The Era of Consumerism has Ended  

By Michael Markowski

January 15, 2010 

The market has climbed back to its pre crash 2008 levels and all appears well.  However, there is great risk in the global stock markets.  The probability of the market being much lower by the end of 2010 is due to the following reasons: 

• Consumers are not borrowing and spending.  Consumer borrowing for December fell at its highest rate in 70 years and retail sales fell at their highest rate since 1992, when the data was first published.  This indicates that “consumers” are being rapidly replaced by “savers”.  The era of consumerism, which began in the 1950s has ended because of two reasons.   The first is that the baby boomers, which drove it are now entering into retirement and the second is due to the significant and permanent contraction of available credit.    
• The stock market is frothy.  Just recently, the number of newsletter writers who believe that the market is going higher hit its highest level since February of 2007 and the percentage of those who believe the stock market is going to be lower now in the teens.  The rationale behind this fairly dependable indicator is that when a majority of the newsletters are saying to “buy” their readers are already fully invested and have no more money to put into the stock market.  Thus, a high reading for this indicator usually indicates that a significant correction will soon be underway. 
• Net equity mutual fund sales for the eleven months ending November of 2009 were down compared to the same 2008 period.  2010 will be the second year in a row in which net mutual fund sales declined after many years.  The fact that 2009 could not eclipse 2008, even with a significant rise in the major U.S. indices such as the S&P 500 and Dow Industrials suggests that the era of ever increasing amounts going into mutual funds is also over.  Without an increase in mutual fund inflows it will be very difficult for a new bull market to get underway. 

There is one company whose shares are ripe for a significant decline.  I believe that it presents a great opportunity those who are not averse to shorting the market.  Its share price has risen almost three fold from their March 9, 2009 lows.  This is despite the fact that Franklin’s fundamentals continue to deteriorate significantly.  Annualized revenue has fallen for five consecutive quarters and was most recently down by 30%.  Its annualized Free Cash Flow (the amount left over after it has paid its taxes and purchased its capital equipment) has been down for eight consecutive quarters and decreased by 55% over its most recent 12 months.  Its Free Cash Margin (the percentage of free cash its generates on each sales dollar) has fallen to 14%, which is 50% below its high margin of 31% over the last 10 years.   To find out about this company go to www.BearMarkettracker.com.