- - Thursday, November 10, 2011


Fall normally is characterized by cooling weather, leaves turning colors and the return of dramas to the movie box office.

While I am always a fan of a good drama, the past week has been a compelling one when it comes to the stock market largely because of the twists and turns that have presented themselves in Europe: Last-minute changes and challenges over new political leadership in Greece, bond rates jumping in Italy, France’s reduction in growth expectations and new austerity measures, and, more recently, rumors that the eurozone may split.

If this were a work of fiction, it would be quite the page-turner, but because it is all too real, the S&P 500 has responded like a roller coaster. The net effect has led that index in the red once again on a year-to-date basis even though the domestic economic figures we received this week were arguably better than expected. Of course, when saying better than expected, we have to remember how far expectations have fallen in recent months.

Weekly jobless claims fell more than expected this week, but a reduction in applications for benefits does not necessarily translate into people being hired. Last week, we learned that non-farm payroll growth cooled in October from September and remains scattered from a low of 20,000 in June to a high of 158,000 in September. Some quick math shows that October’s 80,000 payroll improvement fell well short of the 98,000 payroll growth averaged over the past five months.Even that number is somewhat inflated as it includes the return of 40,000 striking Verizon Communications employees in September.

At the same time, data from the Bureau of Economic Analysis revealed that real disposable personal income, which is adjusted to remove price changes, continued to fall in September. This marks the third consecutive month of such declines. More alarming, the personal savings rate has reversed course and has fallen from more than 5 percent of disposable personal income to 4.1 percent in August and 3.6 percent in September. Although gas prices have climbed somewhat in the past month per AAA’s Fuel Gauge Report, rising food prices will continue to pressure consumer wallets. Earlier this week, the U.S. Department of Agriculture lowered its forecast for the size of the U.S. corn crop for the fourth time in a row, which will keep supplies tight and could pressure prices higher.

Declining real disposable income and savings rates call into question consumer spending generally, but given the time of year raises concerns as to the strength of the year-end holiday shopping season. In early October, the National Retail Federation shared its view that holiday sales would grow 2.8 percent this year compared with 2010. Just to make sure we are on the same page, the federation defines holiday sales as retail industry sales in November and December, so from its perspective the race is on.

It’s a good thing that those sales exclude October because, as we found out last week, year-over-year same-store comparisons for a number of companies fell short. Overall, sales increases in the month were originally slated at 2.2 percent, but that number was later lowered to 1.7 percent. According to Retail Metrics Inc., overall growth was just 1.5 percent. I suspect we will see more than a few revisions to holiday sales forecasts in the coming weeks.

Another topic that will get increasing attention in the coming weeks is the bipartisan debt supercommittee. That group of 12 is due to report by Nov. 23 on its efforts to find at least $1.2 billion in savings, and the latest suggests that the committee members have yet to find common ground on which to reach an agreement.

Needless to say, the drama will continue, and odds are that so will the volatility in the stock market.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. Follow him on Twitter at https://twitter.com/#!/ChrisjVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.



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