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Spend it even if you don’t have it!

04/13/2010

Late last year on Fast Money, I began suggesting that the "affluent consumer" was significantly contributing to, and supporting, overall consumer spending. I anticipated a favorable holiday season as frugality shifted aggressively toward "pent up extravagance." Certainly the performance of consumer discretionary, using the XLY (Consumer Discretionary ETF), is confirmation. Of the nine largest SPDR ETFs, the XLF (Financials) is the best performer (+15.28% as of the Friday April 9 close). The XLY is close behind @ +14.21%, resembling how the Red Sox will be positioned versus the Yankees this year. Sorry, back on point.

Clearly, investment banks, core mutual fund managers and, recently, I, have gotten the overweight energy, tech, and underweight consumer names theme wrong. The rapid appreciation this year in the XLY relative to the overall S&P 500 Index +7.11% is evidence. So where are we now? Here is my take.

The feel good, everything is okay consumer rally will have difficulty continuing to outperform deep into 2010. I still like my JUNGLE BOOK TRADE - IT'S THE SIMPLE BARE NECESSITIES over the duration of 2010.

First let's begin with one of the many misconceptions during the credit crisis - the savings rate will soar. Nope, it didn't - February savings rate was a paltry 3.1%. So, we remain a nation of "dis-savers," once again exceedingly overspending any or all of our disposable income. The comfort of rising capital markets possibly will encourage spending, but housing values need to join the asset appreciation party for real consumer spending trends to continue.

Overall, I remain extremely skeptical of favoring consumer discretionary over my Jungle Book theme. Remember, I am trying to look past the "baseball season of frustration" at the end game. Don't abandon the strategy and aggressively overweight consumer discretionary; everything in moderation. Unless, of course, someone offers you 2007 prices for your house. 

CASE SHILLER HOME PRICE INDEX

Source: Bloomberg

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