Tuesday, September 29, 2009

Consumer confidence is slowly rising



The consumer confidence index dipped in September, and was disappointing relative to more optimistic expectations. Is this a good reason for the equity market to slump and for T-bond prices to rise? Not in my view.

This chart puts the latest move in perspective: you can't even seen the September dip. The big-picture story that is slowly playing out is one of recovery from the extremely low levels of confidence that accompanied the February plunge in equity prices. No index moves in a straight line, and no recovery is unmarred by periods of doubt. I think you have to look past minor setbacks such as this. Things are a whole lot better today than they were last February. There is still room for lots of improvement, to be sure, but that will come with time.

21 comments:

Jake said...

is the worst over? probably, but the equity market is currently pricing in growth of ~4%. if consumer confidence is a strong indicator of future growth, then yes... a flat # should result in a sell-off (we need more than flat GDP... we need 4% growth).

that said, no single indicator should move the market on a single day. it should be the a much wider swath of indicators. currently, they all point to a recovery. how large will be key for markets.

Scott Grannis said...

I question your assertion that 4% growth is priced in. If the market were really priced to 4% growth (sustainable), then credit spreads would be much lower than they are. And I think equity prices would be a good deal higher.

Cabodog said...

Scott, off topic, but what are your current thoughts regarding interest rates and TBT? Thx.

Bill said...

Scott,

I don't understand how the Michigan index could move so much higher in September last Friday and then this index drops which essentially covers the same thing?

Scott Grannis said...

Bill: the two indices track each other over time, but not every month.

Scott Grannis said...

Cabodog: I still think rates are going up, but TBT is not a good way to make that play. The longer rates oscillate like this without rising, the worse it will be for TBT. This is one decision I regret.

MW said...

Bill, look at the questions for each survey. Conference Board is more focused on the labour market, hence the weaker reading vs. UoM.

Public Library said...

Scott,

You will like this read about health Care.

http://www.theatlantic.com/doc/print/200909/health-care

Bill said...

Scott,

I've noticed that August home sales in certain key markets like Miami and Phoenix that got hammered last year saw big drops from July sales (much bigger than historical drops from July to August). Is this a sign that the housing recovery is losing steam?

The Therapist Is In said...

wondering about TBT and better ways to short long bond; why is TBT not a good way to play that market?
thx.

Scott Grannis said...

Public: good article on healthcare, thanks.

Bill: I don't think you can read that much into one month's numbers. There is a range of indicators pointing in the direction of a bottoming in prices and the beginnings of a recovery. Some local markets may buck the trend for awhile, but the ingredients for fundamental improvement are there: a general economic recovery, low interest rates, low home prices, stocks of homebuilders up sharply for many months, anecdotal evidence (my contractor friend), a huge decline in new construction, and of course the passage of a significant amount of time.

Scott Grannis said...

Therapist: In order to short a bond you have to pay the difference between the bond's yield (3.5%) and short-term financing rates (now about zero). That's a negative carry of almost 350 bps per year. If rates don't rise, you will lose at least that much every year (plus transactions costs). TBT has to put on short positions all the time, creating a certain delta for their position. Volatile markets that move sideways (as we've seen for quite a while now) are killers for this kind of strategy.

The purest way (least transactions costs) would be to short bond futures.

MW said...

On that topic of bond futures, there is a new "ultra-long" contract. http://www.cmegroup.com/trading/interest-rates/files/IR-263_Long_Term_Bond_Fact_Card.pdf

Not trying to plug the CBOT, just thought this might be of interest to people here.

The Therapist Is In said...

wow, thanks scott, I went long TBT earlier this year, sold it, and now kind of waiting to buy it back, but now am not sure.

Bill said...

Scott,

Do you think the defeat of the public insurance option is a good sign for the health care issue?

Jake said...

credit markets are currently pricing in 2%, equity markets 4%. hence my assertion that equities are overvalued

Scott Grannis said...

How do you know that?

Scott Grannis said...

Bill: I think any defeat of Obama's far-left agenda is a good sign for the economy, and a good sign that we won't soon end up with the government running the healthcare industry.

MW said...

I think Jake's numbers are from Rosenberg. I would be interested in the methodology for those estimates.

Scott Grannis said...

It they are from Rosenberg then it would make sense. He essentially missed/underestimated the recovery and rally. So now he's fighting it, and he does that by asserting that the market has become overly optimistic.

Public Library said...

"It's the level, stupid - it's not the growth rates, it's the levels that matter here"

M. King