Some Thoughts On The US Consumer

Some thoughts on the U.S. consumer, who accounts for approximately 70% of U.S. GDP (and about 20% of global GDP). The 70% number is up from about 60% to 65% decades ago, the increase resulting mainly from increased healthcare spending. Anyway, not only is the U.S. consumer a workhorse, but he or she is resilient as well. Acceleration of personal consumption expenditures (PCE) have pulled us out of past recessions.

And this may be a dangerous thought, but I do think "this time is different." I think it's akin to what happened on a large scale during and after the '30s depression: permanent, or at least very long-term behavior change. America and the world should be concerned with the U.S. consumer’s ability to pull the U.S. out of this recession.

It's been a shocking last couple of years, as americans have experienced almost $14 trillion of wealth destruction since the second half of 2007, about the equivalent of one year of nominal GDP. More importantly, however, is the source of this destruction. While we’ve lived through challenging financial markets before (does anyone remember the valuation metric for “eyeballs and clicks”?), americans have never seen their homes, their largest and historically most stable asset, fall in value. Fortunately, capital markets can rebound, and rebound quickly, so there is always a chance for smart investors to earn back some of their retirement savings, college tuition savings and the like. Home prices, however, don’t rebound as quickly, especially when the ability to receive financing for a home is, well, challenging at best. With his or her net worth (possibly) significantly impaired, his or her job at risk and/or wages stagnant, is the consumer going to borrow and spend his/her way out of this recession? I kind of doubt it.

People are spending money; just not in a profligate manner as before. The refi/home equity ATM is closed. Certainly not forever; but for a significant period of time in my opinion. Now, having spread a bit of gloom above, I'm not bearish on the markets (or on anything else, for that matter). I'm optimistic, but then again I almost always am - so that's a bias that needs to be known.

I'm "in" the market; and some people ("experts?") may think my 2 largest holdings are insane: AAPL and BAC. Even in today's environment, there are winners and losers; obviously I think AAPL's a winner. I've gone over the AAPL ground a few times lately, so I won't do it again here. BAC? Am I crazy? No, I don't think so. I think BAC stock is truly suffering from irrational pessimism at the moment. I believe CA real estate has bottomed; their normalized earnings power is more like $2.50 rather than $0.20, as some have written. Therefore, even though BAC itself could certainly be in much better shape, its stock should be trading at 20 right now, not 12. I think it'll be worth at least somewhere in the 30s the next few years.......

long AAPL and BAC