Personal Income Data/Gustav Pressure Stocks

Good Afternoon!

We are seeing a big reversal in the stock market today based on a variety of factors. The personal income numbers were terrible:

"Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent."

The same report showed that consumer spending slowed and inflation rose:

"Aug. 29 (Bloomberg) -- Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power.

Purchases rose 0.2 percent, one-third the pace in June, the Commerce Department said today in Washington, while prices surged the most in 17 years. The Reuters/University of Michigan final index of consumer sentiment was at 63 this month, from 61.2 in July.

The figures on spending, which accounts for more than two- thirds of the economy, underscore projections for growth to slow from the 3.3 percent pace last quarter that the government reported yesterday. With unemployment rising and home values dropping, Americans are cutting back on big-ticket items like automobiles and furniture, today's report showed. Stocks fell.

``We are looking for a clear slowdown in the economy,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, who accurately forecast the gain in spending. ``Inflation has been eating into spending power.''

"The Federal Reserve's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent for a second month. The so-called core price measure was up 2.4 percent from a year before, the most since February 2007. That compares with the 1.8 percent to 2 percent median forecast of Fed officials for 2010, which is an indication of their target for the measure."

My Take:

When you put these three things together the story makes sense right? Lower incomes combined with higher inflation= a slowdown in consumer spending.

It doesn't take a genius to figure out why the economy is in such bad shape. What confuses many in this country are the constant sticks saves by the government combined with the unrelenting bullish bias in the financial media.

They both want you to think that the economy is fine, and you should continue to invest in stocks. The facts tell you a completely different story. How can you be bullish on this economy when personal income dropped almost .7% in one month?

Now granted, the end of the rebates represent a good chunk of this number but certainly not all of it. The thing to focus on going forward is there are no more rebates! Incomes continue to drop and inflation continues to run higher than the Fed is comfortable with. This is going to severely hurt growth going forward.

I still have yet to see a catalyst to take this market higher. Whats scary is the majority of the stimulus used by the Fed is now past us. The stimulus checks have been spent, and the Fed is done cutting rates. The one big stick save that's waiting in the wings is the GSE bailout which is just a matter of time.

As I have said before, the market will not like this bailout. You may see a small bounce on the news. This IMO will be followed by a sell off when the bond market gets its say and takes rates higher.

After the GSE bailout, I think the Fed will basically be forced to sit on the sidelines for the duration of the correction. They will be out of cash from backing up the GSE's, and the bond market vigilantes will control interest rates as they take the 10 year higher. They will be switching into "damage control" mode.

Bottom Line:

The economic numbers were pretty rough this morning. The sell off today shouldn't be taken very seriously. All of the moves this week have been on light volume.

Gustav has many investors spooked heading into Labor Day. As a result, they are selling positions and running to the sidelines in case Gustav does some major damage. The personal income data obviously put further pressure on equities.

If anything hits over the weekend, I will have it up here. The market has a history of dropping major bombs over a long weekend in hopes that its forgotten by Tuesday! I think most of the pigmen are probably heading to the Hamptons for the weekend so don't expect much!

I hope everyone has a great Labor Day! Drink a beer, spend time with your families, and try to forget about the stock market for a few days.

Those are my plans!