Tuesday, June 29, 2010

The June decline in confidence is nothing to worry about


Can the June decline in this measure of consumer confidence (from 62.6 to 52.9) really be the cause of today's stock market plunge? I doubt it—it's more likely investors getting cold feet after seeing China's stock market fall to new lows. As this chart shows, confidence is a volatile thing and only takes on significance when a trend is apparent. If there's any trend in place over the past year, it is upward, so to me that says the June datapoint was just one of those random blips. And in any event, it's natural for consumers to be concerned and confused in the early stages of a recovery, especially this one, since the recession was unusually harrowing. Once burned, twice shy, as the saying goes.

17 comments:

Beatotrader said...

Scott...Scott...
in this Blog
June 25
You'd written
Rising consumer confidence is a good sign (Michigan)

and Today...
"The June decline in confidence is nothing to worry about"

It is a problem to see the reality always with pink glasses...;-)
(Like It's a problem to see the rality always with black glasses...)

Scott Grannis said...

I see a rising trend in both series; they are sending the same message.

Public Library said...

Beatotrader: Good point

The 10YR trend broke and yields are heading South.

Euro CDS are heading North.

US Housing is heading South soon (after failed tax-credit).

Swap spreads while not at Greek highs are now heading North.

The Chinese index is in solid bear territory (South).

US Indices heading South.

Gold heading North.

Taxes are heading North.

Rates are already South of the border.

Lots of markets on the margin are heading in the wrong direction. hard to deny it.

It's not rocket science to figure out we haven't corrected the credit crisis yet. Sovereigns and banks the world over are awash in crummy debt.

Benjamin said...

The Fed, and European central banks, can solve this problem through aggressive qualitative easing.

That basically means they print money, and create it "ex nihilo."

Of course, the Fed doesn't literally print money, it just creates deposits electronically.

Fiscal discipline will be needed too. The US is lucky in this regard--we have large vats of waste in our federal rural and military programs that can be lopped off without affecting our wealth-generating ability. In fact, it would enhance it.

I will say this: Is anythng more stupid than having all the tools needed to create wealth--infrastructure, schools, factories, farms, etc--and to let it all wind down, due to an invisible phantom called "debt."

The proverbial visitor from Mars would say we buckling before totems and taboos, little better than an Amazon tribe frightened on an eclipse of the Sun.

septizoniom said...

mr grannis: you discredit yourself with your vigorous viligence towards unrelenting optimism. some of your posts are outstanding, but the "spin it positive" angle is well past is freshness date. be aware some people less gimlet-eyed than others may be relying on your views.

John said...

Today is by my count the fifth assault by the S&P 500 (SPY) on the Feb low. So far the level has held. Many stocks such as Disney, (DIS), Home Depot (HD) and several bank and technology stocks are still considerably above those lows. As long as the SPY holds above the february lows I will continue to hold my trading positions. A decisive break below those levels will trigger my stops and I will have been wrong at least on the short term trends. I will not lecture Mr. Market. He is very freightened right now and is acting panicy. I still believe these markets offer longer term investors good opportunities to cherry pick great companies, strong stomachs are required to deal with increased volatility.

I think Scott is correct on the confidence numbers. The trends are up. Maybe they change later but one number doesn't do it.

Public,

I have always respected your opinion. We may well have more damage due to the credit crisis but markets frequently overreact to data, good or bad. I think a large part of the fear is the 'double dip' scenario which would pull down 2H EPS numbers. Much is already discounted, and many data points still do not point that way. However, as I state above, if the Feb SPY lows are broken, I am prepared to respect the trend and take some losses.

Dr William J McKibbin said...

So, your reading of current economic indicators is that prosperity is right around the corner, correct...?

Public Library said...

I personally doubt we will see a definitional double-dip although it will sure feel like it. Bouncing along the bottom will cause its own issues.

We need to tackle these problems head-on. Reduce government spending, reign in the Federal Reserves ability to serve prescription strength cold medicine to every little sniffle the market gets, and let the market slam insolvent institutions.

Cut taxes and cutout the Government and all of its tentacles. The market would rally massively and we might all rejoice!

Reality is not really shaping up this way however...

Scott Grannis said...

WJMc: My view is that we are still in the midst of a modest/moderate recovery. Market corrections can and do happen during recoveries, and this would appear to be one of those corrections.

John said...

I would point out that both the consumer confidence number and the Chinese LEI number were each one number and do not necessarily indicate a trend. Although I am prepared to accept the verdict of the market if a decisive break on S&P 1040 occurs I continue to believe things are not as dire as market players are percieving. Everyone wants to see the snake they missed in 2008, and many also missed the big rally off the 2009 lows. They, too are cheering the decline. Bulls are intimidted and waiting for lower, giveaway prices (they may wind up buying some of mine). But these prices (and especially lower ones) discount a lot of bad news. Soon it will be overdone and a big rally will develop. Markets never move forever in one direction.

I would point out two other things:

1. Bloomberg reports the President met with his financial advisors, including Chairman Bernanke. They reported the economy is continuing to expand. Despite the opinions of some posters re the Fed, these are the people with access to the most current economic data. And they are not saying 'double dip'. Yes, they could be wrong. But so can the doubledippers. And most of them will never be held accountable for their claims.

2. The number out of China that spooked everyone was apparantly a LEI number. One number. Not a trend. Many people question the accuracy of data in this country, especially an isolated one. How reliable is one number out of China? Does anyone know how the data was collected, or what it is composed of? I seriously doubt it. Traders saw the number, deemed it bad, and pumped their (short) positions scaring other traders. With everybody looking for snakes, somebody will find what surely looks like one.

This is the nature of a thinly traded market dominated by weak holders of securities. They have to all sell before a bottom can be finally made. No one knows where that is. But prices will be found that will clear the bearishness and the bull will be reborn. Many will scoff at this, but I wonder how much stock the scoffers have left to sell?

Cabodog said...

It would scare the financial crap out of me if everyone was as optimistic as Mr. Grannis. Last time everyone was positive was early 2007.

Scott Grannis said...

I must add to that by saying that I have never encountered so much criticism for being optimistic. The markets seem overrun by bears these days.

joemckendrick said...

Scott has a very consistent message: "Everyone stop panicking and just take a deep breath. Keep things in their proper perspective. We've been through much, much worse, and we have always prevailed in the long run. This time is no exception. And I have the data to prove it."

Always enjoy your writing, Scott!

Bill said...

Ok for all the folks who think Scott is too optimistic, I'd like your predictions for what happens next. Are we headed for a real Great Depression with 20% unemployment? Are you selling everything and installing a vault in your basement full of cash to wait it out for the next 10 years?

Public Library said...

John,

Europe hasn't even started their default party yet. You're sipping the Bernanke and Geithner koolaid of Europe being a "localized" event. Since when has Bernanke ever been right?

Now is a good time to remind everyone "We are all sub-prime now".

The US will experience similar issues when our taxes go up and the promised entitlements get slashed. There is no other way for the US to dig itself out of the hole.

Necessary but very very messy.

2009 was a taxpayer funded parade. Banks and corporations, acting like banks, (FORD, GM, GMAC, GE) come to mind, enjoyed the post collapse party on the peoples dole.

The party eventually has to end. Whether the end starts in Europe or the US is of minor consequence. The real capitulation is coming and hopefully it will clear out the pond scum once and for all.

Then we can get back to fundamental investment and building of America. Not supporting failed institutions and ideas.

Cabodog said...

Geez. Never thought I'd say this, but I'm beginning to miss Alstray. He was an optimist compared to this crowd.

John said...

Cabo,

If everyone was as optimistic as Scott the market would be much, much higher....and much more dangerous. Pessimism and outright fear are the dominant emotions in the markets today. The earnings yield (inverse of the PE ratio) is the highest in decades, the yield on treasuriy bonds and notes is the lowest in decades (if not ever, excepting the lows of '08, '09), returns on cash are zero, and inflation is beneign. Clearly the market is not paying attention to fundamentals. Emotions are ruling. I submit that just as a baby cannot cry forever (he/she will eventually become exausted) the emotions of investors also cannot be forever maintained at such high levels.

We have many headwinds facing the economy and markets and several of our excellent posters have highlighted them. It appears certain that the debt loads around the world will depresss returns on securities for some time. However I believe investments in quality common stocks will still exceed those of much lower yielding bonds and zero yielding cash. As fears subside I believe more investors will come to this conclusion. With fear and pessimism high today I believe the risks in the equity markets are reduced, not enhanced. Warren Buffet has said 'be greedy when others are fearful and fearful when others are greedy'.

I remember vividly in 1998 taking calls from inexperienced investors blindly wanting to buy stocks 'someone' had touted 'somewhere'. It was amazing to me how they could all be right for so long. But the day finally came when the party ended. We have not seen the same since. I maintain there was much more risk in 1998 than today. Today, no one wants to own stocks. Optimists like Scott are ridiculed by rude people with apparantly less than half his intellect and experience. I see it as a bullish sign and it gives me confidence.

One last thing: Many believe another crash is coming. They cannot know for sure any more than I can know for sure one is not coming. I believe those who fear another 2008 are in the majority. I do not believe the majority are accomodated by Mr. Market for long periods of time. Like the bull market of 1998, the bear market of 2010 will end.