Thursday, January 13, 2011

Consumer Spending Collapses in Early January

The early 2011 numbers are out for consumer spending and they are flat out ugly:

Quick Take:

The market will likely rally 500 points on the news the way it's been trading lately.  Folks, I was shocked that the market didn't sell off hard after the inflation and jobs data today. 

As you know, I am very skeptical about what is going on right now when it comes to stocks.  Everyone keeps saying that the market can only go higher thanks to the money printing Fed via QE.  I must say I agree but I think there is more to it.

I can't help but believe the HFT trading algos are also involved in helping create a floor for this market.  They are creating massive amounts of liquidity as they move in and out of stocks in a matter of seconds.  They now represent about 73% of the trading on Wall St.

This is very scary to me.  Last year's flash crash showed us what can happen when they all decide to stop buying. 

I wanted to throw up a chart of the DOW and point something out:

Quick Take:

I thought it was interesting to look at the daily market moves since early last year.  As you can see, we haven't had a 200 point sell off since August 2010.  On the flipside, we haven't had many 200 point moves to the upside either.  I can count them on one hand.

Does anyone else find this bizarre?  Here we are working our way through the most dramatic financial disaster in history and the stock market acts like it barely notices on a daily basis.   Think about the stories the market has ignored over the past few months:

-  The greek riots
-  Ireland collapse
-  European debt crisis
-  Horrific housing numbers(beginning in the fall)
-  Bad unemployment
-  Rising interest rates
-  Munincipal bond/state solvency issues

I would have expected at least a couple of large sell offs as a result of these events. 

On the flip side, we never got a huge move higher as the Fed started printing money and companies started blowing out earnings.  The trend is definately higher as a result of these two things but it's been a very slow methodical climb higher.  It doesn't look normal too me when you compare it to the fierce rallies we saw in 2009.

The markets movement is even more strange when you compare it to the the bond and currency markets.  Both have reacted violently  as we work our way through our worst financial crisis since The Great Depression:

We saw the largest bond rally in history last year which was followed by a violent sell off after the Fed announced QE. 

As for currencies, they were just as volatile.  Take a look at the dollar over the past 12 months:

Quick Take:

These moves in the dollar are huge versus normal times.

The Bottom Line

I think the stock market has developed into nothing more than a casino parlor that's dominated by trading robots that scalp each other all day long.  Any large move up or down seem to get sold into. 

I guess we should expect the market to move like this when the average trade is 11 seconds.  When you think about it:  How in the heck can any daily rally be sustained when the quants are programmed to sell once they scalp a few points?

IMO, the market no longer represents what's going on with the economy.  It now represents whatever the trading robots want to do on any particular day. 

I will be keeping an eye on consumer spending moving forward.  The chart above tells me that the inflationary pressures from higher oil and food are starting to have an effect on discretionary spending.  If this trend continues things are going to get ugly in a hurry.


getyourselfconnected said...

I will have a post up in a bit along your line of thought, big surprise! I am also ripping off your "memory lane" idea as well. I will give you full credit of course!

Go STEELERS! The Ravens are annoying and talk almost as much crap as the Jets.

Jeff said...


Thanks Get

Yeah those guys are crybabies!

Gonna be a brutal game.

Herb said...

I have a bad feeling that something is going to break in the next couple of weeks...It feels like the 4th quarter of 2008 again.

Anonymous said...

Jeff, it reminds me of the mid to late '90s when you checked your portfolio everyday to see how much you worth has increased. All the sentiment was bullish, the only difference I can really see is the Fed stance is completely different, back in the 90's the rate environment kept rising today the rates have been lowered to the bottom, so we have the opposite scenario on that end. Could it be that thru the years we have to keep juicing the economy along to keep the market propped up? I keep thinking about buying the VIX but worry this mentality can go on for a few more years until the bill comes due then look out!!Meanwhile I guess enjoy the party, have another drink and keep looking the other way.

Anonymous said...

AP: " Stocks edged higher in early trading Friday after the government said prices and retail sales rose in December."

What are you saying now, Jeff?

Jeff said...


The data tracks the first week of consumer sales in 2011/

What I am saying is the consumer spent like drunken sailors for the holidays and then found themselves broke after their binge in the first week of January.

It's just a warning that the inflation and buyers remorse from X-mas may be starting to hit the consumer.

We need more january data tosee if this trend continued.

Jeff said...

"I keep thinking about buying the VIX but worry this mentality can go on for a few more years until the bill comes due then look out!"


Couldn't agree more.

I looked at some PUTS last night and they were ridiculously cheap.

The VIX looks juicy too. The bears have been traumitized and seem to be sitting on the sidelines which makes these positions potentially very profitable.

GOing to watch things closely in the next few days.

Jeff said...


I hear ya. It feels like Q2 of 2008 for me. Inflation hits like a ton of bricks and then it shows up in eanrings a quarter later.

I see things going to hell in the summer/early fall if oil keeps rising.