Friday, March 11, 2011

Consumer Sentiment Collapses as Gas Prices Soar

From Haver:

"Consumers don't like it when they lose money. And the rise in oil prices reduces their spending power. The mid-March reading of consumer sentiment, from the University of Michigan, reflected that concern and declined 12.0% to 68.2 from 77.5 in February. A reading of 76.4 had been expected. During the last ten years there has been an 83% correlation between the level of sentiment and the y/y change in real consumer spending."

Now lets take a look at the consumers expected price inflation:

My Take:

These charts tell you all you need to know about where we are heading economically.  As Haver explains, there is an 83% correlation to real consumer spending and consumer sentiment.

Today's consumer sentiment number was a huge miss and you can thank soaring gas prices for it. The way I see it, anyone that doesn't think $4-5 gas over the summer isn't going to stop the consumer in it's tracks needs their head examined.

I also thought it was important to highlight the consumers soaring price inflation expectations(as seen in chart 2).  This means the consumer thinks things are going to get worse which means they will likely reign in spending in anticipation of having to be forced to pay more for things down the line.  This does not bode well for things moving forward.

The Bottom Line

Anyone notice what happened the last time prices soared?  The year was 2008...Need I say more?

I don't think we''ll see $140 on oil this go around unless something drastic happens in the Middle East.  I say this because the consumer is in way worse shape than in 2008.  The unemployment rate is almost double what it was back then, and millions of Americans have been forced to dip into their savings over the last 2 years in order to pay the bills.  This means their own personal balance sheet is in much worse shape.

That $1500 in monthly unemployment check only goes so far when you are forced to use just about all of it to pay your bloated mortgage payment on your underwater home.

I think we are nearing a tipping point for the consumer.  Our economy cannot handle $100 oil. 

I wouldn't read to much into today's move in stocks.  The market is simply a lottery at this point because there is so much going on right now.  Just think about it:  We have the European debt crisis, the Middle Eastern Revolution, Japan's earthquake, US debt issues.

These are unprecedented times.  The market is highly vulnerable to violent swings as all of these events play out.  I am starting to sniff a little deflation out there which is forcing me to contemplate selling off some metals.  I have already sold some into this recent strength.

A short term dollar rally wouldn't surprise me here after today's USD sell off.    Don't think for a second that I believe in the dollar over the long term.  My thesis here is risk is relative, and Europe is in a lot worse shape then we are over here as Spain and Portugal hang by a thread.  This should be bullish for bucky.  The Middle East craziness should also support the dollar's case.

These are my thoughts for now but please note that they can change at the drop of the hat because the sudden shocks that we are witnessing in this crazy world are occurring at an unprecedented pace.

Be safe and stay diversified.  I am sitting mostly in cash right now(about 80%).  The balance of my portfolio now sits in GLD, SLV, SDS, QID, and TBT.  I also have a spec play in biotech ADLR but please realize the risk here is HUGE.  I will patiently wait for cheaper prices before buying stocks.  There are some divedend plays that I have been watching but it's still too early.  Stay tuned. 


getyourselfconnected said...

"Why are consumers looking at gas prices when the S&P is up 100%!!! Dumb fools."
Ben Bernanke

I turn 35 at midnight, ouch!

jeff said...

Happy Birthday Bud!