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View Full Version : Consumer sentiment measures the DOW not the economy - Eric Janszen



EJ
05-21-09, 01:13 PM
http://www.itulip.com/images/futureswatch300.jpgConsumer sentiment measures the DOW not the economy

Don’t think the government hasn’t noticed

The Survey Research Center of the University of Michigan creates the consumer sentiment index through surveys of households. The consumer sentiment index is intended to measure expectations of consumers of the future of the economy. The idea is that depending on sentiment, positive or negative, consumers are more prone or not to run out and buy more goods and services.

We are told that the survey more than anything tests consumers’ view of future job prospects and thus access to income to spend. If that were true, you’d expect to see a strong correlation between consumer sentiment and unemployment. But you don’t.


http://www.itulip.com/images/consumersentimentvsunemployment199802009.gif


What we found years ago (See DOW Dissonance (http://www.itulip.com/forums/showthread.php?p=12982#post12982)) is that in fact consumer sentiment, to the extent that it correlates to anything, usually tracks the stock market, specifically the DJIA.


http://www.itulip.com/images/consumersentimentvsDJIA1998-2009.gif


Except for a brief period in 2005 and 2006, consumer sentiment and the DJIA strongly correlate. Rising unemployment starting in early 2007 overwhelmed the DJIA as the key consumer sentiment driver; consumer sentiment peaked in early 2007 before the DJIA peaked late in the year. The DJIA and consumer sentiment declined together during the recession so far, since late 2007, until recently when the DJIA and consumer sentiment re-connected. Consumer sentiment has tracked the Debt Deflation Re-inflation rally ala Nikkei year three; the Bank of Japan and Japanese politicians were slower off the monetary and fiscal stimulus block than the Fed and U.S. Congress.

The DJIA index is used by the FIRE Economy financial media to sell the current state of the economy. The correlation of consumer sentiment to the DJIA testifies to success at cultivating the symbolic value of an index. The DJIA has virtually no economic significance compared to the broad stock indexes such as the S&P index and the NASDAQ that have many times the capitalization of the DOW. The NASDAQ tracks the crown jewels of the technology-driven U.S. economy, the technology companies that boost productivity, but no one talks about the NASDAQ much these days.


http://www.itulip.com/images/nasdaqvsDOW.gif


Who wants to talk about a market that remains 80% below its peak nine years later? The NASDAQ is America's Nikkei.


http://www.itulip.com/images/nasdaqvsjia1980-2009.gif


Eventually, if the U.S. pursies fiscal stimulus without restructuring (see Deflation fare thee well, we hardly knew ye – Part I: In search of real returns in an unreal world (http://www.itulip.com/forums/showthread.php?p=97954#post97954)) the DOW will also be America's Nikkei.


http://www.itulip.com/forums/../images/realdowfuture2012.gif

Real DOW Update: Still looking for a bottom? (http://www.itulip.com/forums/showthread.php?p=80503#post80503)

The DOW matters

Judicial Watch (http://www.judicialwatch.org/news/2009/may/judicial-watch-forces-release-bank-bailout-documents) forced the release of Bank Bailout Documents, including this tidbit located among them, discovered by The Cunning Realist (http://cunningrealist.blogspot.com/2009/05/watched-pot_21.html).


http://www.itulip.com/images/treasfinal.jpg


No plunge protection smoking gun but clear enough evidence that the Treasury Department knows that the best way to take the temperature of American public sentiment is to use the DJIA: note that the Treasury official is not quoting S&P futures but DOW futures.

A smart public official with a negative message to deliver, such as pointing out the failure of a political opponent to vote for your spending bill designed to “create jobs”, gets it out when the DOW is down when it will receive a more accepting audience, and makes sure the DOW is up before announcing that the economy is recovering. Today, for example, will not be such a good day for that.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Chomsky
05-21-09, 02:47 PM
What a great piece. Thanks.

JKD
05-21-09, 03:44 PM
The DOW matters

Judicial Watch (http://www.judicialwatch.org/news/2009/may/judicial-watch-forces-release-bank-bailout-documents) forced the release of Bank Bailout Documents, including this tidbit located among them, discovered by The Cunning Realist (http://cunningrealist.blogspot.com/2009/05/watched-pot_21.html).


http://www.itulip.com/images/treasfinal.jpg


No plunge protection smoking gun but clear enough evidence that the Treasury Department knows that the best way to take the temperature of American public sentiment is to use the DJIA: note that the Treasury official is not quoting S&P futures but DOW futures.




I know you guys are very thorough about crediting your sources, and nothing against the fine folks over at The Cunning Realist, but Zero Hedge had that e-mail posted over a week ago...

http://zerohedge.blogspot.com/2009/05/foia-disclosure-busts-paulson-geithner.html

John

icm63
05-21-09, 05:22 PM
Why is the USA Govt into home baking, does Martha Stewart work for them ??

DOW Fudge
CPI Fudge
10yr Treasury Fudge
Employment Fudge
GDP Fudge
etc

That's a lot of different fudges the govt makes, and all available for sale to the public to raise funds to pay for a lifestyle they cant afford. :D;):D:)

bart
05-21-09, 07:49 PM
The U. Mich confidence index also does a pretty fair job of correlating with unemployment plus corrected CPI, aka the Pain & Misery Index.



http://www.nowandfutures.com/images/pain_misery_conf_index.png

metalman
05-21-09, 08:14 PM
I know you guys are very thorough about crediting your sources, and nothing against the fine folks over at The Cunning Realist, but Zero Hedge had that e-mail posted over a week ago...

http://zerohedge.blogspot.com/2009/05/foia-disclosure-busts-paulson-geithner.html

John


It is good to see that the Treasury's Chief Of Staff is mostly transfixed by just how the market reacts to any gust of the wind.

'transfixed on gust of wind' vs dow as gov't-man's public sentiment indicator... not exactly the same interpretation.

Slimprofits
05-21-09, 08:16 PM
The DJIA index is used by the FIRE Economy financial media to sell the current state of the economy.

an extremely important point.

metalman
05-21-09, 08:20 PM
The U. Mich confidence index also does a pretty fair job of correlating with unemployment plus corrected CPI, aka the Pain & Misery Index.



http://www.nowandfutures.com/images/pain_misery_conf_index.png

how much of your pain index is unemployment?

bart
05-21-09, 09:28 PM
how much of your pain index is unemployment?

Half - it's the standard formula of just adding CPI to unemployment.


By the way, gasoline correlates reasonably well too... which could possibly maybe perhaps partly help to explain why it has gone up less than oil lately.



http://www.nowandfutures.com/images/sentiment_gasoline2.png

Slimprofits
05-21-09, 09:36 PM
Half - it's the standard formula of just adding CPI to unemployment.


By the way, gasoline correlates reasonably well too... which could possibly maybe perhaps partly help to explain why it has gone up less than oil lately.



Great f'n point Bart. And we talked about this many times last summer.

Think back - how many of your conversations with regular folks during the spring and summer were about the price of gas at the pump on a daily basis? I was bartending at the time, and it was definitely the main topic of conversation for about 2 months running.

So the FIRE companies and bullhorn operators might want the DJIA to be the end-all figure of focus for Joe Six Packs, but in an environment of rising gasoline prices, that number quickly takes over in our minds.

metalman
05-21-09, 09:47 PM
Half - it's the standard formula of just adding CPI to unemployment.


By the way, gasoline correlates reasonably well too... which could possibly maybe perhaps partly help to explain why it has gone up less than oil lately.



http://www.nowandfutures.com/images/sentiment_gasoline2.png

thx! higher gas + job loss = fewer votes. what's simpler than that for pols to understand? :D

medved
05-21-09, 10:27 PM
Why is the USA Govt into home baking, does Martha Stewart work for them ??

DOW Fudge
CPI Fudge
10yr Treasury Fudge
Employment Fudge
GDP Fudge
etc

That's a lot of different fudges the govt makes, and all available for sale to the public to raise funds to pay for a lifestyle they cant afford. :D;):D:)

Another anti-government fanatic! Don't blame our diligent and honest government, we all know the real reason behind the crisis. FREE MARKETS DO NOT WORK! Didn't you get the message? ;) :D :confused:

icm63
05-21-09, 11:59 PM
.."FREE MARKETS DO NOT WORK! "...

There is a difference between freedom definitions...

1) Freedom in TombStone (http://www.imdb.com/title/tt0108358/)before Wyatt got there (outlaws had freedom todo what they wanted).[WallStreet 2000 to 2009+]

2) Freedom in TombStone after Wyatt cleaned up..(citzens had the freedom to prosper)

Point: Free markets with common sense laws. :)

flintlock
05-22-09, 08:04 AM
.."FREE MARKETS DO NOT WORK! "...

There is a difference between freedom definitions...

1) Freedom in TombStone (http://www.imdb.com/title/tt0108358/)before Wyatt got there (outlaws had freedom todo what they wanted).[WallStreet 2000 to 2009+]

2) Freedom in TombStone after Wyatt cleaned up..(citzens had the freedom to prosper)

Point: Free markets with common sense laws. :)

x2. And good tongue in cheek humor Medved.

But to all those serious "down with capitalism" folks out there, quit your job. Because frankly, you are a hypocrite if you hop in your capitalist made car, drive down streets built by capitalists, and go to your job at your capitalist owned company and collect their dirty stinking money. Capitalism IS the best system. It just has to work within a system of laws and rules like anything else. Lately, they haven't been. :D

JKD
05-22-09, 08:53 AM
'transfixed on gust of wind' vs dow as gov't-man's public sentiment indicator... not exactly the same interpretation.

I always appreciate EJ's point of view, there is rarely if ever anything trite or derivative.

I am sure EJ saw the Wilkinson e-mail at The Cunning Realist first and it was an honest mistake, but stating that TCR "discovered" it is inaccurate.

Someone not involved in the trading community or day-to-day obsessions of the financial blogosphere might never notice, but EJ's misappropriation of credit in kinda glaring. Zero Hedge is a very popular and widely disseminated blog and TCR almost certainly saw the Wilkinson e-mail there first (he links to ZH from his blog). My comment was an honest attempt to be helpful.

John

occdude
05-25-09, 01:29 AM
Freedom without responsibility is Tombestone ie.anarchy. Thats why socialism doesn't work, It doesn't allow people to act and react.

jk
05-25-09, 01:50 PM
responsibility without freedom: e.g. taxpayers paying bankers for the bankers' mistakes.

ax
05-26-09, 10:08 AM
Another case in point today, or perhaps it worked in inverse order:

http://www.marketwatch.com/story/consumer-confidence-surges-on-brighter-jobs-outloo

"A reading on U.S. consumer confidence surged to 54.9 in May from an upwardly revised 40.8 in April as expectations for jobs improved, the Conference Board reported Tuesday. The gain is the fourth-largest in the 32-year history of the survey..."

Jobs? Didn't those numbers, along with housing, just get worse?

rjwjr
05-26-09, 11:32 AM
Remember the thread (the initial post of which I have copied below) that noted that Goldman's activity was likely steering the direction of the market? If true, wouldn't this mean that very few of us sheeple have a horse in the DOW race any longer? And if very few sheeple have a horse in the race (stock ownership), then why would the sheeples' sentiment be so tied to the variations of the DOW?

<TABLE class=tborder id=post93908 cellSpacing=1 cellPadding=6 width="100%" align=center border=0><TBODY><TR><TD class=thead>http://itulip.com/forums/images/statusicon/post_old.gif 04-23-09, 01:58 PM <!-- / status icon and date -->
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Posts: 3


</TD></TR></TBODY></TABLE><!-- / user info --></TD></TR><TR><TD class=alt1 id=td_post_93908><!-- message, attachments, sig --><!-- icon and title -->http://itulip.com/forums/images/icons/icon1.gif The Goldman Sachs Stock Exchange?
<HR style="COLOR: #99ff99" SIZE=1><!-- / icon and title --><!-- message -->Zero Hedge points out that, for the month of April, Goldman Sachs accounted for over 50% of NYSE member principal transactions. If I'm reading this right, they accounted for about 25% of all shares traded this last week.

I'm thinking that, with their direct line to the treasury, this rally will only crash when they let it.

http://zerohedge.blogspot.com/2009/0...ctions_23.html (http://zerohedge.blogspot.com/2009/04/goldman-sachs-principal-transactions_23.html)
</TD></TR></TBODY></TABLE>

ThePythonicCow
05-26-09, 11:52 AM
I'm thinking that, with their direct line to the treasury, this rally will only crash when they let it.
Agreed. Some of the short term technicians that I follow are seeing, in their various special ways, this same thing. Someone is driving this thing, and it's not the usual investors at large.

http://www.tvparty.com/bgifs18/outer.jpg

There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to... The Outer Limits.
— Opening narration – The Control Voice – 1960s

CanuckinTX
05-26-09, 02:18 PM
Not sure I would discount the contribution of the little people to this rally.

Today I had my quarterly visit from the local Edward Jones rep who has been calling on me for well over a year now (these are the neighbourhood financial advisors that go door to door and I made the mistake once of asking for some info on a Muni bond which is what he was pushing again today).

Anyway when I asked how he's doing he said it's his best month ever and when I said the rally probably isn't hurting he laughed and said that has something to do with it.

So this all kind of fits for now - the market is up, sentiment is up, which begets more of a rally, etc etc. Meanwhile my sister in law's house estimate in Brea, CA just fell another $150k on zillow in the past 30 days. It's all fun and games just like housing was until reality creeps back in.

metalman
05-26-09, 02:32 PM
consumer sentiment measures stocks and stocks measure consumer sentiment...

Stocks Jump After Consumer Confidence Level Surges (http://finance.yahoo.com/news/Stocks-jump-after-consumer-apf-15345497.html?sec=topStories&pos=main&asset=&ccode=)<cite></cite>

everyone's afraid they are missing 'the big rally'... so far is only 500 pts higher than ej predicted back in nov. 2008.

gosh... do i have the sack to short it?

ax
05-26-09, 02:34 PM
consumer sentiment measures stocks and stocks measure consumer sentiment...

Stocks Jump After Consumer Confidence Level Surges (http://finance.yahoo.com/news/Stocks-jump-after-consumer-apf-15345497.html?sec=topStories&pos=main&asset=&ccode=)<CITE></CITE>

everyone's afraid they are missing 'the big rally'... so far is only 500 pts higher than ej predicted back in nov. 2008.

gosh... do i have the sack to short it?

Have no fear Metal, if you're wrong just means you have to work another year or two, assuming there are still jobs in the future :D

bart
05-26-09, 07:39 PM
responsibility without freedom: e.g. taxpayers paying bankers for the bankers' mistakes.

As long as we're already off topic and no one else has posted it - it's also not unlike taxation without representation.

stockman
05-29-09, 08:40 AM
Green Shoots or Smoking Weed?


"But that is not the point I want to make. In December 2006, only a few
months after the peak of the housing bull market, the total value of US
residential property stood at $21.9 trillion. Prices have dropped by 31%
since the end of 2006, so the estimated value today is about $15
trillion; however, the mortgage debt remains more or less unchanged
and stands at $10.6 trillion. In other words, whereas debt-to-equity in
the US housing market was 48% as recently as in December 2006, it is
now 70% and will rise to 80% once house prices have mean-reverted.

Wealth is extremely skewed

Although painful, a rise in debt-to-equity of that magnitude would


actually be manageable if it weren’t for the fact that income and wealth


in the US is extremely skewed. The top 1% of income earners in the US


account for a whopping 23% of national income while the median

household has seen no improvement in income for the past ten years

(see chart 1). Wealth is even more unevenly distributed. Almost 34% of









all wealth in the US is held by the wealthiest 1% of the US population.


The same picture emerges when you look at home ownership. Almost


one-third of all US households have no mortgage. If you adjust for that,


the 70-80% debt-to-equity ratio suddenly becomes a major challenge

because it means that the two-thirds who do have a mortgage already

face a debt-to-equity ratio in excess of 100%. Even worse, once the
mean reversion has run its course, two-thirds of US households will be
facing a debt-to-equity ratio of 120-125% on average.





US consumers are broke







That is a shocking number and it blows a huge hole through the heart


of the green shoots campaign so valiantly promoted by most of the


mainstream media in recent weeks. The poorest two-thirds of US




households are effectively broke, whether they realise it or not."


1636

Slimprofits
05-30-09, 09:17 AM
Barry R. covered this subject on May 29th and he cites an article from marketwatch.com that is suspicious to say the least. Also, another good chart:

http://www.ritholtz.com/blog/2009/05/confidence-game/

http://www.ritholtz.com/blog/wp-content/uploads/2009/05/conf-spx.png

Chart via Bianco Research, May 2006

metalman
05-30-09, 09:48 AM
interesting from 2 yrs ago...


A quick tour through the DOW and consumer confidence numbers going back to the pre-bubble crash starting July 1998 reveals a peculiar disconnect that we discuss later. Our graph includes a relative unemployment rate to show the correlation between expected unemployment, as indicated by consumer confidence, and actual unemployment.


http://www.itulip.com/forums/../images/DOWConEmploy.gif


A) Fall 1999: The stock market bubble is over for the DOW.

B) Winter 2000: Consumers don't catch on right away that the previous few years of were not a "New Era" but were in fact the result of a stock market bubble. Consumer confidence peaks a couple of months after the DOW, then dips a couple of months after the beginning of the bear market. (April 5, 2000 iTulip notes: "A bear market is born." [http://www.itulip.com/urgentmessage.htm#Bear] (http://www.itulip.com/forums/../urgentmessage.htm#Bear%5D). Consumer confidence lags the DOW in both directions.

C) Fall 2000: After about nine months in denial, after portfolios have been marked to market, gradually reality sinks in: it was a bubble and it's really over. Mass layoffs (not shown) rise, increasing the prospect of rising unemployment. Consumer confidence gets hammered.

D) Winter 2001: Unemployment indeed begins to rise, in line with the previous decline in consumer confidence.

E) Spring 2001: Consumer confidence levels off as consumers believe the worst is over. The DOW declines as the U.S. economy enters a brief recession. Contrary to popular belief, market declines are coincident not leading indicators of recession.

F) Summer 2001: DOW bear market leads a decline in consumer confidence.

G) Fall 2001: 9/11 attacks. Markets and consumer confidence plummet. (FYI: I was just about to close a round of venture funding for a company I was running when 9/11 occurred. That was at the end of a nine month process. Needless to say, the funding was withdrawn and I had to start over. Many start-ups failed due to lack of funding in this period.)

H) Fall 2001: DOW bottoms along with commodity prices (not shown) and CPI inflation is negative in one month and near zero for the quarter(not shown). Fed talks openly about the threat of deflation. Printing presses running full steam. (iTulip explains that the gold price appears to have bottomed [http://www.itulip.com/gold.htm] (http://www.itulip.com/forums/../gold.htm%5D).)

I) Fall 2001: Consumer confidence bottoms, lagging the start of a DOW recovery by several months.

J) Winter 2002: DOW hits a bear market rally peak.

K) Spring 2002: Consumer confidence peaks after rising as the impact on economy of 9/11 is not as bad as expected. Decline in consumer confidence lags the start of another DOW decline, as usual, by a couple of months.

L) Summer 2002: DOW makes its first bottom.

M) Spring 2003: U.S. launches world's first "pre-emptive war." Markets and consumer confidence plummet together. Consumer confidence bottoms for the economic cycle. (FYI: I'd just closed my 3rd round of funding for the company. We have our first flat quarter as sales activity stops. Orders are not cancelled, so the next quarter revenues increase 85% versus 40% as per the previous eight quarters.)

N) Summer 2003: Unemployment peaks for the economic cycle. Note that just as consumer confidence declines before unemployment begins to rise, consumer confidence rises before unemployment begins to fall.

O) Winter 2005: Consumer confidence remains range-bound until Oct. 2005.

P) Fall 2005: Hurricanes Katrina and Rita hammer consumer confidence but have little impact the markets.

Q) Spring 2007: DOW peaks over 14,000 after rising 15% for a year.

R) Summer 2007: Consumer confidence has changed only gradually over the period. The divergence of the DOW and consumer confidence over such an extended period is unusual.

Conclusions

1) The factors that have been driving the DOW up for the past year have not been reflected in consumer confidence because the rise has been driven by factors

DOW Dissonance (http://www.itulip.com/forums/showthread.php?p=12982#post12982)