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Wednesday, February 24, 2010 12:39 PM

Is Consumer Confidence a Contrarian Indicator?

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On Tuesday economists were surprised when the Consumer Confidence Index Plunged To 46.

The Conference Board’s confidence index slumped to 46, below the lowest forecast in a Bloomberg News survey of economists, from 56.5 in January, a report from the New York- based private research group showed today.

Economists forecast the confidence index would decrease to 55 from a previously reported 55.9 January reading, according to the median of 68 projections in the Bloomberg survey. Estimates ranged from 50.9 to 59.

The Conference Board’s measure of present conditions decreased to 19.4, the lowest since February 1983, from 25.2.
Across the Atlantic, conditions are deteriorating as well. The New York Times has that story in Europe's Recovery Shows Signs of Stalling.
“Recovery in our largest export market — the euro area — appears to have stalled,” Mervyn A. King, governor of the Bank of England, told a committee in Parliament.

There were disappointing economic reports from other European countries as well Tuesday. French consumer spending on manufactured goods in January experienced its worst decline in two years in part because of the end of a cash-for-clunkers program, while Italian consumer confidence fell this month to its lowest level since July.

Belgium’s business sentiment indicator was flat this month instead of the increase that analysts had expected.
A Contrarian Indicator?

Mark Hulbert at MarketWatch thinks that consumer confidence is a contrarian indicator on the basis It's darkest before the dawn.
According to the Conference Board's "Present Situation Index," which measures how consumers are feeling about the economy right now, they are even more pessimistic today than they were at the depths of the 2007-2009 bear market. In fact, as analysts have been quick to point out, you have to go back several decades to find another occasion when consumers were this glum about the economy.

Here's one thing to remember before we get too dejected by this news, however: The last time that the Present Situation Index was as low as it is now was at the end of 1982 and early 1983. Coming as it did at the beginning of a two-decades-long bull market, that was a great time to get into stocks.

As Nathan Rothschild famously once said, the time to buy is when the blood is running in the streets
Blood In The Streets?

There was blood in the streets, in March of 2009. It is pretty tough to say there is blood in the streets now, except from gored bears shorting this bounce too early.

Stock market comparisons between now and 1983 are preposterous. So are fundamentals.

In the early 1980's we had an internet boom, a housing boom, and enormous productivity gains to look forward to. Moreover we had interest rates at 18% that would fall all the the way to 0% and the price of crude fell to $12.

Now we have boomer downsizing, unsustainable debt levels, and a massive attitude change towards savings away from consumption and risk.

Yet, save for a few die hard bears, bullish sentiment is pretty extreme. Most, like Hulbert think we are off to the races based on history. However, current conditions are not like 1983, they are more like 1930.

Rather than being a contrarian play, I think consumers have reached the recognition phase, with a panic phase yet to follow. This possibility is something that economists might want to take into consideration if they would ever take off their rose colored glasses and view the real world for how it is.

It may be darkest before dawn, but the sun has barely set. The contrarian play is to bet against the masses who misunderstand history.

Mike "Mish" Shedlock
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