A Deeper Look At Consumer Spending

Here is a graph of the year-over-year percent change in consumer spending in chained 2000 dollars. DG = Durable Goods, NDG = Non-Durable Goods and Service = service (duh). Pay particular attention to the first two areas of change. They represent the first year over year levels of consumption expenditures coming out of a recession. Here is the point of this graph. Consumption expenditures are still strong on a year-over-year basis. Until we start seeing YOY comparisons like those in the first few quarters after the recession the economy should be doing OK.

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Consumer Spending Year Over Year Change

Here is a chart of Personal Consumption Expenditures year-over-year change in chained 2000 dollars. The previous chart I used was derived from the wrong data set.

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Construction Spending Up .2%

From CBS:

Spending on U.S. construction projects rose 0.2% in March, fueled mostly by outlays for private nonresidential projects and offsetting a drop in spending on federal and private residential construction.

Construction spending in February was also revised to rise significantly upward, by 1.5%, from a previously estimated gain of 0.3%, causing some economists to boost their projections for first-quarter economic growth.

Let's look at the numbers:

Total annualized construction spending was $1.187 trillion in March, with private construction spending totaling $900.281 billion.

Private residential construction totaled $569 billion or about 48% of total construction spending and 63% of total private spending. This number was down 1% from February and 14% from March 2006. At the same time, private nonresidential spending is up 2.4% from February and 16.5% from March 2006. However, public nonresidential spending was up .4% from February 2006 and 9.5% from March 2006.

Here's an interesting fact. The total value of private and public nonresidential spending is $609 billion, making it about $50 billion larger than nonresidential. That means these combined sectors could theoretically absorb construction workers displaced in the housing slowdown. That assumes that residential and nonresidential construction projects are occurring in the same location and involve the same skill sets etc...

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Consumer Spending Decreases .2% In March

From the AP:

The Commerce Department reported that consumer spending on all items was up 0.3 percent last month, the slowest increase since a similar rise in October. Incomes rose by 0.7 percent, the fourth straight solid month of income growth.

The spending performance was even weaker when the effects of higher gasoline prices were removed. After adjusting for price increases, consumer spending actually fell by 0.2 percent in March, the poorest showing since the fall of 2005 when the economy was suffering the aftershocks of Hurricane Katrina.

From Bloomberg:

``I would expect, especially if gas prices continue to push higher, that consumers are not going to be contributing nearly as much'' to economic growth, Chris Low, chief economist at FTN Financial, said before the report.

.....

``The rise in gasoline prices ate up the gains in nominal spending,'' said James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``Everything points to a much weaker consumer in the second quarter.''

This is one of the main reasons I focus a great deal of attention on gasoline prices. It's a price consumers have to pay, usually at least once a week. It's also a vital expense. Consumers will buy gas pretty-much regardless of the economic circumstances. When gas prices increase, consumers may cut back on spending on other goods and services.

The drops in consumer spending occurred in non-durable goods and services. These sectors dropped by 2.8 billion and 13.2 billion in chained 2000 dollars.

The inflation numbers were mixed. CBS reported:

The core personal consumption expenditure price index was flat in March, bringing the year-over-year increase down to 2.1% from 2.4% in February. Economists had expected a 0.1% gain in the core PCE.

The downward direction on inflation is sure to please Fed officials, but the level remains above the central bank's inflation ceiling of 2%.

Total inflation rose 0.4% in March and is up 2.4% over the past year.

For those of you who don't consumer food or energy, you saw no price increases. For the rest of us, we saw an increase especially in oil. The price at the pump in Houston Texas (where I live) is just below $3.00/gallon for premium. And it's only the end of April.

It's important to add the Fed has been forecasting lower inflation from lower growth for nearly a year now. Inflation has remained above the Fed's comfort zone for most of this time. While it has dropped a bit it's still higher than the Fed would like. Conversely, it's also important to point out inflation has not gotten out-of-hand. It's just been very stubbornly hanging on to the 2% - 2.5% range for some time.

I still don't see the Fed lowering rates because of this. They have firmly come out on the side of fighting inflation at the expense of economic growth.

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Technical Issues Hurting Refiners

I've been closely following the gas market for the last few months. The reason is simple: gas prices are higher than the same time last year partly because gas stockpiles are down in a big way (here's a link to the latest update.) It turns out refiners are having more problems than usual:

Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough U.S. refineries, they don't run right.

After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime that has raised concerns about the adequacy of oil-product supplies.

Just about every day in recent weeks, a period when refineries ramp up production, unit malfunctions, fires and other mishaps have had oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.

This is an issue the US will have to come to grips with over the next few years. So long as the US is dependent on gas for a variety of necessary economic functions all of the parties involved -- but primarily business and environmental concerns -- are going to have to figure out a way to deal with the situation.

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Big Stocks Finally Beating Small Stocks

From the WSJ:

For months, Wall Street professionals have been recommending big-company stocks as a safe bet in a slow-growing economy, only to be proven wrong as small stocks surged ahead.

Now, after the Dow Jones Industrial Average's run this month to records and its first close above 13000, gains for blue-chip industrials this year are equal to those of the small-stock Russell 2000 index. Both are up 5.3%. But for just this month, the industrial average is up 6.2%, compared with 3.6% for the Russell.

The gains for big household names like those in the industrial average were fueled by quarterly earnings gains that beat expectations for the likes of 3M, Microsoft and Exxon Mobil. Microsoft, for instance, posted a 65% earnings surge and its stock jumped 3.5% in one day on the Nasdaq Stock Market.

......

The common wisdom has been that large companies, which often have more-extensive overseas operations than small companies, are better positioned to withstand a softer U.S. economy. They also benefit from a weaker dollar because profits in foreign currencies look more impressive when translated into dollars. The U.S. currency on Friday touched its lowest point against the euro since the launch of the common currency in 1999.

Strong international sales have been a common theme for the duration of this earnings season. Many large companies have literally the same reporting template: weak US economy, strong international demand.

However, how much of the gain in sales is actually due to stronger sales and how much is actually due to the dropping value of the US dollar relative to other currencies?

This has been a theme of the WSJ's blog for the past week or so.

Here's a chart of the Dow versus the Russell 2000 for the last 4 years and the last week.

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The End of Free Banking

The Office of Fair Trading (OFT) last week announced that it would launch a full-scale investigation into unfair bank charges on current accounts.

The OFT inquiry will be completed by Christmas, and will examine whether the "provision of so-called free banking" is explained clearly to customers. The OFT will also continue to study the fairness of unauthorised overdraft fees.

OFT chief executive, John Fingleton, said:

"This market study will enable the OFT to consider wider questions about transparency and value in the provision of personal current accounts. This will provide the necessary context for assessing the fairness of unauthorised overdraft and returned-item charges before we apply the law in this area."

Needless to say the banks have been quick to issue a counter threat, by warining that any regulatory restriction on unauthorised borrowing charges might force them to end free banking to their customers who stay in credit.

As noted many times before on this site, banks are not charities they will make money one way or another.

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Painting Weekend

I'm painting the house this weekend -- with much needed and appreciated help from Bonddad's wonderful girlfriend. I'll be back Sunday night.

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Gasoline Supply May be Very Tight This Summer

From CNBC

Phil Flynn, a member of Alaron Trading, told CNBC’s “Squawk Box” that the U.S. may face tight gasoline supplies this summer.

“(Production numbers) better change soon,” Flynn said Friday. “Otherwise, we’re going to have big problems in this country. I don’t know how we’re going to get gasoline supplies where they need to be by Memorial Day. We need to be at 210 million barrels in just a few weeks. We’re at 194 million.”

Here's a chart of US gasoline supplies. The red line -- the line that is heading down in a big way -- is the current inventory level.



This means that gas prices could again be a problem this summer.

Last summer we had $3.00/gallon prices and above with little painful effect on the overall economy. However, we've now had 4 quarters of slow economic growth, and a year of bad housing news. This summer $3.00/gallon may be an inflection point hitting consumer spending negatively.

As with most things economic, we'll have to see how this one plays out.

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Advance Estimate GDP = +1.3%; Price Deflator Increases 4%

From the BEA

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the first quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.

The Bureau emphasized that the first-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The first-quarter "preliminary" estimates, based on more comprehensive data, will be released on May 31, 2007.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the first quarter primarily reflected a downturn in exports, an upturn in imports, a deceleration in PCE for nondurable goods, and a downturn in federal government spending that were partly offset by a smaller decrease in private inventory investment, an upturn in equipment and software, a smaller decrease in residential fixed investment, and an acceleration in PCE for durable goods.

From Bloomberg:

The U.S. economy grew in the first quarter at the slowest pace in four years, hobbled by the slump in home construction and a bigger trade deficit.

The 1.3 percent annual growth rate was less than forecast and followed a 2.5 percent fourth-quarter pace, the Commerce Department reported today in Washington. A measure of inflation watched by the Federal Reserve rose at a faster pace.

.....

A jump in oil last quarter pushed up prices. The report's price index rose at an annual rate of 4 percent, the most since 1991, compared with 1.7 percent in the fourth quarter.

The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, up from a 1.8 percent fourth-quarter gain. Fed Chairman Ben S. Bernanke is among policy makers that have said a 1 percent to 2 percent increase is preferable.

From CNBC:

Weaker exports and a steady slide in spending on homebuilding helped slow U.S. economic growth to its softest pace in four years during the first quarter, the Commerce Department reported on Friday.

Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3% annual rate in the three months from January through March.

That was a little more than half the fourth quarter's 2.5% rate and well below the 1.8% rate that Wall Street analysts had forecast GDP would expand. The last quarter when growth was weaker was in the first three months of 2003, when GDP expanded at a 1.2% rate.

.....

A price gauge favored by the Federal Reserve - personal consumption expenditures excluding food and energy items - increased at a 2.2% rate in the first quarter, slightly ahead of forecasts for a 2.1% advance. That was up substantially from the fourth quarter's 1.8% rate and is likely to keep Fed policy-makers wary about the potential for a pickup in inflation.

From CBS:

Hit by rising energy prices and a weak housing market, the U.S. economy slowed to 1.3% real annualized growth in the first quarter, the weakest expansion in four years, the Commerce Department estimated Friday.

.....

Led by higher energy costs, the GDP price index increased 4%, the most in 16 years. Meanwhile, core consumer prices - which exclude food and energy costs - increased at a more moderate 2.2% annual pace. In the past year, core prices are up 2.2%, the same year-over-year pace as in the fourth quarter, but above the Fed's 2.0% ceiling.

Consumer prices including food and energy are also up 2.2% in the past year.

Here are the details from the report.

Personal Consumption Expenditures (PCEs): + 3.8%. The big surprise here is the 7.3% in durable goods expenditures. The big reason for the jump was a jump in car and furniture sales.

Gross Private Domestic Investment decreased 6.5%. Residential investment fell 17%, which is to be expected. Nonresidential investment increased 2%, with the subcategory structures increasing 2.2% and software/equipment increasing 1.9%.

Exports decreased 1.2% and imports increased 2.3%.

Government spending (government consumption expenditures) increased .9%. Federal spending decreased 3% and state spending increased 3.3%.

Here's the summary:

This report is terrible. Growth slowed more than forecast and inflation increased more than expected and well beyond the Fed's comfort zone.

The Fed is between a rock and a hard place. They've been there for awhile and they will remain there for the foreseeable future.

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Treasury Market Update

Let's take a look at the weekly 10-year Treasury chart.



There are two trends on this chart.

1.) Since interest rates hit 5.25% in early July 2006, rates have headed lower. Remember that Treasury prices and yields move inversely, so this means traders have been buying treasury bonds. This means there is at least a diminished fear of continued inflationary pressure.

2.) At the same time, there is an upward move in yields that started in November of last year. That means that traders are selling at an interest rate of about 4.4%.

Putting these two trends together and we get a classic consolidation triangle. All this means is there is a tug-of-war going on in the market between bullish and bearish sentiment.

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Earnings Are Good, But Beware Comparisons

From IBD:

With more than half of companies reporting so far, analysts are looking at high single-digit year-over-year gains. That would snap the streak of 14 straight quarters of double-digit earnings growth.

But that is a lot better than Wall Street was predicting at the start of earnings season.

With fear of a slowing economy, many firms issued conservative guidance or none at all. Analysts didn't want to go out on a limb.

"People had really ratcheted down their expectations, so it was going to be pretty easy to get over," said Dirk van Dijk of Zacks Investment Research.

Back on April 1, analysts expected S&P 500 companies to deliver first-quarter earnings growth of 3.4%, said Thomson Financial.

Let's talk about expectations management. CEOs -- and all public spokespeople of big companies -- are media savvy. They understand that beating lower expectations will be a positive boost for stock prices. Hence, they will try and lower expectations in the hopes that a positive earnings surprise will increase a stock's value.

Analysts have a different fear, but one that has a similar effect: they don't want to be wrong. Hence, they will tend to be more conservative especially at a time of slowing economic growth.

These two factors are coming together this earnings season.

After all of the smoke clears from this earnings season, we're probably going to wind up where we thought we were going to wind up: High-single digit growth. This is about what we expected.

But the combined effect of conservative or no company estimates and analysts making conservative projections for fear of being wrong has lead to a bit more overall excitement this earnings season than is warranted.

In short -- we're where we pretty much predicted we would be this earnings season -- high single digit earnings growth. We just took a more emotionally charged avenue to get here.

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Barclays Face Investigation

Barclays face an investigation by the Information Commissioner's Office (ICO) as a result of the recent BBC programme "Whistleblower", which placed an undercover reporter in a Barclays call centre and one of their high street branches.

Whistleblower alleged that call centre staff accessed private customer files, and made sales calls to people who asked not to be contacted.

The ICO said that the allegations were a cause for concern.

The BBC placed their undercover reporter in the Doxford call centre in Sunderland, where she found examples of mis-selling, employees lying to customers and security failings.

Quote:

"I've seen customers misled, lied to and treated with contempt. I've seen people charged for financial products they neither asked for or knew they had."

The ICO has asked Barclays for the results of an internal inquiry, and for a copy of its policy on telephone sales.

Barclays said in a statement:

"We take the allegations made by the programme very seriously and are conducting our own internal investigation. Where there has been improper behaviour we will take action to improve what we do. Of course we will also fully co-operate with the Information Commissioner's own investigation."

To add to Barclays humiliation Reuters report that it faces a US investigation by the Securities and Exchange Commission (SEC), into allegations of insider dealing by bank staff who served on bankruptcy committees.

The SEC will look at trading activity between 2002 and 2003 by a proprietary trading desk at Barclays.

A separate lawsuit filed against the bank in March by a former employee alleges that Barclays' U.S. distressed debt desk, which deals in bankrupt company bonds, traded debt after "potentially gaining nonpublic information" through bankruptcy creditor committees.

This has been topped off by the news that a group led by Royal Bank of Scotland says that it plans to go hostile if necessary with an offer for ABN AMRO, the Dutch bank that has already agreed a deal with Barclays.

The hostile bid is estimated to be worth around £49BN, compared with the £45BN offered by Barclays.

Not a happy week for Barclays!

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Weaker Dollar Boosting Earnings

From CNBC:

Of those 19 Dow components--about two-thirds of the Dow--one company, Alcoa, had a negative impact on revenue from currency changes.

Two companies--AT&T and Intel--told us that there was no effect. But 14 companies had a positive impact, ranging from a low of 7% to a high of 51%.

The average company had a 27% positive currency earnings impact.

Revenues from these 19 companies are up $21.5 billion for the quarter. Of that amount, $3.4 billion, or 16% has come from positive currency gains.

So far, revenues are running about $9 billion ahead of analyst estimates. So the currency factor explains about 40% of the surprise.

US companies are benefiting from the same situation that has benefited Asian companies for some time. If the value of a currency is lower, goods sold in that currency are cheaper. Hence, the boost in international earnings.

It's going to be interesting to see how this impacts the international trade deficit. This increase in domestic profits from international sales is what is supposed to happen in a free-trading currency trading situation. As the trade deficit increases, the home country's currency is supposed to drop in value which in turn makes its products more competitive internationally. The question now becomes, is the dollar at a point of inflection -- where it's decreased value now has a long-lasting positive impact on the trade balance?

Here's a chart of the deficit form Martin Capital.

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Market's Overview

With the markets rallying right now, let's take a look at the overall technical picture of the markets to see exactly what they look like.

First, here is a chart of the SPYs and QQQQs. Both markets have a very nice uptrend in place. It's not too steep and not too shallow. W.D. Gann -- one of the greatest traders the market has ever seen, hypothesized a 45 degree angle is about right for the markets. These rallies are along that line.

In addition, the 10 and 20 day simple moving averages are trending up and each index is above the SMAs. So long as prices continue up, they will continue to pull the SMAs up. Also note the 10 and 20 day SMAs are above the 50-day SMA, which means the shorter-term averages will pull the longer averages up.

In short, these are bull charts from the daily perspective.





The IWNs are a little different. While they share many of the same bullish characteristics of the SPYs and QQQQs, they differ in one key area. Price wise, they are having a difficult time rising over resistance. Traders are hesitant to take this average higher.

The WSJs market beat blog has done a fair amount of writing on what it calls megacaps -- stocks with very large market capitalizations. These stocks have performed well from an earnings perspective and are considered safer as well. The IWNs difficulty getting over resistance may be a sign of a flight to quality -- traders looking for more secure names.

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More Signs of International Strength Helping the US

From today's WSJ:

More than half of General Electric Co.'s revenue is expected to come from outside the U.S. for the first time this year, Chairman Jeffrey Immelt said in an interview before the conglomerate's annual meeting.

Ford's North American automotive operations continued to suffer losses, but other key units, including Ford Europe, posted profits. Notably, the company's Premier Automotive Group posted a record $402 million pretax profit in the quarter.

The North American Automotive unit posted a pretax loss of $614 million, versus a loss of $442 million a year ago. Sales in the division fell $1.6 billion to $18.2 billion. European pretax profit rose to $219 million from $65 million. Sales rose to $8.6 billion from $6.8 billion. First-quarter revenue in Ford's South American operations climbed to $1.3 billion from $1.2 billion, although pretax profit fell to $113 million from $137 million.

This these appears to be becoming far more important to US companies.

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Freight Slowdown Hitting Transportation Companies

From the WSJ:

In addition to UPS's profit decline of 14%, railroad operator Norfolk Southern Corp. said its first-quarter profit fell 6.6%, hurt by continued weakness in the automotive and housing sectors. Trucking carrier Arkansas Best Corp., Fort Smith, Ark., saw its profit shrink by 22%, but said a cost-cutting program begun last fall helped it offset weakened freight demand.

The stubbornly persistent freight slowdown that began last year has been particularly tough on trucking companies, which are facing overcapacity and pressure to cut prices because they increased truck purchases before stricter engine-emission standards took effect. Railroad shipments fell nearly 5% in the first quarter, but tight capacity has helped railroad operators maintain their pricing power so far. Norfolk Southern, of Norfolk, Va., said pricing remained strong in the first quarter.

Here's a graph of total rail traffic's year-over-year percent change. It confirms the transportation slowdown:



When people aren't shipping goods, it indicates the economy is slowing. Additionally, businesses are in a difficult position. If they are anticipating a slowing economy they will order a smaller amount of goods. If they order too much, their inventory will rise which will hurt profits. If they order too little they may make the situation worse.

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It's a Wash

From the Street.com.

"Are stocks going up or is the measuring stick going down?" asks Jeffrey Saut, chief investment strategist at Raymond James. The Dollar Index has lost over 33% since its peak in January 2002, he writes, while the Dow has rallied about 30% in the same period.

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More Signs of International Strength Helping the US

From Bloomberg:

Sales in Latin America, where Colgate has almost three- quarters of the toothpaste market, rose 14 percent. Colgate- Palmolive, which also makes Science Diet pet foods and Irish Spring soap, boosted advertising spending 20 percent, helping revenue increase the most in at least nine years.

``The Latin American piece is the growth driver of the company,'' said Christopher Meeker, who helps manage $560 million at Farr Miller & Washington LLC, including Colgate shares.

This type of earnings announcement has been very common this season.

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The Beige Book

The Fed released the Beige Book today.

Most parts of the country logged moderate economic growth in the early spring, despite sluggish manufacturing largely due to the housing slump.

The fresh snapshot of the national economy, released Wednesday by the Federal Reserve, found that "manufacturing activity was slow" in many areas and that "residential real estate activity continued to weaken, with sales declining in many districts and flat in a number of others."

Here's a link to the full report.

Here are some relevant bullet points from the report (in italics):

-- Reports on retail sales across the Districts were generally positive, although vehicle sales were mixed in several Districts.

-- Reports on retail sales in most Districts were generally positive.

-- Reports on vehicle sales were mixed among the Districts.

-- Residential real estate activity continued to weaken in many Districts.

These points lead to a question. Just how confident is the consumer? Assuming that buying durable goods indicates confidence, the consumer might not be as confident as it appears. Autos sales are mixes and housing numbers aren't that strong.

-- Manufacturing activity remained slow overall, although reports on conditions in the manufacturing sector varied across Districts.

-- Activity in the services sector increased in most areas throughout the Districts, particularly for firms serving business customer

Business seems to be doing alright, but not great.

-- Most Districts reported continuing tight labor market conditions, especially for skilled occupations, although several Districts reported expansions in employment levels.

-- Wage increases were reported in some industries of the New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. These were generally modest.

These figures are the key to keeping the economy in positive territory right now. So long as job growth is at least moderate and wage growth over the inflation rate continues, consumers will probably continue to spend.

-- Consumer prices remained generally stable or increased modestly, but most Districts reported a rise in input prices, particularly for metals and raw materials

This could really put the Fed in a bind of the economy continues to slow.

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Gas Prices Decrease

From This Week in Petroleum

Gasoline saw a slight decrease for the week of April 23, 2007, falling 0.7 cent to 286.9 cents per gallon. Prices are 4.5 cents per gallon lower than at this time last year. East Coast prices were down 0.4 cent to 283.5 cents per gallon. The Midwest saw prices fall 3.2 cents to 277.5 cents per gallon. Prices for the Gulf Coast dropped 0.8 cent to 275.5 cents per gallon. Rocky Mountain prices increased 4.3 cents to 284.4 cents per gallon, while West Coast prices were up 2.3 cents to 321.8 cents per gallon. The average price for regular grade in California was up 1.1 cents to 331.6 cents per gallon, 24.8 cents per gallon above last year's price.

The good news in this report is the price difference between this year and last year has decreased to 4.5 cents. The bad news is gas inventories are still declining. Here's the chart from the same report:



Refiners aren't leaving any room for error in their production capabilities right now.

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Will Construction Employment Lead to Recession?

For the last year or so, the blog Calculated risk has been discussing the effect of the housing slowdown on construction employment. His central argument is that as housing slows, construction employment will follow. Here is his explanation of the following graph linking housing and construction employment.

This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions follow starts, and employment usually tracks completions.

Here is the graph:



Let's coordinate that information with a chart of total employment and recessions. Notice that right before a recession employment rates are strong. However, also note the employment situation deteriorates rapidly as the recession begins and progresses.



Will construction losses be severe enough to send the economy into recession? I don't know. But these two sets of data indicate we may be finding out soon.

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New Home Sales Increase 2.6%

From Marketwatch:

Boosted by warmer weather in the Northeast and Midwest, sales of new homes increased by 2.6% in March to a seasonally adjusted annual rate of 858,000, the Commerce Department reported Wednesday.

Sales of new homes were off 23.5% compared with March 2006.

The inventory of unsold homes rose by 1,000 to 545,000 in March, representing a 7.8-month supply. The inventory is down 1.4% compared with a year earlier, the biggest year-over-year decline ever recorded.

The median sales price rose 6.4% year-over-year to $254,000, as luxury homes continued to increase their market share.

Here's a link to the report from the Census Bureau.

Looking at the numbers, one fact stands out. Sales of homes in the Northeast increased 50% from 48,000 to 72,000. This is the primary reason for the increase. The Midwest also saw an increase from 122,000 to 134,000, or an increase of 9.8%.

It looks as though the increases in the NE and MW were essentially delayed deals that buyers put off until the weather settled down.

Also looking at the numbers we continue to have inventory issues. While the months available for sale number decreased from 8.1 to 7.8, the total number of homes on the market increased 1,000. The year-over-year inventory change was a decrease of 1.4%. This is both good and bad news. It's good because it may indicate the massive inventory build has stopped. It's bad because a years worth of sales have not taken a large number of homes off the market, indicating a glut of new homes for sale may still exist.

I should add that Calculated Risk has an excellent summary up.

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Durable Goods Orders Rise

From the Census Bureau:

New orders for manufactured durable goods in March increased $7.1 billion or 3.4 percent to $214.9 billion, the U.S. Census Bureau announced today. This was the fourth increase in the last five months and followed a 2.4 percent February increase. Excluding transportation, new orders increased 1.5 percent. Excluding defense, new orders increased 4.5 percent.

From Bloomberg:

Orders for U.S. durable goods rose more than forecast in March, signaling business spending started to recover as the first quarter ended.

Orders for goods made to last several years increased 3.4 percent after a 2.4 percent gain in February that was larger than previously estimated, the Commerce Department said today in Washington. Orders excluding transportation equipment rose 1.5 percent after a 0.4 percent drop.

``We had been worried that businesses weren't confident enough to invest and this shows better confidence,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. ``It's still too early to say manufacturing is completely on the mend, but this is a positive.''

Let's coordinated this data with a few other points.

According to the Federal Reserve's most recent Industrial Production release:

Output in the manufacturing sector moved up 0.7 percent in March; the increase was led by advances in the production of durable goods.

According to the same report, final products of consumer durables orders

1.) The 4th quarter 2005 - 2006 year-over-year comparison was a decrease of 2.5%

2.) The annual rate in the first quarter of 2007 was a 0% increase, and

3.) The March 2006 - March 2007 comparison was down 1.3%.

We also have the following numbers in the business equipment sector:

1.) The 4th quarter 2005 - 2006 year-over-year comparison was an increase of 9.7%

2.) The annual rate in the first quarter of 2007 was a -.5% decrease, and

3.) The March 2006 - March 2007 comparison was an increase of 7.4%.


In addition, we have the following comparisons in the final products of materials durable goods orders:

1.) The 4th quarter 2005 - 2006 year-over-year comparison was an increase of 5.6%%

2.) The annual rate in the first quarter of 2007 was a 2% increase, and

3.) The March 2006 - March 2007 comparison was up 3.6%.

The materials orders are twice the size of the consumers durables -- 19.15% versus 7.16%. The materials orders are twice the size of the consumers durables -- 19.15% versus 9.95%.

At the same time, we have the following chart from Martin Capital:

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More Signs of International Strength Helping the US

From the WSJ:

PepsiCo Chief Executive Indra Nooyi said the company's international business "performed well on virtually every dimension." "Volume gains in snacks and beverages were broad-based, operating margins expanded and growth was balanced across developed and emerging markets," said Ms. Nooyi. "Our business momentum is strong coming out of the first quarter, which increases our confidence in the full-year outlook."

Revenue at PepsiCo's international division rose to $2.25 billion from $1.89 billion. Its Quaker Foods North America unit saw revenue increase to $463 million from $443 million.

This has been a constant theme this earnings season -- strong international sales.

Pepsi's national sales were also strong, so the international division didn't bail out the domestic. But that's not the point. The point is international sales are strong across a spectrum of companies.

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The Phone In Rip Off

The poor old consumer has to be ever more vigilant these days, guarding himself/herself against rip offs and unnecessary products/services being foisted upon him/her by unscrupulous and dishonest individuals/companies.

Aside form the myriad of companies pushing loans with excessive interest rates, unnecessary PPI products and "ambulance" chasing lawyers it is now revealed that the phone in competitions run by our "trusted" media organisations are in fact rip offs.

This should come as no surprise to anyone, given the extortionate fees being charged per call and the ludicrous odds of actually being able to get through.

Nevertheless, the British consumer seems to be particularly gullible and has spent a veritable fortune on these scam phone competitions.

Finally they are now being exposed for what they really are. The BBC's Panorama programme broadcast on Monday revealed that viewers have been defrauded of millions of pounds on a phone in operated by GMTV's breakfast show.

Seemingly for the past four years Opera Interactive Technology, a company working for GMTV, had been finalising shortlists of potential winners "long before" lines closed.

GMTV has, not surprisingly suspended all phone-in quizzes, but said it was confident it had not breached regulators' codes.

Opera Interactive Technology have denied any wrongdoing.

Panorama claims that tens of thousands of callers had been charged £1.80 to enter competitions on GMTV, but at least 50% of them had no chance of winning.

The programme estimated that since 2003, callers had wasted £10m a year entering the competitions.

The premium rate phone line watchdog Icstis has formally written to Panorama to request a copy of the programme's evidence, which it would use to decide whether to launch an investigation into the "serious allegations".

Panorama said Ofcom has launched a formal investigation, following a complaint against GMTV and Opera. But Ofcom has not confirmed that it is related to the same issue.

GMTV has now terminated its contract with Opera Interactive Technology.

The lesson to be learned here is simple, don't waste your money on phone in competitions.

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More Signs of International Strength Helping the US

Whirlpool's earnings announcement:

Whirlpool Corp. shares jumped as much as 17% to a record high on Tuesday after the appliance giant said last year's Maytag acquisition along with strong international demand boosted first-quarter revenue.

.....

"As expected, higher material costs and significantly lower demand in the U.S. negatively impacted our first-quarter results," said Chairman and CEO Jeff Fettig in a statement. "The global environment is progressing as planned and we continue to expect lower industry demand in the U.S. through the first half of 2007 with gradual improvement during the balance of the year."

From Kimberly Clark's earnings report:

Kimberly-Clark Corp. reported Monday a 64% increase in first-quarter profit, helped by cost cutting and strength in emerging markets, and affirmed its financial forecast for the year.

...

In Europe, personal-care sales rose more than 12%, with currency effects accounting for the entire increase. Sales volumes were up 1%, as strong gains for diapers were mostly offset by lower sales volumes in other areas. Net selling prices were down about 1%.

Huggies Newborn and Natural Fit diapers and Huggies Little Walkers diaper pants drove a 9% volume growth for Huggies diapers in core European markets of the U.K., France, Italy and Spain. In developing and emerging markets, personal-care sales climbed about 16%.

Sales growth was particularly strong across Latin America, as well as in China and Russia, the company said.

These results indicate that foreign sales may help to cushion corporate profits as the US economy slows.

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Volume Issue?

There's been a fair amount of talk about "decreasing volume" in the market. I don't see that as the problem with the SPYs and IWNs. I do see it possibly with the QQQQs. Here are the charts of the SPY, QQQQ and IWN with an exaggerated volume display. The horizontal line is a simple eyeballing of the recent rally's volume level with other volume levels.

I think what some people are missing is the China sell-off distorted volume readings in the market. Take a look for yourself.







I should add that I see plenty of other problems in the market -- namely that the economic preconditions to a solid rally aren't there. But it doesn't look like volume is an issue at this point.

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Violence In Another Country's Oil Fields

From Bloomberg:

The Ogaden National Liberation Front, a rebel group demanding an independent state within Ethiopia, claimed responsibility for an attack on a Chinese-run oil field that left 74 people dead, the African nation said.

``The attack has killed 74 people and seven more workers have been kidnapped'' from the field near the town of Abole, which lies in the east of Ethiopia near the border with Somalia, Bereket Simon, an aide to Ethiopian President Meles Zenawi, said in an interview from Addis Ababa today.

Nine Chinese workers were killed and seven kidnapped, he said. The field is run by Zhongyuan Petroleum Exploration Bureau, the Associated Press reported.

Just what the oil market needs -- another geographic area with violence and oil.

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Flight to Quality Underway, pt. II

From the MarketBeat Blog of the WSJ:

But in all of 2007 so far, the biggest contributors to the S&P 500’s rally include just one company with a $150 billion market cap or more, AT&T. The megacap advances in April suggest a flight to safety — investors more willing to bet on global conglomerates — while the lack of broader market gains suggests investors are worried about economic growth. Breadth has been negative on four of the past five trading days; only Friday’s massive rally helped more stocks finish higher than lower on the day on the Big Board.

......


As noted in earlier posts, outperformance of late has been concentrated in megacap stocks. The exchange-traded fund tracking the S&P 100 has outdone those tracking the S&P Mid-Cap 400 and Small-Cap 600, as well as the Russell Microcap index. The largest-cap stocks trail small- and mid-cap names on the year, but have rocketed ahead in the last month, gaining 4.75% compared with the 3.7% in both the Midcap ETF and iShares SmallCap ETF. It may not persist, but it does point to both a flight to safety and indication that those companies have the ability to offset dollar weakness with overseas sales.

Take a look at this chart, which is a comparison of the utilities ETF versus the S&P 500 ETF.



Utilities are clearly moving up in relation to the broader indexes, indicating investors are looking for quality and safety right now.

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Existing Home Sales Drop 8.4%

From CBSMarketwatch

Sales of existing homes plunged 8.4% in March to a seasonally adjusted annual rate of 6.12 million, the lowest in nearly four years, the National Association of Realtors reported Tuesday. It was the largest percentage decline in sales since January 1989. Economists were expecting sales to fall to 6.45 million. The median price of an existing home fell 0.3% year-over-year to $217,000. The inventory of unsold homes on the market fell 1.6% to 3.75 million, representing a 7.3-month supply. Sales of condos were unchanged, while sales of single-family homes dropped 9.5%. Sales fell in all four regions. "This number reflects subprime lending" as well as the cold weather in February, said David Lereah, chief economist for the real estate group. End of Story

From Bloomberg:

The decline in sales, while partly weather related, may renew concern that the housing recession will linger and put at risk the Federal Reserve's forecast for moderate economic growth. Subprime mortgage defaults are rising, and owners' reluctance to reduce prices may keep more unsold properties on the market.

``I have no reason to believe that this particularly is the low,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``A lot of forces that drove sales higher in recent years are still weakening.''

Concern about mortgage defaults helped depress consumer confidence in the U.S. to the lowest level in eight months during April, a separate private report showed.

From AFX News:

Existing home sales in the US recorded their steepest drop in 18 years in March, even as they shrank to a nearly four year low, the National Association of Realtors said.

Here's a link to the National Association of Realtors Website for the numbers

A few points.

1.) This number, well, sucks. Housing is not anywhere hear a bottom.

2.) All regions dropped. The smallest drop was 6.2% in the South. The Midwest had the largest drop of 10.9%.

3.) The total inventory available for sale increased 17.1% from year ago levels, increasing from 3,198,000 to 3,745,000. Current months available for sale inventory increased from 6.8% to 7.3%.

4.) There is further to do on the downside. While sales dropped, the median price increased from $213,600 in February to $217 in March. Seller's still haven't gotten the message that to move houses off the market they're going to have to lower prices.

5.) While weather was probably partially responsible, this drop is fundamental -- that is demand is weakening. Credit standards are tightening, consumers already have a ton of debt on their books and there are simply a ton of houses on the market to sell.

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Living Beyond Our Means

Those of you who are yet to be convinced that we as a nation are living beyond our means, should read the Spring forecast presented by the Ernst & Young ITEM Club.

The report starts out optimistically enough, predicting growth of 2.9 % GDP for 2007 and noting that a rapidly expanding business sector is now driving UK economic growth faster than household or government spending.

However, ITEM then goes on to note that as a nation we are far too relaxed about risk, inflating assets and the costs of borrowing (as a result of the "benign" economic conditions in which we are living).

Professor Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, says:

"Many people are following the Chancellor's lead and are borrowing to finance consumption. The UK's current deficit has reached 3.5 % of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There's a danger that we are slithering into complacency."

Spencer warns of an increase in interest rates, which will squeeze homeowners and borrowers.

Quote:

"...it is clear that interest rates will be pushed up again to 5.5% after the May MPC meeting, putting them 1% above their level in early August."

He warns:

"Both as individuals and as a country we have borrowed a huge amount to support this growth. The bottom line is that we are all living beyond our means.

In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy's so sweet, what will happen when it turns sour?".

Economies work in cycles, we have been privileged to live in a time when the British economy has enjoyed a lengthy period of growth and prosperity. However, history teaches us that at some stage, there will be a downturn.

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Business Economists More Pessimistic

From the WSJ:

The National Association for Business Economics industry demand index fell 20 points during the first quarter to 20, indicating much softer demand growth versus previous months.

The quarterly index, based on a survey of 107 NABE members about conditions at their firms or industries, is calculated by subtracting the percentage of respondents reporting declines from those reporting increases.

The industry demand index has posted a quarterly loss of 20 points or more only six times in the survey's 25-year history, NABE said, the last time being the first quarter of 2003.

"Nearly every indicator in the April NABE Industry Survey showed slower momentum in the first quarter than previously, with very cautious expectations for the near future," said Ken Simonson, chief economist of Associated General Contractors of America, who compiled the analysis of the latest survey for NABE.

Employment growth during the first quarter "sagged," according to NABE, with only 23% of firms adding to payrolls, a three-year low.

A few points, in no particular order of importance.

1.) This survey is only of 107 members. That's a small sample size. While my guess is these firms are larger and therefore have a disproportionate impact on the market, it's still a small size.

2.) That being said, the index has been around for a long time which gives us some benchmarking numbers to look at.

3.) Employment strength, low unemployment and increasing disposable incomes are a primary driving force of the US economy right now. However, this report says employment "sagged". That is not a good sign going forward. Remember the following chart, which shows employment conditions change rapidly right before and during a recession.

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Toyota Now the Largest Auto Company

From the WSJ:

TOKYO -- Toyota Motor Corp. surpassed General Motors Corp. in quarterly sales for the first time, making it the world's biggest auto maker.

Toyota sold 2.348 million vehicles world-wide in the January to March period, topping the 2.26 million vehicles that GM sold in the same three-month period. GM has been the world's No. 1 auto maker for more than 70 years.

While the sales figures released Tuesday are only quarterly results, they represent the first time Toyota has surpassed GM in global sales. Analysts say it is just a matter of time before the Japanese auto maker surpasses GM in its annual figures.

Toyota has been steadily grabbing market share from its Detroit-based rival in the key U.S. market, as high gas-prices lure Americans to Toyota's smaller, more fuel-efficient vehicles such as the Camry, Corolla and Prius hybrid and away from GM's larger trucks and sport-utility vehicles. Sales of Toyota's high-end Lexus line grew 7% to 322,000 vehicles last year, making it the top-selling luxury brand in the U.S.

This really shouldn't surprise anyone. Japan has successfully implemented a great long-term strategy: build a quality product and people will buy it. For as long as I can remember, the general sentiment about Japanese cars is simple: they're well built.

In addition, Detroit as shot itself in the foot (again) with its strategy of selling large trucks in an era of rising oil prices. This entire situation is a complete replay of the 1970s when the oil shock first sent consumers to Japanese cars.

Finally, it shows the incredible effectiveness of a long-term strategy. Toyota has obviously been following a long-term plan which again revolves around a quality product. They have done this slowly and continually. And it has paid off handsomely.

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Oil Prices Increase On Nigerian Situation

From Bloomberg

Crude oil surged, approaching $66 a barrel in New York, on concern shipments from Nigeria may be disrupted as complaints about the country's presidential election spawn more violence.

Nigeria is counting votes after the April 21 poll that observers said was marred by fraud. Militant attacks have already cut about a quarter of Nigeria's output. The country produces low-sulfur, or sweet, oil that is prized by U.S. refiners because of the high proportion of gasoline it yields. Refiners are boosting gasoline output before the summer months.

``Nigeria is the driving force in the market because there are a lot of questions about the fairness of the vote,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``The Nigerian crude is sweet with a high gasoline yield, so any disruption will be very bullish for gasoline.''

Let's look at a few charts. Here's a 15 minute chart from Future Source. Notice how oil ran upwards today in a strong rally.



Here's the weekly chart from Stockcharts. Notice how oil is above the head and shoulders formation and is now consolidating above the neckline.



I would guess that a peaceful resolution to the Nigerian situation would bring the price back down for now. This action would mirror the daily action after the Britain/Iran situation. However, oil is under upward pressure still from OPEC's production cuts, decreased US inventories, the approaching summer driving season and increasing oil demand. In other words, the fundamentals are still bullish.

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More Signs of International Strength Helping the US

From IBD

This is an article talking about the airline industry. Although there is concern about weakening domestic demand, international demand is helping to soften the blow to earnings.

Analysts say weaker domestic demand would hurt Southwest more than other airlines since it has the most U.S. flights. Also, Southwest's large fuel hedges are wearing off.

Meantime, it's boom time on the international front, where demand, load factors and pricing remain strong. Most low-cost carriers don't fly these lucrative routes, but the legacy carriers are adding new flights, buoyed in part by an "open skies" deal that will free up European airports such as London's Heathrow to more U.S. carriers.

Even if domestic yields slow, many of those flights feed into higher-yielding international connections. "Those new international routes make domestic routes stronger," said Michael Boyd of the Boyd Group.

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Big Drug Stocks Shine last Week

From IBD:

On Friday, the 79 stocks in IBD's ethical drugs group rose to their highest level since November 2000. The group has been on a general uptrend since July, though increases have become sharper the last month.

Last week's surge was largely the result of better-than-expected quarterly results, even as many top players continue to grapple with sluggish growth, weak pipelines and regulatory risks.

"In general it was a huge quarter for U.S. pharma companies both internationally and in the U.S., where sales were stronger than expected," said Jon LeCroy, analyst at Natexis Bleichroeder.

Last Thursday I wrote an article that had the charts of the health care, utilities and consumer staples ETFs. These charts have done well during the post-China sell-off, indicating investors may be reallocating to more conservative areas of the marker.

This may be part of a flight to quality that seems to be happening in the market right now. Large drug companies are considered more conservative investments because their profits are a more immune to economic weakness -- people need certain types of drugs and will buy them in any economic environment.

Last week's performance by the big drug companies may further confirm this flight to quality.

Here's a five year chart of PPH -- the ETF for large drug stocks. While the average is in a rally, also notice that the average has been in a trading range for the better part of 5 years as commodity stocks have taken the lead in the market.

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Tamil Tigers Target Petrol Stations

Those of you who use credit/debit cards to buy your petrol (ie all motorists) should be on your guard.

It seems that there is an international credit/debit card scam being perpetrated by criminals with links to the Tamil Tigers, the victims being motorists who buy their petrol via credit/debit cards.

The victims' bank details are being skimmed, and the card details and Pin numbers are then used to withdraw money from customer accounts.

It is estimated that approximately 200 of the UK's 9,500 petrol stations have been targeted. Police are investigating complaints made in Edinburgh, Norwich, Bury St Edmunds, Peterborough, Nottingham, Leeds, Bristol and Hull.

Keep a close eye on your bank and credit card statements for anything suspicious.

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Truck Tonnage 1.6% Higher in March

From the American Trucking Association

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 1.6 percent in February after falling a revised 3.1 percent in January.

On a seasonally adjusted basis, the tonnage index improved to 113.3 (2000 = 100) in February from 111.5 the previous month. The index decreased 1.7 percent compared with a year earlier, marking the eighth consecutive year-over-year decline. The not seasonally adjusted index fell 6.8 percent from January to 101.2.

This is the 8th straight year-over-year decline. This does give a strong indication that economic growth is slowing, although probably not to recessionary levels. As the article notes, trucking is responsible for 70% of all transport in the US.

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Will The Rest of the World Bail the US Out?

There is growing talk about the possibility of international economies preventing a collapse of the US economy. On Friday I posted this article where I noted that large US companies are reporting weak US sales but strong international sales.

The Big Picture quoted this point from this weekend's Barron's (subscription required):

THE REST OF THE WORLD IS CARRYING THE U.S. STOCK MARKET. Fast-galloping overseas economies, flush world capital markets and a sagging dollar fatten multinationals' earnings and furnish the fuel for commodity-related stocks to surge.

That's the takeaway from the earnings beats by Caterpillar (CAT) and Honeywell (HON) last week, the 22% jump in the Philadelphia Steel Producers index since March 5, the continued outperformance of foreign stock indexes, the seven-month high in copper and the run toward $700 an ounce in gold.

As a result, materials stocks are the new momentum favorites, and more broadly, traditionally cyclical sectors are being treated and valued as perpetual-growth vehicles -- a process even extending to sectors like railroads and utilities, now considered implicit plays on the commodity-demand boom.

It's enough to make independent souls look for traditional growth stocks to (finally) to return to favor. Quantitative strategist Joe Mezrich of Nomura notes that among all the stock factors he tracks, "long-term expected earnings growth" -- a long-term dog of a performance driver -- recently perked up, and it tends to be a decent signal of a growth revival when it does so.

Let me add two additional points to the above.

1.) This report from the International Monetary Fund titled World Economic Outlook highlights that the rest of the world is doing pretty well. Growth is fair in most other regions. In general, the IMF is projecting growth to at least continue on its present trajectory. If that continues, publicly traded US companies with sufficient international exposure will continue to see either earnings increases or insufficient earnings decreases to prevent a large loss of stock market value. In other words, assuming earnings are a prime driver of stock prices, we won't see a major correction although we could see a difficult rally going forward because of domestic economic problems.

2.) About a week ago I posted an article based on Marc Faber's observations that while debt was the primary source of consumer funds in the 2000 - 2005 period equity appreciation was the primary source for consumer funds from roughly 2006 on. This information comes from the household net worth tables from the Federal Reserve's Flow of Funds Report.

For the sake of argument, let's assume this is true -- that increased equity valuations are boosting or supporting consumer spending. If point number 1 is true -- that US companies have sufficient international exposure to mitigate a shortfall in US earnings -- than the natural corollary is consumer spending will be supported by equity prices.

Let's simplify the above to a few bullet points.

1.) International economies are doing pretty well.

2.) US companies with sufficient international sales will continue to see increased sales from stronger international economies.

3.) Increased international sales will mitigate the effects of slowing US growth on corporate earnings.

4.) If corporate earnings growth slows but does not contract the market's overall level and value will be sustained.

5.) If increased equity prices are supporting US consumer spending, than slightly increasing or stable equity values will continue to support US consumer spending.

6.) Consumer spending is responsible for 70% of US economic growth. So long as consumer spending expands, it will mitigate the effect of the housing and capital expenditure slowdown.

That's about as simple as I can make this.

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Bull v Bear -- The Final Round

The arguments between the bulls and the bears in the current market has one interesting twist: both are shaving off pieces of the economy and ignoring the rest. The bears for focusing on housing and capital spending while ignoring the employment and wage situation. In contrast the bulls are focusing on employment and wage gains without taking full stock of the housing problems -- or in the least arguing that housing won't spill over because it hasn't yet.

However, I think the bulls have a stronger argument for now simply because they are already in control of the market. The markets have rebounded fairly well from the China sell-off and appear to be moving up still.

That being said, I think the bulls will remain in control for now, assuming the following happens.

1.) Earnings continue to at least meet expectations.

2.) There is no severely negative employment news. For example, last month the BLS reported a gain of 180,000 with upward revisions to previous months. From the bulls perspective, this news will help to fuel wage gains which will drive consumer spending.

3.) The torrid merger and acquisition pace of the last few months continues.

4.) Consumer spending continues in positive territory. Consumers account for 70% of US GDP growth, so their continued spending is vital to keep the economy from falling into a recession. I have been very negative of consumers, largely because of debt levels. However, we have yet to see a level where consumers don't spend. Until we see that, we need to assume the consumer will continue to buy all sorts of stuff.

5.) News of the subprime mortgage problems remain largely contained in the subprime area. If we start to hear a spate of news about prime mortgage defaults increasing or a large number of banks increasing loan loss reserves, than bulls may get skittish. We have already had some news to this effect in the market, but I don't think it's enough to scare the bulls.

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The Bull Argument

Below I express what appears to be the bear's main line of arguments. Here is how the bulls are looking at things.

While GDP growth is slowing, the elements causing the slowdown are contained. The housing slowdown had not severely impacted consumer spending. While personal consumption expenditures slowed in the second and third quarter of 2006 to 2.6% and 2.8% respectively, they accelerated to 4.2% in the 4th quarter.

The main reason for this increase is solid job growth leading to increased disposable income. According to the Bureau of Labor Statistics the US added 180,000 jobs in March and previous months were revised higher. These gains are adding to confidence and bolstering spending. According to the Bureau of Economic Analysis disposable income increased 1.06% in the 4th quarter.

The economy demonstrated it can take the shock of higher oil prices last summer, so the increase in gas prices at the pump won't slow spending this summer.

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Liquidity Fueling the Markets

This chart is from a site called Shadow Government Statistics. I can't speak to the veracity of their computations. However, if the chart below is correct -- or even in the ballpark -- we could have an answer for the bull market.

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The Bear Argument

I admit it: the current rally is perplexing to me. In an attempt to try and figure out what exactly is going on I'm going to present what I see as the bull and bear market arguments to see which makes the most sense.

The Bear Market

GDP growth is declining. According to the Bureau of Economic Analysis GDP growth for the last three quarters was 2.6%, 2% and 2.5%. Gross Private Domestic Investment was the primary reason for th decline. Residential investment has dropped 11.1%, 18.7% and 19.8% for the last three quarters. While nonresidential investment was positive for the first two of these three quarters, it declined 3.1% in the fourth quarter of 2006.

While personal consumption expenditures have increased, the consumer is heavily indebted. Household debt has increased from 97% of disposable income in 2000 to over 130% in 2006 (this information is from the Federal Reserve's Flow of Funds report). At some point these debt levels will constrain consumer spending, especially with a negative savings rate.

While inflation is not out-of-control, it is above the Fed's stated 1%-2% comfort range. Energy and agricultural prices are under upward price pressure which will prevent inflation from coming down. This in turn will keep the Federal Reserve on the sideline if GDP growth continues to slide.

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Will International Sales Prevent a Bear Market?

There are a lot of earnings reports coming out right now, and there seems to be a common theme. The US economy is weak, but international sales are keeping earnings going. Just below this article I posted points from Caterpillar's report that showed a big drop in US sales but strong international growth.

While McDonald's saw solid US growth, they also had good numbers from international sales.

Europe also delivered strong growth in the first quarter, fueled by robust same-restaurant sales across the segment.

Quarterly performance in the Asia/Pacific, Middle East and Africa segment was also strong, as the company cited its "everyday value and locally relevant products driving comparable sales and financial results across the segment."

Consider the above points in conjunction with the following observations from BCA Research:

Today, we present two U.S. equity implication of a soft dollar. First, the S&P growth index is mostly comprised of sectors that have sizable international sales exposure. Importantly, a soft currency makes their products cheaper to foreign customers, a positive development for revenue growth. Meanwhile, the opposite is true for companies in the value benchmark, as their client base is primarily in the U.S. The upshot is that analysts will continue raising relative earnings estimates in favor of growth companies in the coming months. Bottom line: diverging global economic expectations and a weak U.S. dollar bode well for growth over value.

This article makes a very prescient observation: growing international markets plus a cheaper dollar mean US companies are now experiencing a similar situation as Asian exporters.

Will this prevent a bear market? I don't know. But, I am seriously considering the implications of these events.

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How Strong is The US Economy

From CBS Marketwatch. This is from a report on Caterpillar's earnings release.

"In North America, sales volume was down significantly from a year earlier," a company statement said. The negative aspects of the quarter included a "significant" decline in housing construction, a slowdown in nonresidential construction and a decline in coal production.

"The steep drop in housing construction continued to depress sales, particularly of smaller machines, as home contractors retrenched. ...Coal mining had a bad first quarter."

North American machinery sales fell by $450 million, or 13%, but rose by $560 million, or 44%, in Europe, Africa and the Middle East.

Cat's earnings from outside the US were the reason for the stock's strength today. The news from the US is not that good.

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The Markets Last Week

What an odd assortment of weekly charts we have.

The SPYs and QQQQs had a hard time gaining any traction until today (Friday) -- they basically meandered between bulls and bears with no sense of direction. However today they opened higher and basically kept in that position. The QQQQs sold off a bit, but not so much as to endanger the rally.





The IWNs were essentially unchanged for the week, although they had a really big dip yesterday, but got rid of the loss today.



None of these are strong bull market charts. They show the market is susceptible to random events for quick movement, but outside of those moves they are essentially evenly balanced between the bulls and bears.

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Dollar Update

Here is a weekly chart from Stockcharts.



Notice the following.

1.) The dollar has broken through support and is now trying to find a new low.

2.) The downtrend started in early 2006 is still intact.

3.) The 20, 50 and 200 day SMAs are all heading lower.

In short, there is not one bullish element on this chart.

The underlying fundamentals are still bearish. The US economy is slowing while other economies are growing. While the trade deficit has decreased over the last few months, it is still at very high levels.

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Oil Market Update

Here's a chart from Stockcharts.



Notice the following points.

1.) The uptrend started in mid-January is still intact.

2.) The average is still above the support line drawn from mid-December to early March. This is the neckline of a head and shoulders pattern. Prices are just above this line right now, so we'll have to see how the average reacts to this line of support.

3.) The average has formed an ascending triangle pattern from mid-March to the present. That means we have lower bottoms which is usually a bullish indicator.

4.) The 20 and 50 day SMA are still trending up.

The fundamentals are still bullish. Demand is increasing and OPEC has successfully limited production. The US is starting the summer driving season and gas prices are already higher than at the same time last year.

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British Gas Lambasted

British Gas has been lambasted by Energywatch, which has reported that the number of complaints from customers have more than doubled in a year.

As from October 2006 to March 2007, British Gas had 21,427 complaints mainly concerning disputes over bills.

The total number of complaints and enquiries from British Gas customers hit a stonking 14,001 in March.

Ironically, although British Gas has around 30% of the market, it has over 70% of the total complaints in the industry.

Well done British Gas!

Seemingly, according to British Gas, the problems are being blamed on their new computerised billing system. How many times have we heard that tired old refrain "it's a computer error"?

Let me nail that nonsense once and for all, computers are programmed and operated by humans; the computer is only as good as the software and data input. Where errors occur, these errors are due to human error not computer error.

These problems imply that British gas had not tested its new system thoroughly enough before going live.

As if to add to the hapless customers' woes, British Gas has also managed to find itself without an adequate number of staff available to handle the complaints arising from this mess.

Energywatch noted:

"But it has compounded the error by not having the level of customer service, and the ability to handle customer complaints, in a way that leaves customers assured that British Gas is taking their problem seriously."

British Gas are rather shame faced about this fiasco, and have taken on an 800 extra staff to deal with customer queries (doubtless the extra costs of the face saving exercises will be reflected in gas future bills).

Phil Bentley, MD of British Gas, told the BBC:

"Obviously we apologise for the inconvenience and the stress.

I understand what it's like to get a bill that's incorrect. We apologise to those customers and we're working very hard to improve services."

Finally, as if to rub salt in British Gas's festering wounds, Energywatch's data reveals that most other suppliers have at least halved their complaints on a year-by-year basis.

Well done British Gas!

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Two Manufacturing Reports Show Slow Growth

I missed the NY Fed's manufacturing survey on Monday. Here's the main point of the report:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers were flat again in April. The general business conditions index edged up 2 points, to 3.8, rebounding only marginally from March.

New orders were just above 0. Shipments dropped.

Here's some bad news for the Fed. Prices paid increased while prices received dropped slightly. The prices received index has dropped for three-straight months. This may indicate producers are having to cut prices to move product. In addition, inventories have increased three straight months, indicating future production may drop to prevent more of an inventory build-up.

The Philadelphia Fed reported similar conditions:

Activity in the region’s manufacturing sector was basically unchanged again this month, according to firms polled for the Business Outlook Survey. The index for general activity was near zero, and indicators for new orders, shipments, and employment were only slightly positive, suggesting little change from March. Regarding future activity, the region’s manufacturing executives were somewhat more optimistic this month than they were in March.

The Philly area also reported similar pricing problems as the New York Area -- increasing inputs and stagnant prices received:

Area manufacturers reported higher costs for inputs again this month. The prices paid index edged three points higher and has now increased for three consecutive months. Thirty-seven percent of the firms reported higher input prices, up seven points from March; 13 percent reported lower input prices in April.

Despite increased costs, fewer firms reported higher prices for their own goods this month: 17 percent reported higher prices, down nine points from March. The prices received index fell 11 points, to 5.2, its lowest reading since August 2005.

These two reports indicate the decline in Capex spending may be hitting home with manufacturers.

In addition, manufacturers are just hanging on in positive/expansion territory.

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Flight to Quality Underway?

Below are three charts for the Utilities, Healthcare and Consumer Staples ETFs. The charts are for the price performance year to date. Notice how they have all done well this year.







Is this the beginning of a flight to safety? It sure looks like it.

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DR Horton's earnings drop 85%

From Reuter's:

D.R. Horton Inc. (NYSE:DHI - News), the largest U.S. home builder, said on Thursday quarterly earnings fell 85 percent, in part due to charges related to the lower value of land.

.....

For the fiscal second quarter that ended March 31, D.R. Horton earned $51.7 million, or 16 cents per share, down from $352.8 million, or $1.11 per share, a year earlier.

The results included charges totaling $81.2 million, or 16 cents per share for land options forfeited and for the lower value of inventory of land and houses it owns.

"We believe that there will be continued softness in '08, and I would expect that we'll continue to adjust our inventories downward in the first two quarters of '08," Tomnitz said.

About 80 percent of the impairment charges were related to California projects, particularly in Sacramento. Horton, based in Fort Worth Texas, said it has begun to aggressively cut prices in California.

Excluding the charges, the earnings were 32 cents per share, short of the 36 cents that was the average of analysts' forecasts, according to Reuters Estimates.

A 7 percent reduction in the average selling price of a home and added incentives hurt gross margins before the charges. The margins fell to 17.7 percent, down 7.8 percentage points from the previous year and 0.9 percentage points from the prior quarter.

There is nothing good in this report.

1.) Notice that land values are dropping.

2.) The company is "aggressively cutting prices." That will hurt profits and margins going forward.

3.) The company is using incentives aggressively. This hurts in several ways: it further hits profits and margins and it means home prices are in fact lower than stated.

4.) The company is now saying 2008 will be soft. That means housing problems will be with us for longer than we would like.

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A Deeper Look at Retail Sales

The following is from the comments section and frankly needs no further explanation.

Here’s the Shoppertrak monthly Year-over-Year data beginning Thanksgiving 2006:

Monthly data: sales/foot traffic
Holiday season: +5.0%/-1.7%
January: +4.9%/-3.9%
February: +4.3%/-4.9%
March: +2.7%/+2.9%

The weekly data has to be treated as noise, there is too much variability in volume in this weighted index.

The months’ sales and traffic tell a more interesting story. First, notice how each successive month is increasing less over last year’s numbers. In the case of March, adjusted for inflation, there was no growth YoY.

Second, notice how the YoY sales increases have been built on less traffic. This is a pretty startling statistic, in that it suggests that the “median” consumer has rolled over, but the “mean”, more wealthy consumer has enough wealth to casue the overall result to stay positive. March’s positive foot traffic may be due to Easter coming one week earlier this year. By the end of April, we should know if the trend is intact.

If the trend continues, we should have negative YoY retail sales no later than summer.
(BTW, I haven't found Shoppertrak's earlier 2006 data anywhere online. I'd be glad to take the series back further, if someone can supply a source).

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Foreclosures Increasing

From IBD

Home foreclosures rose 7% in March to 149,150, RealtyTrac said. The figure, which includes default notices, auction sale notices and bank repossessions, was up 47% vs. a year ago. It comes as the gov't urges lenders to try to rework troubled subprime loans. Also, mortgage applications fell 2.5% last week as rates rose again. Rates have retreated this week.

I will continue to make this observation: we are in an economic expansion. Foreclosures should increase during a recession or just after a recession. If we have a recession we're in big trouble.

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US PC sales "sluggish"

From IBD:

The April index reading is almost 20% below the year-ago figure, and is 21% below the 12-month average.

Worse yet for the major PC makers — including Dell, (DELL) Hewlett-Packard, (HPQ) Apple (AAPL) and Gateway (GTW) — demand among some key customer groups has plummeted.

Planned PC purchases among parents sunk 32% in April from March. The purchase intent score for parents is at its lowest level since TechnoMetrica started measuring home PC purchase intent in April 2002.

Also hitting new lows for PC purchase intent were households with incomes over $75,000 and people with graduate or professional degrees. These groups are more likely to buy higher-end, feature-rich PCs, which carry higher prices and profits for PC makers, Kambanis says.

On a positive note, PC purchase intent among people 18 to 24 years old is at its highest level since the poll started five years ago.

IBD included this article so investors could get an idea of whether or not computer makers would be an attractive long of short. However, this information also gives us an idea of consumer sentiment going forward.

Retail sales are the only economic area holding the economy up. Because computers are a pricier item (with laptops still costing about $1000 per), consumer intent to purchase or not purchase these items gives us a clue for how confident consumers are going forward.

The drop in this number indicates consumers may not be that confident going forward. There could be a lot of non-income based reasons for this: Vista is unproven, it's too early to purchase for the fall semester etc... However, this number could also indicate consumers are either strapped financially or at least are pulling in their spending habits a bit.

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Consumers Encouraged To Litigate

The Office of Fair Trading (OFT) has decided to encourage consumers, who have been cheated, to litigate against the miscreants.

The OFT has stated that it believes that the public should have wider access to litigation, if they have bought goods from companies that operated cartels or otherwise colluded to fix prices.

The OFT has also committed to becoming more proactive in helping consumers bring private claims.

Lat year consumers were given the right to sue companies that have engaged in anti-competitive. However, the costs of mounting such a lawsuit has prohibited many from taking them to court.

The OFT has stated that it will address the costs of consumer based litigation. It intends to introduce new forms of "no win, no fee" arrangements.

Matthew Levitt, a competition law expert at Lovells, is quoted as saying:

"The OFT will be sensitive to the need to avoid the 'excesses' of the US system. One of the key features of the US system - triple damages (where consumers are awarded compensation equal to three times their loss) is not part of the OFT's proposals."

However, quite how long the process of taking this forward to practical reality will take is anybodies guess.

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Gas Prices Are Still Rising

From This Week in Petroleum

For the eleventh consecutive week, gasoline prices increased, climbing 7.4 cents to 287.6 cents per gallon for the week of April 16, 2007. Prices are now 9.3 cents per gallon higher than at this time last year. All regions reported higher prices. East Coast prices were up 8.4 cents to 283.9 cents per gallon. The Midwest saw prices rise 6.3 cents to 280.7 cents per gallon. The largest regional increase was in the Gulf Coast, with prices up 8.8 cents to 276.3 cents per gallon. Rocky Mountain prices increased 8.2 cents to 280.1 cents per gallon. West Coast prices were up 5.7 cents to 319.5 cents per gallon, with the average price for regular grade in California up 5.3 cents to 330.5 cents per gallon, 40.9 cents per gallon above last year's price.

Inventories are still down



And prices are still increasing:

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What Percentage Subprime?

This chart is from the WSJ's Marketbeat blog. Notice the large percentage of loans written last year to either subprime borrowers or second homebuyers.



I'm not saying this is good or bad. What I am saying is it seems like a fair amount of mortgage loans were made to people who either had questionable credit or already had a home.

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