The Startling Truth About Consumer Spending
The Dynamic Wealth Report
August 13, 2010
by Corey Williams, Editor
The results are in.
It looks like unemployment insurance benefits are the key to our
economic recovery. It’s an ugly development. But it’s creating a unique
opportunity for you to profit.
Let me explain…
Right now the unemployment rate in the U.S. stands at 9.5%. That’s 14.6
million Americans who are unemployed. (I’m not even going to get into
how many more millions are underemployed.)
Here’s what’s most disturbing. Millions of people are out of work for
far longer than in any previous downturn. The average time of
unemployment has exploded. It’s unlike anything we’ve ever seen.
Can you believe the average length of time a worker is unemployed has
reached more than 35 weeks!
Simply stated, it’s a disaster.
Fortunately, unemployment benefits have helped replace some lost wages. They’ve helped families weather the economic storm. It’s even helped
stabilize the economy.
How important are these benefits to the overall economy?
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I think their impact is huge. And the data backs me up.
Consider this…
9.7 million people are currently collecting unemployment. Almost 4.5
million people are in their initial 26 weeks of unemployment. And more
than 5.2 million people are on extended benefits. These benefits kick in
after their initial 26 weeks.
The amount of money they get varies from state to state. But the maximum
is $400 a week.
This money is quickly pumped back into the economy. It has supported the
rebound in consumer spending we’ve seen over the last year.
One thing’s for sure, it’s not the only reason. But without these
benefits, there’s no way consumer spending would have rebounded so
quickly.
Don’t forget, growing consumer spending was a driving force behind the
market’s recovery last year. Cyclical consumer services companies are
some of the best performing stocks since March 2009.
Here’s the problem. Unemployed workers can collect a weekly benefit for
26 weeks. After 26 weeks are up, they have to apply for extended
benefits.
In May, the money for extended unemployment benefits ran out. And new
legislation to extend them was stonewalled by a Republican filibuster in
the Senate.
Millions of people eligible for extended unemployment benefits couldn’t
get them.
I don’t think it’s a coincidence retail sales, consumer confidence, and
personal consumption (PCE) went into the tank in June. I think it’s a
direct result of the lapse in extended unemployment benefits.
Here’s the silver lining…
New legislation was signed last month to fund extended unemployment
benefits. Just last week, more than 1.2 million people began receiving
extended unemployment benefits. And with weekly benefits of up to $400,
it adds up quickly.
It’s an additional $488 million in spending each week. I think it’s
enough to reverse the weakness we’ve seen in consumer spending over the
last few months.
I don’t think the impact of these benefits is being accounted for in
consumer services stocks.
What I’m leading up to is this… A rebound in consumer spending is
going to catch a lot of investors by surprise. You have an opportunity
to grab consumer services stocks before they take off.
ETFs are an easy way to get exposure to the entire sector.
The iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) is
one of the best.
IYC holds 197 stocks. They’re mostly retail, travel, and media
companies. The top holdings are Wal-Mart (WMT), McDonald's (MCD),
Walt
Disney (DIS), Home Depot (HD), and Amazon.com (AMZN).
These companies will directly benefit from the extension of unemployment
benefits.
Obviously it’s not good sign when you’re looking to unemployment
benefits to drive consumer spending. But it’s the reality of the moment. And it’s creating a unique opportunity to profit from a rebound in
consumer spending.
• Calgon Carbon (CCC) was
upgraded by Wedbush this week. They now have an outperform rating on the
stock. The analyst said the recent selloff overlooks positive
announcement in growth markets.
• Advance Auto Parts (AAP) was downgraded to hold
by Longbow this week. The aftermarket auto parts retailer is up more
than 34% so far this year.
• RBC Capital Markets started coverage on The Gap
(GPS) this week with a sector perform rating. The clothing retailer
reported Q1 earnings per share shot up 45%.
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