The Calm Before the Storm?

by Michael Panzner, Financial Armageddon. September 26, 2007

Observers have been bewildered by the extent to which consumer sentiment and retail spending have held up in the face of an imploding housing market and worsening conditions in lending markets. Some speculate that it is because too many consumers still have access to credit cards and legacy lines of credit, or, perhaps, that the average American has temporarily swallowed the Washington-Wall Street line that things will somehow turn out all right in the end.

Regardless, a quick look at the relationship between a measure of how home builders are feeling about the future and the various gauges of consumer sentiment suggests a downturn in the latter is simply a matter of time. Given the large lead times and hefty sums involved, one would expect that contractors would be especially sensitive to changes in prospective buyer finances and purchasing plans. The collapse in the home builders index suggests it won't be long before consumers change their tune.

The Census Bureau today reported that August new orders for durable goods fell more than expected. However, the more interesting aspect of this data series may be the year-on-year percentage change in the ex-transportation component and its relationship to stock prices.

Back in 2001, following its sharp, post-stock-market-bubble decline, the measure bottomed and began to move sharply higher about a year or so before the equity market did. Could the negative turnaround that occurred in this particular indicator last fall have been a signal that a bearish end will soon be approaching for stock prices as well?

Stocks finished higher in choppy trading, aided by end-of-quarter window dressing, news of a strike settlement at General Motors (+9.4%), and late-day speculation that a suitor may be eyeing Bear Stearns (+7.7%). A weaker-than-expected August durable goods report and continuing worries over credit market conditions tempered gains.

At the close, the Dow Jones Industrial Average rose 99.5, or 0.7%, to 13,878.15. The S&P 500 Index added 8.21, or 0.5%, to 1,525.42, and the Nasdaq Composite Index increased 15.58, or 0.6%, to 2,699.03.

Among the winners were selected cyclical shares, auto and parts makers, and financials, with the Amex Broker/Dealer Index rising 2.1%. The losing groups included home builders and gold stocks, with the Philadelphia Stock Exchange Gold and Silver Index posting a loss of 1.7%.

December gold futures fell $3.30 to $735.50 while the U.S. Dollar index drifted slightly higher. Treasury bonds ended more-or-less unchanged.

Michael Panzner

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