Regarding the Consumer Sentiment Celebration – I’ll Pass

Rejoice oh troubled masses of American investors, the consumer has been reported still living. Yes, the dead and depressed are walking and talking, and according to the headlines of the popular press, they are in a better mood for shopping too.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Thomson Reuters/University of Michigan Consumer Sentiment Index improved in mid-August to 73.6, from 72.3 in July (and 73.2 in June). This nascent revival broke a sorry streak of two consecutive months of deterioration for the data point. Apparently it was cause for celebration, as the SPDR S&P 500 (NYSE: SPY) pushed a bit further toward a 1.0% gain for the week. The celebration was more clearly seen in Friday’s 0.4% gain of the Consumer Discretionary Select Sector SPDR (NYSE: XLY) and the 0.7% rise of the SPDR S&P Retail (NYSE: XRT).

The measure of current economic conditions improved last month by 4.9 points, to 87.6. The latest stock market gains, as seen in the performance of the SPY, probably have something to do with that. The rise of the last couple months has continued a positive trend spanning the past year.


Chart at Yahoo Finance

Yet, it would appear the gains of both stocks and consumer sentiment are based on a weak foundation, supported by hope in the world’s central banks. The fresh consumer report showed consumer expectations about the future are much more pessimistic than the feeling about today. The Expectations Index decreased to a lowly mark of 64.5, from 65.6 in July, as investors look forward to a fiscal cliff, global economic demise and maybe a complex war in the Middle East. Meanwhile, in the U.S., gasoline prices are rising, unemployment is not improving, and business investment is limited by economic and political uncertainty, with regulatory uncertainty tied to that. So, if you’ll excuse me, I’ll save my champagne for another day.

Retailers’ shares also benefited from the week’s Retail Sales data, which showed July’s retail sales gained 0.8% and rose 0.9% when excluding autos and gasoline. Each data point far exceeded economists’ consensus expectations, but that was at least partly due to their following revised lower June figures. The XRT gained 2.3% on the week nonetheless. Still, the news didn’t help the nation’s most important retailer, Wal-Mart (NYSE: WMT), which reported results that didn’t justify its premium valuation to growth expectations. Individual data dictated the direction of many retailers during this reporting period for the industry.

Investors bought stocks generally Friday on the consumer report and data showing the Leading Economic Indicators Index (LEI) improved in July. Equities were also supported by Angela Merkel’s nod to European Central Bank (ECB) support of the euro and troubled area bonds. Joining the SPY higher, the SPDR Dow Jones Industrials (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) gained fractionally on the day Friday. Meanwhile, the dollar and gold held about steady, with the PowerShares DB US Dollar Index Bullish (NYSE: UUP) and the SPDR Gold Shares (NYSE: GLD) each inching forward. The price of crude rose Friday though, on Iranian President Ahmadinejad’s latest provocation. The iPath S&P GSCI Crude Oil TR Index ETN (NYSE: OIL) gained 1.2%.

In conclusion, while traders celebrate the headlines, I advise investors to take a pass on the party.

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