Why Consumers aren't Consuming

By Ron DeLegge, Editor

April 28, 2008

SAN DIEGO (ETFguide.com) - For so long, U.S. consumers were doing their job by consuming, but now the tables have been turned on them and they’re the ones being consumed.

A tidal wave of bad news is devouring consumers across the nation and it promises to crimp their spending and once comfortable lifestyles.

Here’s a quick gander at how bad things have gotten:

--Weakening confidence. In line with readings from the University of Michigan, consumer sentiment is at the same lowly levels of the 1982 recession.

--Soaring food and energy prices. Crude oil and gasoline prices remain stubbornly high and are consuming a larger percentage of people’s income.

--Sagging home values. Economic forecasting firm, Global Insight projects U.S. home values to decline by a staggering $1.2 trillion this year.

For all these reasons and more, many economists are predicting something that hasn’t happened since 1991: A decline in consumer spending for this quarter.

Interestingly, the S&P industry sector most sensitive to consumer spending hasn’t been slammed as hard as one might expect.

The Consumer Discretionary SPDR (Ticker: XLY) is down just 1 percent on a year-to-date basis. It’s also outperforming both the broader S&P 500 and along with its more defensive cousin, the Consumer Staples SPDR (Ticker: XLP).

85 stocks are contained within XLY including Home Depot (Ticker: HD), Starbucks (Ticker: SBUX), and Whirlpool Corp. (Ticker: WHR).  

Just last week appliance maker Whirlpool reported a 20 percent decline in first-quarter profits. The company subsequently slashed its 2008 earnings forecast and warned of more bad news ahead.

Some of the restaurant chains within XLY, like Yum! Brands (Ticker: YUM) and Darden Restaurants (Ticker: DRI) are being stung by surging food costs and slower traffic.

Even though XLY has outperformed the more defensive XLP so far this year, it’s an odd discrepancy that won’t likely last. XLY is far more dependent on financially strong and confident consumers than XLP.

XLP has a basket of just 40 stocks. Among the group are Campbell Soup (Ticker: CPB), Coca-Cola (Ticker: KO), and Kraft Foods (Ticker: KFT).

Other ways to profit from worsening conditions for U.S. consumers is by owning the Proshares Ultrashort Consumer Goods (Ticker: SZK) and Proshares UltraShort Consumer Services (Ticker: SCC). Both exchange-traded funds (ETFs) are designed to increase in value when consumer stocks fall.

To date, SZK is ahead by 9.7 percent and SCC is up by 1.8 percent.

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