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VERSACE: Renewed concerns on how sustainable the recovery may be

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ANALYSIS/OPINION:

Despite all of the progress we have made over the past 18 months, renewed concerns over the sustainability of the tepid economic recovery are rising. Concerns about Greece and then Portugal, followed by Germany's ban on naked short-selling and euro concerns, have pushed the stock market down in recent days.

More have fallen into the worry camp, and when it comes to the stock market, this tends to be a self-fulfilling prophecy. Adding fuel to the fire this week included a jump in initial jobless claims as well as an upward revision to those for the prior week as well as misses versus expectations for the Empire Manufacturing Index and for building permits data.

As I wrote last week, there are periods of time when we will take two steps forward and one step back. The question that many, including me, are asking, is: Is this a pause to refresh? That is, is there some healthy cooling-off going on in the stock market that would enable investors to get on board the investing train and allow them to commit fresh capital after such a strong run in the stock market from March 2009 until late April of this year?

Hard to tell, but if we start to examine several pieces of data, it becomes clear to me that renewed concerns are warranted. Consider that for the month of April, the United States posted an $82.7 billion deficit, which is nearly four times the April 2009 deficit of $20.9 billion per the Treasury Department.

Aside from the fact that in 43 of the past 56 years the month of April has generated a surplus because of income tax payments, the monthly deficit was measurably higher than the $40 billion expected by analysts and economists. To be fair, there were some timing issues with how April fell this year compared with prior ones, but even after accounting for that, the deficit was wildly higher year on year and marked 19 consecutive monthly budget deficits, the longest string of shortfalls on record. Updated forecasts now call for the full-year deficit this year to be $1.5 trillion on top of a $1.4 trillion shortfall last year.

As always, I try to put this into perspective. As of now, the national debt of the United States is $12.98 trillion per U.S. Treasury data made available by www.usdebtclock.org. To me, the two more revealing statistics that really frame the national debt are debt per citizen, which now stands at $41,979, and debt per taxpayer, which is $117,887.

Pretty scary, if not sobering, if you ask me. Now consider the latest Mortgage Bankers Association delinquency survey released this past week. The survey showed that at the end of March approximately 9.4 percent of borrowers were overdue on payments but not yet in foreclosure and about 4.63 percent were in the process of being foreclosed. On a somewhat positive note, credit card default rates fell to their lowest levels of the year for most of the six major U.S. card lenders. On the other side, credit card industry executives voiced their views that as the U.S. unemployment rate hovers near 10 percent, default rates and delinquencies are likely to remain high.

As many are scratching their heads and likely muttering to themselves, it's all about jobs - and by that I mean job creation. While we have heard about the positive job creation in April to the tune of 290,000 jobs, what flies in the face of this are the more than 1.3 million initial jobless claims May 2010 to date.

Factoring all of this together, it comes as little surprise that the stock market sold off this week and that the shares of companies such as Red Robin Gourmet Burgers Inc., True Religion Apparel Inc. and other premium product companies that hinge on the consumer are under pressure. Other sectors hit hard include the transports and industrials, reflecting weaker industrial production and durable goods data in recent days.

If tougher times are ahead and consumers are going to re-tighten their belts, then the areas on which to focus your investing homework would include food retailers, personal-care companies and others where the products are rather inelastic.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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