Substitutes

Posted by Jeff Carter
on June 11th, 2010

Retail sales took another tumble this morning, down 1.2%. Consumers are adjusting. Some would say, unemployment is high, no surprise that consumers are not spending. However, macroeconomic numbers like the diesel fuel index, shipping indexes have been rising, so many economists are looking for an end to the recession. Some analysts are shaking it off as a one month anomaly. They are looking at year over year numbers.

Looking at year over year numbers will lead to bad decisions in this case. Last year was so horrible, virtually anything a company does this year looks better. I think you have to throw out last years numbers and go back to 2003-6. Perhaps even average those numbers in and then compare, if they are meaningful. Analyzing this market is a very tricky task, more treacherous than any market over the last 30 years. Huge upheaval in government, the world wide credit situation, and the wretched 2008-2009 period makes it tough. Many analysts are missing it.

Consumers have switched. They used to shop at higher end stores, but now have gone to lower end stores. High end restaurants are hurting. Applebees, McDonald’s and others are doing okay. Places like Costco are crowded. Consumers are fully pricing in the effects of the massive tax rise in 2011. They also are probably estimating the effects of more stimulus, more regulation, more financial panic. It’s in the news every day, and it’s on consumers minds.

Consumers change behavior based on the elasticity of demand for goods. Things like fuel, food and other staples have low elasticity. Luxury goods have higher elasticity. Economists quantify the elasticity. Lower numbers indicate a lower elasticity.

The very high end retail stores are not hurting. The very very wealthy in America are unaffected by macroeconomic effects, and virtually immune from most government policy. They have enough money that they can make small adjustments and carry on with their lives. This is one of the factors that contribute to the limousine liberal phenomena.

All this uncertainty leads to very high market volatility. The stock indexes seem like they are on a roller coaster. Yesterday, all the bears were stung. Big rally. Almost felt like a relief rally. But it was just short covering. Short covering rallies are vicious.

The big hedge funds are still in cash. Oceans of cash are sitting on the sidelines waiting this out. They are invested in short and mid term US treasuries. When the short end of the yield curve starts to get more expensive, that is when the stock market might have a long sustained rally. Until then, this thing is going to feel like one of the wildest roller coasters you have ever seen. When markets are on a roller coaster, the public cannot build wealth. Until they can build and grow wealth, the cash hoard will build and the market will stagnate.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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