The State of the Consumer

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A good indicator on the state of the consumer is the sales of Claire's, a chain of stores that sell value-priced jewelry and other knickknacks in its 2,000 locations.

Not only are the stores geographically diverse enough to give us a good read on domestic spending, but their low price points (most stuff is under $20) can tell us how willing consumers are to part with their pocket change. Can't buy a $60 pair of designer jeans? How about a $7 pair of earrings?

A few weeks ago, Claire's reported a 10% drop in same store sales. There's some obvious trepidation out there among buyers, who would rather save than spend. But instead of money-market accounts (and their zero yields), it seems that most folks prefer to stash their savings in the stock and bond markets. Saver inflows are propping up the stock market, even as the evidence mounts that people just aren't into buying stuff; indeed, this recent bout of frugality might change consumption patterns for years.

Still, there are signs of life on the economic front. FedEx reported on 9/11 that its first-quarter profit would exceed guidance due to better-than-expected international demand. Investment-grade debt offerings are set to reach a record this year, as firms are now able to raise cash at favorable rates and reduce their overall cost structure. From both the equity and the debt side, investors are seeking to add to their risky assets.

The hope among bulls is that internal cost-cutting will drive up the bottom line to the point where folks will start spending again. From a risk-return standpoint, peppering equity allocations with positions that are higher in the capital structure may be prudent, just in case the timing of the bull case is less than perfect.

Ben Warwick (ben@qesinvest.com) is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.

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