CCI Continues Its Dramatic Decline

| November 12, 2007 | 0 Comments

Unknown by many, there is a private organization based in New York that has the power to influence the US capital markets.  This organization, to the best of our knowledge, is not controlled by any government.  Yet, their announcements are often watched as closely as the Federal Reserve.  Since they are such an influential organization, I like to keep my eye on them, and I would suggest you do the same.

The private organization I am referring to is called “The Conference Board.”  They were established in 1916 by a group of concerned “business leaders” who represented many of the major industries at the time.  This non-profit has been around for more than 90 years, and it is still as influential as ever.  To this day, they continue to receive the backing and support of many of the leading businesses in the nation.

The Conference Board is widely known for their research into market economics.  They regularly conduct their own research looking at leading economic indicators and, more importantly, the Consumer Confidence Index (CCI).  The CCI measures short and long term outlooks for the economy and the job market, as perceived by households throughout the US.

About two weeks ago The Conference Board released the CCI numbers for October.  The results in a nut-shell were not good, in fact, they were downright horrible.  In July the CCI number was over 110 indicating a positive outlook on the economy and the job market.  In August the number dropped to around 105, by September it was below 100, and today it sits at just over 95.  Lynn Franco, Director of The Conference Board Consumer Research Center had this to say about the recent results.

“Consumer Confidence posted its third monthly decline and continues to hover at two-year lows.  Further weakening in business conditions has, yet again, tempered consumers’ assessment of current-day conditions and may very well be a prelude to lackluster job growth in the months ahead.  In addition, consumers are growing more pessimistic about the short-term future and their rather bleak outlook suggests a less than stellar ending to this year.”

So consumers, who represent some 70% of the spending taking place in the US, lack confidence in the economic outlook.  With confidence falling, we have a real potential problem on our hands.  Reduced spending by the consumer could push the economy into a recession.

Why am I bringing this 2 week old information to your attention now? Simply to highlight that the CCI was measured back in mid October, and here we are almost 3 weeks later, with a handful of new data points.

First, the real estate market continues to weaken, and consumers are now struggling to borrow against their homes.  Real estate loans are harder to come by because of tightening credit standards, due to the sub-prime problems, and falling home prices.  Not to mention foreclosures are up and homes for sale inventories are at record highs.

Second, oil prices continue to flirt with record levels, and now the national average price for a gallon of gasoline is more than $3.  This is a new record which hurts every consumer in America.  With more and more money being spent on gas, the average family has fewer discretionary dollars to spend.  Add to this the recent price increases announced by Proctor & Gamble and we have the makings of an inflationary environment.

My last point is recent announcements by key businesses in the retail sector.  Target (TGT) announced that expectations for same store sales in November would be up between 2% and 4 %.  December also looked strong with an expected increase of 3% to 5 %.  This announcement comes less than a month after announcing lower EPS guidance for 2007.

Wal-Mart (WMT) also announced higher expected comparable store sales for November of 0% to 2%.  Yet just a few weeks prior they announced price cuts on more than 15,000 items, and have started more aggressively advertising Christmas deals starting as early as October.

Clearly something is wrong here.  The CCI indicates a tough economic environment and may potentially cause consumers to cut spending, yet the retailers expect sales to grow.  Now tell me, if you thought the consumer was strong and willing to spend, why all the extra effort around cutting prices, starting new promotions and pushing Christmas sales early?

I intend to watch closely the CCI announcement which is expected Tuesday, November 27, at 10 A.M. ET.  Your portfolio must be prepared for a potential steep decline in the sectors that are affected by this.

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