Well it was another red day in the markets as the Dow lost another 49 points. What concerned me more today was the news. I will link the three articles below with a quote from each and then give you my take:
1. UPS misses earnings and cuts outlook.
"UPS pared its per-share profitforecast yesterday to as low as 86 cents from 94 cents to 98 cents as fuel costs rose and a sagging economy weighed on premium-priced air shipments to consumers.
Consumer spending, which accounts for more than two-thirds of the economy, will rise at an average annual pace of 0.5 percent in the first half of the year, the survey showed. That would be the smallest two-quarter gain since it dropped in the six months that ended March 1991."
2. Libor continues to rise as banks refuse to lend to each other.
"Money markets in the US and Europe are signalling renewed fears about the financial strength of banks, with key confidence barometers almost returning to the levels that preceded the collapse of Bear Stearns.
In the US on Wednesday, that spread rose rose 2bp to 77.5bp. The difference had climbed above 80bp on concerns about Bear, then fell back to 60bp in mid-March after the investment bank was sold to JPMorgan Chase."
3. Wall St.'s Banks may have to cut 35% of jobs.
"April 9 (Bloomberg) -- Kenneth Moelis, the former president of UBS AG's investment bank, said Wall Street firms may have to eliminate as much as 35 percent of employees as leveraged lending dwindles and the pace of mergers and acquisitions slows.
``The Street got staffed up to support what was a slight bubble in M&A,'' Moelis, 49, said in an interview on Bloomberg Television today. ``You're going to see a significant retrenchment.''
Lets start with UPS. This is pretty simple. UPS is a bell weather for looking at how the consumer is doing. When people buy UPS has more packages to ship. Its a pretty direct correlation. As you can see the expectations is .5 growth over the first 6 months which would be the worst since 1991! This is 70% of the economy! The UPS news took its toll on the consumer companies like retailers today. If the consumer continues to struggle then this economy is going nowhere and the stock market will nosedive.
The Libor story. This is the overnight lending rate that banks use to lend to each other. Its back up to where it was before Bear Stearns got bailed out. The banks continue to not to lend to each other because they don't trust each other's balance sheets and they are not confident they will get paid back. The banks are basically scared ***less right now.
This fear will eventually will get passed on to us in the form of higher mortgage rates. RIGHT NOW, THE BANKS HAVE ZERO DESIRE TO LEND MUCH MONEY BECAUSE OF INSOLVENCY ISSUES. They are broke and CANNOT lend like they did during the housing bubble. This will eventually crush the housing market.
So far the Fed rate cuts have kept interest rates at decent levels which has allowed us to avoid the credit crunch for the most part. However, as this fear among the banks continues to rise, it will eventually push mortgage rates through the roof. They have to pass this pressure on to us at some point by rising rates. If you think housing prices are falling fast now, wait until rates are at 7-8%!!!
This is where we are heading. Remember the 13% interest rates on mortgages in the early 80's?? Don't think it can't happen again.
The third story gives you an idea of how difficult things will be for the investment banks going forward. I think I have been hard enough on them today. This story confirms what I discussed this morning.
Take financials and the consumer out of the economy and you will have a stock market at much lower levels. We are far from the bottom and I see no end in sight right now. Continue to stay defensive and do not be surprised if there is a market event in the next few weeks. The market will eventually cave from all of these combined pressures.