Two Bets Against a Weak Consumer

12/23/2008 1:00 pm EST

Focus: ETFS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Josh Levine of ChangeWave Research say consumer sentiment is worse than ever, and they recommend two short ETFs to play the trend.

The de-leveraging of the American household balance sheet stems from three drivers:

1. More savings from after-tax income
2. Paying off and/or losing credit availability
3. Walking away from mortgages, credit cards and other debt

If this is a return to normal savings rates, that would be positive for the country over the long term, but negative for recovery in 2009. Without a return to 2% to 3% GDP growth in 2010, any stock market rally will die a quick and ugly death.

With that said, the latest ChangeWave Alliance consumer spending survey showed us the first signs that the rate of contraction in consumer spending is flattening out, [but] the 90-day outlook remains the toughest on record in a ChangeWave survey.

In fact, we continue to see many signs that the consumer retreat is not abating.

For starters, record numbers of respondents reported they're spending less money because they're trying to save more and reduce debt. The 90-day outlook remains astonishingly grim.

Three in five (60%) US respondents said they'll spend less money over the next 90 days—one point worse than our previous survey in November. Just 11% said they'll spend more money—one point better than previously.

We also found that consumer sentiment has turned more negative than it was in November. Two-thirds (66%) think the overall direction of the US economy is going to worsen over the next 90 days-nine points worse than a month ago. Only 9% said they believe the economy will improve-a decline of six points to the lowest reading since we began asking this question.

Our Alliance research provides overwhelming evidence that the recession will be deeper and more prolonged than most of Wall Street anticipates.

As further negative earnings and guidance comes out—not to mention the possibilities of further macro shocks to the financial system—we expect the major indices will challenge recent lows and potentially break through to lower levels. November's retail numbers were the weakest in more than 35 years. Surging layoffs and rising foreclosures conspire against any short-term relief.

[So, buy] UltraShort Consumer Services ProShares (NYSEArca: SCC) under $130; [it's an] aggressive buy below $110. (It closed Monday just below $125—Editor.)

At the end of September, one in ten US homeowners with a mortgage was either at least one month behind on payments or in foreclosure. We expect foreclosures will dramatically accelerate broader home-value depreciation as banks become increasingly willing to sell at almost any price in order to get the asset off their books.

Lower the buy-under price for UltraShort Real Estate ProShares (NYSEArca: SRS) to $125; [it's an] aggressive buy below $100. (It closed Monday around $61—Editor.)

(Editor's Note: Both of these are "double-short" funds, which rise roughly $2 for every $1 their underlying indices fall-and vice versa. As such, they are only for risk-tolerant investors who can afford to lose the money they're putting in to these funds.)

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