, eventually the two will align, but it's difficult to project when that is. I believe very soon, but that's me. Plus the best way to recreate demand for government bonds is how?...Tank the stock market. I believe I will find the best opportunities first in the retailers, which I will discuss which ones specifically on today's premium podcast (subscribe here).

A quick update on my Lending Club investment, I've experienced no late payments and my 10.5% target return is still being reached. They just posted an article saying that their average returns for investment are 9,9%. This makes sense, seeing how demand for loans must be spiking due to the illiquidity of the credit markets. Happy Trading.

1 comments:

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