We keep hearing that we cannot count the consumer out and they will spend to support our robust 2.8% GDP growth we clocked in at last quarter. The experts all claim that same store sales are great, but they forget to tell you that most companies closed down tons of stores and Best Buy is benefiting from Circuit City’s failure. However, all the cheery news we are hearing does not jive with Black Friday’s relatively dismal sales.

According to the NRF consumers spend .5% more this Black Friday than last year, which sounds great, right? Not really. Considering a year ago we were on the “brink” or “abyss,” or any other term you want to use to describe horrible, sales were only up .5% when things were so good? I am sorry, but that does not fit with this strong recovery story being thrown down our throats like it is going out of style. If we were in a recovery or things were as good as we are being told sales would have been estimated to have been a lot higher than .5%.

Not only that, but who believes you get the best deal on black Friday? History has proven that the longer you wait, or buy online as most shipping is free, the better the prices get. On top of that, I did not hear one report of anyone getting trampled to death at Walmart, so I find it hard to believe sales were even up .5%. Not that I am rooting for anyone to get hurt or anything, but with a .5% print we should have seen some good pushing and shoving on the news, I got nothing up where I am.

While I do believe things are better I do not think they are nearly as good as being reported. Even David Rosenberg, who may not be the best market forecaster, but is one heck of a economist, is using the term depression to describe our current situation. I know, there are no soup lines, but here is what you need to remember about a modern day depression, we have unemployment, Social Security, food stamps, a whole variety of other public and private organizations dedicated to helping those less fortunate. In other words, this is not your grandparent’s depression.

Do I think we are really in a depression? If we are not it is very close to one and denying that is crazy. What else would you call 10.2% official unemployment, 17.5% U-6 underemployment? Considering U-6 is how we measured unemployment during the 1930’s I think 17.5% qualifies as a depression, but hey let’s not let facts or history get in the way of a great recovery story. I am a whole lot more optimistic than I was as long as other countries keep printing money as well, but the minute they stop and we continue I will be extremely pessimistic as that is when we head for real trouble. In fact, even with others printing money we are in trouble, but I digress. I believe in America and know we will get through this. However, if government does not get its act together and get out of the private sectors way, well, we will have soup lines again.

No one seems to be paying attention to how energy prices are rising at a rapid rate during these economically tough times. In fact, those who are paying attention to energy claim that the rising cost of energy is a “good thing” because it shows that the economy is on fire. I would first like to point out that there was never any real fundamental reason for energy to ever trade as high as it did last year, production was fine, supply was fine and capacity never even hit 100%. In a nutshell there was no shortage which $147 a barrel indicated there was, but what that price did indicate was a record low in the USD other than that no other fundamental indicator reinforced that price.

In fact, several reports, after the fact, showed that it was market manipulation that caused the price of crude to balloon to record highs. This led to position limits, but frankly the CFTC has probably the worst regulators in the history of regulations, even worse than the SEC. So, I have no hope for further manipulation to be avoided in the near future. Keep in mind that while I think it was blanket manipulation I could be wrong, but I have seen nothing to the contrary to suggest I am so that is my opinion.

Now, how is energy going to kill Santa? Energy prices are the tax that impacts everything in everyone’s life about just how much control oil has over our everyday life. My favorite example is your utility bill because most people do not understand how their utility bill actually works. By law your electric utility is not allowed to profit from selling you electricity or natural gas, they make their profit from delivering it to you, so this means they do not care about pricing and you get shafted on the pricing. Just in the last 30 days natural gas almost doubled at National Grid, it went from $.39 per therm to $.69 per therm, that will surprise people next billing cycle considering the weather got very cold very fast this year.

The other big surprise is that delivery service charges this year are at record highs. I called National Grid to ask why this was the case, they are thoroughly confused to how supply and demand works, but that is a different story altogether. They said since demand was higher last year that delivery charges were lower, somehow when demand is up delivery is lower and when demand is lower delivery is higher which would be a shocker to my economics teacher. So, this year you are getting an extra charge for delivery which outweighs your actual usage charges, go look at your bill if you don’t believe me, and that will continue for a while as natural gas prices increase, a double whammy.

My house is modest, 2,000 square feet or so, and I locked in energy rates at 7 year lows, but my energy bill actually doubled this summer when they should have decreased by 25% by my calculations. Now, if you did not lock in your rates you are facing rising costs plus that higher delivery charge. This adds up and then you have the gas pump which will surely go to $3+ a gallon if we it $80 per barrel. Then that will cause food prices to go up, dramatically because 2008 is still fresh in everyone’s mind and people will be hedging or trying to get ahead of the curve making it a self fulfilling prophecy of $4 a gallon.

See where this is going? What will make this even worse is a weakening dollar and the Fed is doing more to fight the recession and in a much weaker position to defend the dollar, which it has no interest in doing anyhow. All of these higher costs will kill Santa causing Xmas sales to stink in a bigger than expected way. Do not forget that states are acting very quickly to pad their weakening balance sheets and seem to think that rising taxes, i.e. sales taxes, utility taxes, etc., will raise money quickly. This is a fallacy as consumers adjust very quickly and stop spending when taxes go up and things get too expensive. Politicians do not understand this, and likely never will, which is why in NY we have net losses in population instead of net gains.

Based on where we are in the energy markets I suspect that energy will slay not only Santa, but Chanukah Harry as well. With shrinking credit lines and no new credit lines to tap there is no place to turn except for cash and, frankly, unemployment checks just do not go that far. This is a big problem that is being ignored and Wall Street can pretend that everything is fine, but when we have an economy driven by the consumer, 71% driven in fact, and we have another wealth transfer to the energy complex it will kill the rest of the economy and Santa as well.

This week should be fairly busy with market moving data points and bond auctions which will help gauge the economic recovery that we are told is happening now. The biggest data point, in my opinion, to watch is consumer spending which economists expect to grow at 50% of June’s rate. June delivered a ‘strong’ .4% increase in spending and July has a medium estimate of a .2% increase.

I have no idea which way the number will come in as the bar is set fairly low and people are out spending for back to school items. I believe there is a case for either an upside surprise or very dismal results. In general, I believe spending will continue to decline as unemployment appears to be on the rise again, but July may surprise us to the upside as sales and deep discounting of products is attracting consumers. However, discounted products squeeze profit margins and employers are getting more out of their existing workforce, mainly because people need to keep their jobs, but lower profit margins make it impossible to keep people employed.

The Case for an Upside Surprise

According to Bloomberg purchases, excluding automobiles, dropped .6% as of August 13^th. They went on to say that retail sales slipped .1% in July which leads me to lean towards an upside surprise in consumer spending. Mostly because of pent up demand, we love to spend money, along with deep discounts and kids just a couple of weeks to get ready for their first day of school are a recipe for a surprise. Frankly, the ingredients are there for people to spend more as they are told the economy is recovering and stocks are up.

Perhaps June’s numbers were so bad because people where saving money for July and August to buy their kids new clothes. If that is the case then we definitely could have a, albeit short-term, surprise to the upside which will surely cause the market to add 100 or so more points to its overbought averages. If we do get an upside surprise I am sure it will be a one-off event as people really are hurting.

The Case for a Downside Surprise

While people are told things are better, they know better because they live in the real world and not in statistics. Unemployment has been creeping up over the last two weeks and many people have lost access to emergency unemployment benefits which means hundreds of thousands of people are absolutely broke. For those who are employed, their falling home value and massive stock market losses from last year make them feel especially poor.

Not to mention, their credit card bills just went up by 2% and they either closed some credit cards or the credit card issuer closed the account for them. Either way, they have less available credit to buy things which will and cash, frankly, is in short supply. However, the kids got to have the new Nike’s or Guess jeans or whatever is cool and obscenely expensive nowadays and who are parents to say no. There is also the likelihood that people blew their money on a new car with the cash for clunkers program. A surprise to the downside would mean that the Dow would probably come off a good 50 points as it, inexplicitly, does not go down now, ever.

The End Result

No one has any idea what the number has in stored for us and I am much more interested in the unemployment numbers that will be out Thursday. Contrary to popular belief, I believe unemployment is a leading indicator for our current problems as this is a credit led recession, unlike other recessions we have had in recent decades. I am sure that the markets will blow off any bad news and continue to trade in the top end of its current range. Frankly, the markets behavior make no sense to me as it is so overbought right now and, regardless of what they say publicly, no one has a real explanation for its rapid and sustained gains.

The really good news is that I have also noticed that the crowds picked up at stores in the last month which means they may be out spending money. However, I am willing to bet the average transaction size is much smaller than it was last year at this time. Either way the numbers come I am sitting out of equities with only 25% exposure, the risk/reward ratio is just not attractive, and am looking for a sharp decline in September or October when liquidity returns to the market. While I could be wrong on the timing, I am not wrong overall as the markets have 4%+ GDP growth and a lot of very, very, good news priced into it right now.