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Two Warnings For the Bears


There could be people out there still doubting the US consumers' resiliency.

In Solving the Consumer Demand Dilemma, I mentioned that readers needed to pay attention to retail sales data and the ISM services data.

The retail sales figures today were somewhat better than many were fearing. Certainly, there was no doomsday here. Today's report by Thompson, which is a compilation of 30 retailers, showed a 2.9% YoY contraction versus the 3.8% contraction expected by economists. A separate study by the International Council of Shopping Centers and Goldman Sachs reported a 2.1% decline versus expectations of a 3.5%-4.0% decline. Retail stocks have surged as a result of the reports.

The ISM services data was also slightly better than expectations. Some components of the report were actually quite impressive.

So, I think it's fair to say that putting both of these readings together marginally weakens the bearish case regarding the chronically "limp" consumer.

The bear case for the economy and the stock market rests on a weak consumer. If consumers prove to be more resilient -- on the aggregate -- than expected, look out above. A self-sustaining growth cycle will have been kicked off and the market will be off to the races.

It will take several months of data to be able to confirm either way. However, today's data are clearly positive.

Many bears are making the mistake that the outcome is foreordained. It's false that the US "consumer" must necessarily retrench due to high debt. 30% of consumers have no debt whatsoever. 40%-50% have reasonably prudent debt levels. It's only 20%-30% that have gotten into trouble. As long as the free-fall in the 20%-30% can be stabilized through the various private and public restructuring and refinancing programs, then all depends on the willingness to spend of the 70%-80% that are able to spend. This is more of a psychological issue than anything else. There's no hard debt constraint. The "necessity" of debt destruction on the part of the US "consumer" is simply a myth.

So what of consumer psychology? I'm not a believer in the theory that there's been a massive and irreversible shift in consumer attitudes. However, I've been believer that the crisis in late 2008 and early 2009 may have changed some attitudes at the margin -- enough to make a difference relative to heightened expectations. However, this is very much a subjective assessment, although it has some support in the data. The important thing to note is that there's no real "hard" objective constraint on consumer spending in the US. In the aggregate, there's plenty of room on the household balance sheet. The question is whether it will be used.

Many bears think a negative outcome is assured. They are wrong. The US recovery rests on attitudes -- even whims -- not cold hard facts. If consumers feel confident enough to spend, they will. Because, contrary to popular belief, they can. Debt destruction and deleveraging is a false necessity.

Don't forget: Perhaps the most powerful force in psychology is the power of inertia. Patterns that are ingrained are not easily changed. And with regard to consumer spending patterns, inertia favors the bullish case. The burden of proof is on the bearish hypothesis. And with today's retail sales and ISM data, that hypothesis was not confirmed.
No positions in stocks mentioned.
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