Market Problems Could Mean Drop in Consumer Spending

The bulls and bears are slugging it out at this time given the continued uncertainties regarding the weakening housing market and credit issues. On Monday, Citigroup, Inc. (NYSE/C) announced it would need to take $8.0 billion to $11.0 billion in additional losses related to the housing and subprime problems. The news clearly supports my contention that the current market risk remains high but ignored by the bulls.

On Monday, Fed Governor Randall Kroszner scared investors after saying “.conditions for subprime borrowers have the potential to get worse before they get better” in a speech at the Consumer Bankers Association Fair Lending Conference.

The soft housing market and credit concerns could have an impact on consumer spending. The Conference Board Consumer Confidence Index fell to 95.6 in September, the lowest level since an 85.2 reading in October 2005. The concern here is that low consumer confidence could translate into a decline in spending in the holiday shopping season following Thanksgiving.

Add in the high oil prices at over $90.00 a barrel and their impact on inflation and consumer spending, and you have a situation that could blow up the markets.

Buying has been driven by some decent earnings from key companies. In addition, the third-quarter GDP report showed strong growth of 3.9% versus the estimate of 3.0%. The reading was the strongest in about 1.5 years and could mean that the economy is not as bad as believed.

My advice at this time is to be careful and watch your positions, especially those that have moved up quickly over the past weeks or months. You can protect yourself in several ways: setting stop-loss limits; buying put options on stocks or indices; or simply taking some profits off the table, especially after strong gains in the stock.

In my view, if we do see a major surprise impacting stocks, the market could be vulnerable to some major selling.