Unemployment continues to remain high, Washington has shown no consensus on job plans and the U.S. global economic recovery is faltering. Naturally, consumers would alter their spending habits to account for the uncertainty.

The latest Money Anxiety Index (MAI) showed an increase in the level of financial anxiety in September. The index rose to 99.8 up from last month and at its highest in over 30 years.

Unlike subjective economic indicators that gauge how people feel about the economy, the money anxiety index measures how economic indicators affect consumer behavior. 

According to Geller’s findings consumer’s begin to modify their behavior to changing conditions, before their confidence (sentiment) starts to wane. In his latest report, Geller points out that the MAI began to rise in October 2006, three months before consumer confidence began to fall in January 2007, and 14 months before the recession hit.

Here’s a chart of the misery anxiety index prior to the recession:

money anxiety index

Now here’s a look at the consumer sentiment index prior to the recession:

consumer sentiment

September’s MAI isn’t anywhere near its 1980s high of 136, but Geller, developer of the index believes rises in the index signal a recession. Now we’re not saying we swear by this data, but if recent retail sales are anything to go by, consumers certainly seem anxious. If you want to check this out for yourself, look the MAI and recession start dates since 1959:

MAI timeline

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Remember 2008?  The market decline was precipitated by the collapse of Real Estate.  The ripple effects of declining Real Estate were (and are) widespread. 

– Homeowners lose equity (and their Home Equity ATM)
– Defaults rise
– Foreclosures increase
– Banks balance sheets get hit
– Banks fail- Distressed Real Estate sales crowds out legitimate sellers;

Stock investors need to pay attention to Real Estate.  Forget about R/E getting back to the 2000 – 2004 levels or activity for years.

The impact of a double dip, or continuation of Real Estate’s decline, could be more than just economic.  It can bring investor/consumer confidence down.  Declining confidence has been the downfall of many markets. 

Robert Shiller (of the Case Shiller Housing price index) has stated that he expects to see housing fall an additional 25%.

Once real estate bottoms, whenever that is, it does not mean a return to the housing heyday of 2005.  Many of the factors that contributed to the housing bubble are no longer available.  Easy credit, cooperative appraisers, and loose application rules no longer exist. 

So even if, and when, the housing market stabilizes, don’t expect to see a boom.  It just isn’t going to happen.                 

This means that one of the forces that drove the stock market from the low in 2002 to its peak in 2007 will be missing. 

So far we attribute the stock market’s bear market rally from the low in 2009 to the liquidity that the Fed is pumping into the system.  Housing is not there to take the baton from the Fed and keep the stock market going.

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People are making some noise about the fact that on a non-seasonally adjusted, house prices in April were slightly above where they were in March.

But this is the easiest way to look at it: The year-over-year declines for the broad 20-city Case-Shiller composite index shows things getting worse, not better.

For more details, see here.

chart

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four casino las vegas queens

Morgan Stanley equity strategist Adam S. Parker reports that investors are asking 4 big questions, to which he provides his thoughts.

1) Is this just a temporary soft patch? While US GDP will likely recover in the second half of 2011, the correlation between GDP and the S&P 500 is negative year-to-date and very low historically. Moreover, auto stocks are not responding to the prospect of a 2H production recovery, with F and GM now at multi-month lows. In our view, even a mid-cycle correction (the current bull case) is likely to last longer than just a few weeks. We are not buyers of the retreat, at least until forward profit margin expectations get reset, as market sentiment has shifted –it’s now guilty until proven innocent.

2) What about energy stocks? While Brent has now strengthened back to within just 5.4% of its 2011 high, the stocks have nonetheless declined 5% month-to-date.    We remain neutral on energy stocks, preferring low beta exposure until evidence that strengthening demand resurfaces.

3) Are banks cheap enough? The correlation of the net income between banks and retailers is high, and pair-trading banks against retailers is now likely prudent giving the compelling attractiveness of banks’ beta. We remain market-weight financials, however, due to concerns about demand for loans and regulatory risk.

4) Where’s the attractive beta? Technology and industrials have been highly correlated in recent weeks, with AAPL, GOOG, MSFT, CAT, GE, DE, and UPS, among others, at or near multi-month lows. Technology has never been cheaper on price-to-forward earnings relative to industrials, and we remain overweight technology and underweight industrials.

 

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