Yesterday, Art Cashin sounded like he was reading my Morning Alert to CNBC viewers saying: “Everybody’s sitting on their hands waiting for the Merkel-Sarkozy meeting and they may have their hopes a little too high.” Cashin sees parallels between the current market and the 1987 crash, and he even closed with: “you want to be very careful here.” You also want to be careful about the retail sales and consumer data we’re seeing. As David Fry notes:
Consumer Metrics Institute, a painstakingly reliable organisation reported some interesting data Monday. First they attributed the rise in consumer credit primarily to Student Loans. Further, on a “back of the envelope” estimate they suggest roughly $100 billion of consumer stimulus is in the economy from “rent free” mortgagees’. So with many homes in default banks aren’t pursuing foreclosure as a remedy thus providing those folks with disposable income. It’s that pesky Moral Hazard thing again. It’s unfair to all paying their mortgages faithfully knowing their neighbour and others aren’t. For those living rent free it’s more rationalized cash for iPads and other stuff.
That also helps to explain the incredible divergence of Retail Sales vs. Consumer Confidence (chart from Zero Hedge). I had postulated this weekend, as we were discussing the chart above with Members, that the divergence was a reflection of forced or compulsory spending. In other words, consumers used to have discretionary income which they would use or not use depending on their mood. Beginning in 2008, consumers had less money but the price of commodities shot up and that has kept consumer spending high – but that doesn’t mean they are happy about it.
In 1999 or even 2004, a consumer would have $100 in their pocket and drive to the mall and buy a tank of gas for $30 and have $70 left to spend. In 2011, the same consumer (if he still has a job) has the same $100 (assuming health care costs didn’t go up and he eats 40% less) and he stops for gas and now it’s $75 and he has $25 left to spend. He’s still going to spend that whole $100 – but don’t expect him to be HAPPY about it! Now let’s consider that that same consumer has no job and is falling another $2,500 a month into debt to the bank – sacrificing their homes to keep food on the table – THAT’s what we’re looking at with $10Bn of mortgage debt piling up every month…
Moody’s may not have downgraded the U.S. credit rating, but that doesn’t mean it’s feeling good about the U.S. economy, lowering its growth forecast to 2% for the rest of the year and 3% next year from its earlier view of 3.5% growth for the rest of 2011 and another 3.5% in 2012. The likelihood that the U.S. will fall back into recession is one in three, Moody’s contends.
Fitch released a report on its Sovereign Rating Methodology today with no “substantive” changes to its review process. The US will maintain it’s AAA rating with Fitch but the agency warned previously it may place a negative outlook on the U.S. later this month, although it also said it was encouraged by the debt agreement signed by Obama.
Over in Europe, France’s CDS swaps have gotten more expensive than Panama as hedge funds are just saying no to the Euro in general and all sorts of imbalances are being created in the more thinly-traded swaps markets as money moves away from the under-priced big boys.
It’s interesting how all this is lending credence to Karl Marx’s view that Capitalism ultimately self-destructs as income is driven away from the workers and pooled in the investment class who then, in turn, begin to attack each other as excess capacity runs headlong into a lack of aggregate demand. That Marxist logic led us to make two very successful short plays on oil yesterday – one that we took off the table and then the USO Sept $32 puts at .90 are going to be looking good this morning as the oil futures slip back towards $85. As Nouriel “Dr. Doom” Roubini warned yesterday:
We’re not there yet but I think there is a risk that this is the second leg of what happened during the Great Depression. We had a severe economic and financial crisis, then we kicked the can down the road (and have) too much private debt—households, banks, governments. You cannot solve the problem with liquidity. At some point where there is too much debt either you grow your way out of it…either you save yourself out of it…or you can inflate your way out of the debt problem, but that has a lot of collateral damage. We’re not doing it. We’re creating zombie households, zombie banks and zombie governments, and you can have a depression.
A sobering chart produced by the Atlantic adds back in Americans who left the job force temporarily to derive an alternate unemployment rate. The methodology is grounded on the theory millions of Americans discouraged from looking now will start again if the economy picks up.
So how bad is unemployment by this measure? Try 12.5%. Meanwhile, ICSC Retail sales FELL 1.5% this week, accelerating from -0.5% last week. The weak sales are attributed to consumer concerns over losses and volatility in the stock market. However, a drop in gasoline prices may help restore consumer confidence.
July housing starts were also awful at -1.5% (604K) and permits are down 3.2% to 597,000. As we already discussed in Member Chat early this morning, both German and EuroZone GDP was a miss this morning with Germany dropping all the way down to 0.1% from 1.3% in Q1. That did not stop the UK July CPI from hitting a blistering 4.4% with Upward pressures included goods & services; clothing & footwear; household goods & maintenance; housing & household services.
Now for the good news (yes, there is some!): July Industrial Production was up 0.9% and, while that was in-line with expectations, it’s the first report in two weeks that was and it’s up from 0.2% prior with Cap Utilization (an indication of hiring needs) at 77.5%, above the 77.1% expected and a nice move up from June’s 76.7%. Dow components WMT and HD also reported nice numbers. We wait patiently to hear what The Merkoszy comes up with later today and, most importantly, we’ll be watching those Must Hold lines – which HAVE to be taken back this week.
I wonder if Cramer will mention the death of his long-time favourite, ESLR today? This Momo Solar has had a wild ride but it’s finally over as they filed Chapter 11 today as Chinese competition and EU austerity drove the final nails in their coffin. We have to forgive Cramer for ignoring ESLR as he’s probably too busy answering the phone about SODA this morning.
We are still very cashy and very cautious. As Art Cashin says – Be careful out there!