AGORACOM Small-cap Investor Relations Blog

I’ve been unequivocal in my predictions that US housing is doomed …. and that we still have yet to see its worst days. Until now, the market/pundit/banker/speculator solution has been “drop interest rates”. Again, something I have labeled as an exercise in futility from the outset.

Now that we’ve arrived at 2% interest rates and real estate only continues to decline, the proof is in the pudding.

Moreover, things have gotten worse. Lower rates have:

• Created a lower US Dollar that is >>>
• Leading to sky rocketing oil prices that are >>>
• Eating away at consumer wallets that is >>>
• Leading to corporate layoffs that is >>>
• Bringing the economy to a grinding halt that is >>>
• MAKING THE REAL ESTATE CRISIS WORSE

Bottom Line: Where once only sub-prime borrowers were terrified of losing their homes, we now have everybody scared of falling home equity, losing their jobs and even losing their homes. “Scared” is the operative word. Scared is the reason why otherwise secure feeling consumers just a year ago will no longer stretch their resources to acquire depressed real estate – no matter how “cheap” interest rates get.

It is psychological now. Look for home inventories to climb and prices to fall quite dramatically over the next 12 months.

Regards,
George

Clearly, the US consumer and economy are in trouble. Inflation in food and oil costs are sucking real money out of consumer pockets, re-financing homes is no longer an option and the markets had their worst June since the Great Depression. All of this adds up to a 28-year low in US consumer sentiment.

In this environment, it doesn’t take a rocket scientist to conclude that discretionary spending is going to get hit hard in 2008 and I can’t think of a company with more discretionary products than Apple. Consumers may still want to buy MP3 players and smart phones but there are plenty of cheap alternatives to the iPod, iTunes and iPhone in the marketplace.

I am going to exercise PYMWYMI (Put Your Money Where Your Mouth Is) and call for Apple to revisit $110 – $120 over the next 3-6 months. To capitalize on this, I am going to buy October puts in AAPL.

I’ll let you know how it goes.

Regards,
George

My friend, Barry Ritholtz, made a great point on Friday when he stated:

We learned today that consumer spending upwards by 0.8% in May. However, that appears to be primarily inflation driven consumption, fed by stimulus checks, and higher food and energy prices.

To illustrate his great point, consider the fact that you aren’t actually buying more gas, you are simply paying more for it. Buying more gas would imply that you are doing a lot more traveling related to business, travel, etc. and that you are filling your tank more than usual, which would be a good sign for the economy.

On the other hand, simply paying more for gas means you are driving the same (perhaps even less) but spending more money at the pump. Nobody should mistake this as a sign of a robust economy.

If he is right, then what is the actual state of consumer spending? It is an important question and, thankfully, Merril Lynch’s David Rosenberg provides the startling answer via the chart below:

For a great read on the state of consumer confidence, be sure to read Barry’s latest post.

Regards,
George