Stock Chart Says Very Merry Christmas for Retailers this Year

consumer spendingTwo very important parts of the economy, both dealing with consumers, are “heating up” and I want my readers to know about them.

Once the government’s “cash for clunker” program to spur U.S. car sales ended, many auto analysts were concerned that car sales would plummet. The opposite occurred.

In fact, auto sales are booming. For September 2010, General Motors posted an 11% rise in units sold, Ford sales were up 41%, Chrysler sales were up an astonishing 61% and the world’s biggest car maker, Toyota, said that its September unit sales were up 17% from September, 2009. How’s that for growth!

Consumers are returning to the showrooms and buying cars again. They are cautious, they are looking for a deal, but they are buying. And that’s the most important thing. But it’s not just cars that consumers are buying.

The U.S. Commerce Department said on Friday that consumer spending in the U.S. rose 0.4% in August, more than the Street had been predicting. So, what does this mean? It means that you should expect U.S. retailers to have a better-than-expected Christmas season.

Veteran readers of my column know that I’m a big believer in stock charts. To me, a stock chart can tell the story six to 12 months out. A look at the Dow Jones Retail Index shows a mini bull market. This index was one of the biggest winners in September, up 13% for the month. This stock chart says that Santa will make it a Merry Christmas for retailers this year.

Consumer spending makes up 70% of the U.S. economy. These consumers are buying again, both big-ticket items like cars and small-ticket items like retail products. If it were not for the overhang of the U.S. housing market, given the continued accommodative stance of the Federal Reserve, this economy would actually be booming.

Michael’s Personal Notes:

An article in The New York Times this weekend covered a topic that our government is likely not happy to hear about: corporations, instead of spurring the economy with capital investments to create jobs, are hoarding their cash. U.S. corporations now sit on about $1.6 trillion in cash.

I wrote about this in PROFIT CONFIDENTIAL a couple of months ago. Still worried about the economy, big companies prefer to keep their cash instead of investing it in new equipment, buying competitors or launching new products/services. And, in an effort to add to their cash hoards, companies are actually borrowing money they really don’t need, as they can access cash at record cheap costs.

While I’m not here to comment on the morals of big U.S. companies hoarding cash as opposed to spending it to spur the economy, as an avid stock market watcher, I see the hoarding of cash by these companies as a good thing. The stock market loves to climb a wall of worry. And when you have U.S. corporations sitting on a record amount of cash during a recession, it means that these companies are still very worried about the economy. The more worried they are, the higher I believe stock prices will rise.

The cash these companies are hoarding is actually a built-in back-stop for the stock market. In the event the market crashes or begins its bearish descent to Dow Jones 6,440 (the low from March 2009), these companies will have ample cash on hand to initiate stock buyback programs to protect their stock prices.

Where the Market Stands:

While investment newsletter writers and stock advisors are feeling somewhat more comfortable with stocks give the best September we’ve had for stock since 1939, caution still prevails. I read one well-known newsletter this weekend that was very bearish on stocks for
the majority of its 10 pages.

On the backdrop of this negativity, I believe that the stock market will continue to rise. The Dow Jones Industrial Average opens this morning up 3.9% for the year. I remain convinced that the bear market rally that started in March 2009 remains intact.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else