Skip to comments.Long on the U.S. Consumer --Mark’s Market Commentary
Posted on 08/20/2002 4:12:21 PM PDT by arete
Bad news continues to drip out about the coming weakness. From todays The Wall Street Journal: There is a sense that things have not gotten better in the world economy. The outlook for the global economy is deteriorating amid fading optimism of a second half rebound
As long as the economy hasnt gained strength and momentum, it remains vulnerable to new shocks, be they external or homemade, the Bundesbank warned.
Nearly everything that has occurred since the beginning of the summer has been an economic negative. This is a vicious cycle, says Laurence Meyer.
All over the world, money is flowing into safe assets
Yet the equity speculators are a stubborn lot, and refuse to give up hope on a 1999-style equity meltup, sparked by a second half recovery:
Growing expectations of a recovery have been particularly apparent in the financial markets, says the IMF.
All eyes are currently on the U.S. consumer. The global speculating community has made a giant sized bet that despite all the hints of economic weakness, the U.S. consumer will continue to borrow and spend himself into oblivion.
After some recent observations, I must agree. I see no visible signs of restraint in my neighborhood.
There is still an explosion of new vehicles hitting the road today with those paper tags from the dealer.
There are still too many partially-employed posers hanging around the beach cities, killing time, talking on their 4 oz. stainless steel cell phones.
The parking lots of Home Depot, Target, and Best Buy are still packed.
The largest big screen TV retailer in Southern California has just turned on the afterburners, running full page ads in The Los Angeles Times offering no interest, no payments until January 2004.
The same type program is also being offered by Guitar Center and Mars Music, where drumsets can be purchased by unemployed wannabe rock stars on credit.
Honda and Yamaha just offered zero payment programs available on any motorcycle for six months.
There will be no correction in the economy and/or the stock market until these guys face the repo man. All of these were spotted in Manhattan Beach over the weekend:
The mixed race floor supervisor in the car stereo department at Best Buy (BBY), driving a leased Lexus GS430, with 20 custom wheels financed by Primerica, driving around with his overweight drama queen girlfriend with overprocessed hair and heavy makeup.
The bodybuilding framing supervisor for the luxury spec home builder, driving a Ford F350 crew cab, complete with a $14,000 lift kit financed by Household International (HI), pulling a flatbed trailer with $30,000 of fourwheeler ATVs.
The 25-year old blonde public relations director, fresh out of college, paying $1,800/mo. for a one bedroom apartment near the beach, driving a new BMW 330 convertible, with the latest fashions financed on her Capital One (COF) credit card, barely making the minimum payments while seeking a high income boyfriend to start taking over the bills.
The ex-stripper, now married to the managing director of the Black Oak Hedge Fund, working out at the Sports Center L.A., driving the latest model Mercedes SL500, on her way to the antique dealer, scratching the back of her head wondering what her stressed out husband was talking about on the phone at 3:00am last night discussing systemic risks and illiquid trading.
The artsy movie producer, dressed and tattooed in a manner which would make him incapable of gaining employment at a 7-Eleven, driving a Porsche Carrera 4, wearing $500 sunglasses, wondering how he is going to explain to corporate how is latest $90 million movie flop only grossed $2 million on its opening weekend. Especially since hes now getting cash calls from the 47 real estate partnerships he invested in because of excessive office vacancies.
The current consumption binge since November 2001 will go down in the record books as the greatest of all time.
What is fascinating is how this activity has manifested itself during the beginning stages of what could be a severe multi-year recession.
Prior to 2001, global investors regularly expected and traded the usual ebb and flow of spending cycles. After a 6 9 month binge, it was expected that the consumer would step back and take a breather. After a 3 - 5 year cycle of strong employment, it was expected that some contraction would occur, and stocks would be sold well in advance of the contraction.
This time, its different.
The entire financial planet is now making a bet that the Magic Wand has repealed the business cycle, normal consumer spending cycles, real estate bubbles, and credit booms and busts.
Everybody is making uni-direction bets that global prosperity is a virtual certainty. Prosperity gunned by the mighty U.S. consumer, who is assumed to be a giant vacuum cleaner ready to suck up what ever goods Asia, Europe, and Latin America can produce.
And the expectation that consumer debt and spending levels can remain in the parabola mode indefinitely has been hyperaccelerated by the financial speculators desire to flip stocks, bonds, options, or derivatives using the highest leverage possible.
After all, that is every educated persons dream. To put a small amount of money in somebodys hedge fund, and watch it explode in value so you can retire in 10 years.
There remains a heavy divergence between the corporate bond market and the equity markets. Although some of the higher profile potential bankruptcies have been averted, we dont see any improvement in junk bond prices. Qwest finally unloaded its phone directory business. That is, unless some accounting irregularities spring forth which would trigger a material adverse change and cancel the deal. There are some murmurings about more revenue recognition tricks in this area.
Our favorite junk bond fund may have marked some type of a short term top today: Huge volume needs to come in very soon to take out that big white candle. [ Chart ]
The real estate bubble recorded a final, blowoff top, according to several Mark to Market Indicators
The Wall Street Journal reported homeowners refusing to pay appraisers and demanding new ones sent out by Countrywide (CCR) when they dont get the airball valuations they expected. The last time I witnessed this activity was in August of 1989.
A large percentage of homes sold in my neighborhood have In Escrow or Sale Pending signs instead of Sold. Translation: We have this house sold, but the buyer is not likely to qualify. Other offers are welcome. The last time I witnessed this phenomenon was in August of 1989.
One of my largest clients called me on the phone today, and told me that Northern Trust was prepared to refinance all 7 of his properties with no loan fees or appraisal fees. The fixed rate offered on the residences was 5.9%, and a start rate on the apartment buildings was 3.90%. Thats unheard of, and has to be a record. Ive never witnessed such insanity in my 25 years of lending experience.
The constant drone heard at the cocktail parties is the in your face bragging about how many real estate properties have been acquired for minimal down payments, and how real estate will never go down because this time its different. The last time I heard that was in August of 1989.
As for todays action, there isnt much to report today, other than that the market chopped around a lot today. The volume was kind of light, so its too early to determine what will happen next. If we are going to go sideways a couple more days on lighter volume, then we could build up more power for the high volume dynamite blast necessary to get past the September lows.
Or, we have already seen short covering exhaustion. And if the hopers start selling now, then we could continue to see the beginning of another slow death march down. At the January and March tops, after the hysteria INTC explosions, it appeared that the market was ready for a significant multi-week advance, where all momentum indicators appeared to be charging firmly to the upside.
TODAY, WE HAVE A NEW RECORD LOW 5-DAY ARMS READINGS: 3.38 ON THE NYSE, AND 3.03 ON THE NASDAQ. THESE READINGS ARE LOWER THAN THOSE RECORDED AT ANY OF THE HIGHS THIS YEAR.
Just in case of a top has been put in, well add this milestone. It will be invalidated if we make new highs from here.
August 20, 2002
The major indexes completed a three drives to a top wedge, fueled by three Invisible Hand interventions in the U.S. Dollar and OEX futures, supercharged by thin trading during options expiration week. The interventions occurred in the morning of the July 24 lows when JPM and Citigroup were on the brink of derivative failure, at 3:00am on August 5 after the IMF Brazil bailout, at midday on August 14, and finally in the early morning hours on August 19, culminating in a fakeout punch through the 50-day averages.
The drive was topped off by the lowest ARMS readings of the year, at the end of an all time record fastest point collapse in the VXN.
The last major countertrend rally of a cyclical bear market is always the most convincing Damon Vickers.
You can have my credit cards when you pry them from my . . .
Comments and opinions welcome.
I guess mixed race people shouldn't get credit. I'm against PC, but the guy who wrote this is an A__HOLE.
I think that he was merely painting a picture not making a statement on who should or should not get credit.
OTOH, 'Sale Pending' and 'In Escrow' mean what they say they mean, and the author's interpretation was pretty hilarious. I've seen these signs for as long as I can remember, but now all of a sudden, they mean things are going down the tube.
He's writing for the rough and tumble, irreverent and hardened traders who frequent "Capitalstool.com". It isn't sanitized like CNBC and isn't for everyone.
Consider them the canaries in the coal mine.
Somebody tell me some good news!
1) Personal income rose last quarter.
2) U.S. Productivity rose last quarter (1.4%), which was well below 1st quarter (6.1%) but WAY above anything in recent years for a 6-month average.
3) New home apps are up
4) Unemployment steady. Very slight decrease in new jobless claims.
5) Inflation? What inflation. It is nearly zero!
6) Toys R Us has turned it around; Dell (as I recall) showed a profit; 98% of the major U.S. companies certified without a problem as to their books.
7) Gas is still extremely cheap.
8) East European markets---still the biggest NEW, viable markets in the world, are still wide open.
9) Tax cuts have not (yet) been repealed, so taxes will be slightly lower next tax season. and
(10) the Dow climbed back to almost 9,000, despite months of "talking down the economy" by the media and the Democrats. Consumer confidence remains pretty high.
That should perk you up, but I can probably give you ten more.
There is NO, I repeat, NO consistent sign in any of the traditional "thermometers" of inflation: oil prices, gold prices (which are up very slightly, and only over a very short period), or interest rates, which are at post-Depression lows.
When you have home mortgage rates at 6.7%, that, my friend, ain't inflation.
So corporate bond rates are?
Trade deficit is?
Private and public debt is?
Suit up: The look for fall is serious, sober and button-down -- at work and at play. With banker suits and librarian-length skirts, the $140 billion-a-year fashion industry is hoping to ride the new serious Zeitgeist that reflects everything from a shaky economy to just-yesterday's business scandals. This fall, the first season featuring clothes designed since the Sept. 11 terrorist attacks, retailers from Macy's to Men's Wearhouse are betting consumers will, finally, want to look grown up. The men's suits are gray, navy and pinstripe. Women's hemlines are, sedately, midcalf. And the neckties? They're Reagan-era red.
Will we see Walmart start selling suits?
What is the level of private debt as a share of private assets? Compared to where it was five years ago?
I don't think you want to hear those answers.
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