Friday, April 11, 2008

Consumer confidence plummets/Inflation rises

TGIF. I bet many on Wall St. are saying this today after today's slaughter. I would like to talk some more about the stock market and I apologize to all that are looking for more housing related information.

I think its extremely important right now to understand what is going on on Wall St. because it explains why housing is dead and going to get worse.

You are about to see the perfect storm hit Wall St. over the next few weeks. Next week is all about earnings and the estimates seem to be way too high because the data on the economy keeps getting worse.

Bloomberg reported new data on consumer sentiment and inflation. A few quotes on both from the article followed by my take:

The Consumer:

"Confidence among U.S. consumers fell to a 26-year low after employers fired workers and gasoline prices surged, threatening the spending that accounts for more than two thirds of the economy.
The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the weakest level since 1982, when the jobless rate approached 11 percent, the worst since the Great Depression. In other figures released today, the Labor Department reported that the cost of imported goods climbed 14.8 percent in March from a year ago, led by oil. "

``The consumer's feeling increasingly hemmed in,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts. ``They've got higher energy bills, higher gasoline bills, higher food bills and obviously the employment markets are nowhere near as strong as they were.''

Inflation prices on Imports:

"Import prices rose 2.8 percent in March after a 0.2 percent gain the prior month, the Labor Department said. Expenses excluding fuels jumped 0.9 percent, the most since records began in 2001.
Import Prices
Import prices were forecast to rise 2 percent, according to the median estimate of 52 economists in a Bloomberg News survey.
``People will be a little less confident about the inflation outlook now than they were before the report,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who had forecast a 2.6 percent gain. ``The Fed's going to ease, but they'd feel better about it if these numbers had come in lower. The risk remains that higher import and commodity prices may get passed on to the consumer.''

My take:

These numbers were way worse then I was expecting. I have talked a lot about the consumer and the fact that they are feeling like they did in 1982 is mind boggling. This was about the same time mortgage rates and unemployment were running in double digits.

Think about the things that have happened from 1982 up until today. We have had the '87 market crash, the early 90's housing bubble, the late 90's tech bubble, and 9/11 and yet we feel worse now then we did during any of those times. It blows you away when you put this in perspective. If you think that the stock market and housing has bottomed you better rethink your position.

As you know, the consumer is 70% of the economy and if they are feeling this bad then have most likely stopped buying. GE said in their earnings that the credit crunch really hit them hard in late March. I am starting to believe that this is when the consumer really hit the brakes. The unemployment rate rose to 5.1% around the same time and when people don't have jobs they don't spend. If this is the case, then earnings expectations are way too high and this will put immense pressure on equities.

Now lets discuss this inflation on imports. This is big because the cost of products we are importing from Chindia and other countries is rapidly rising. This is bad in a couple ways. First its taking more money out of the pockets of consumers and secondly it puts the Fed in a box.

The Fed is slowly getting into a position where they still need to cut rates, but at the same time they realize if they cut rates they risk killing the dollar and causing massive inflation.

If imports continue to rise faster then the Fed wants then the rate cutting might be over. In fact they might lean more towards raising rates to save the dollar.

Put yourself in Ben Bernanke's shoes and you have these two choices. Cut rates and try and save your insolvent financial institutions or raise or hold rates to save the dollar and help the consumer. Tough choice isn't it? The Fed will become helpless in the very near future because they won't really be able to do much with rates. Why?

Because they risk a financial collapse with either choice. Cut rates and you risk losing the consumer to inflation. Raise rates and you potentially lose most of your financial institutions and you destroy the housing market and the economy.

The bottom line:

The way I see it? Insolvent banks, rising inflation, a powerless Fed, and a weak consumer equals the perfect storm for the stock market.

I think the bottom callers on CNBC might be changing their attitudes in the coming weeks. Time will tell.

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