A Disconnect From Reality�

by Chuck Young, Rebel Traders | May 30, 2008

There seems to be a major disconnect in the markets these days. A disconnect from reality, really. There's a chasm between consumer confidence and business leaders. We are hearing so many company CEO's remaining confident in US and foreign spending. Even when they do acknowledge a "softening" in the US, they fail to recognize weakness in foreign economies. Consumer confidence numbers here and abroad are coming in very, very low. Maybe business should listen to the consumer. They aren't "talking themselves into a recession", as we've heard some say. They simply know how much income and savings they have at their disposal, and it’s not enough. They know how much more they have to pay for food, gasoline, utilities, housing and transportation (autos).

We're living through a manic phase of the market. For instance, if some say oil prices will fall on US dollar strength, then any small rise in the dollar is met with the selling down of oil company stocks. This might last a day or two, and then manic buying ensues once again, as the price of oil just continues to rise.

It's the same wrong thinking in regard to the Federal Reserve actions. "Oh, the Fed cut interest rates, so everything in the market will be fine!" Oops! Not so fast! Interest rate cuts haven't stimulated the economy or lowered borrowing costs. It hasn't restored confidence in our financial systems. Those cuts were unable to halt the housing price decline and foreclosure rates increasing. They couldn't make up for years of no rise in real income either.

The talk of late is that the US Dollar is starting to rebound. Some media commentators have gone as far as to say this signals a stop to rising oil and gold prices. In 2004 to 2006 the Federal Reserve raised the Fed Funds rate a total of 17 times. During that time the US dollar stopped its decline and headed up throughout that time period. Soon after the Feds stopped raising rates, and left the economy to its own devices, the dollar started falling once again. And not only did it fall again but it went even lower than its previous lows. This clearly tells us that left to its own devices; the economy can’tsustain itself and begins to fall apart once again. The only way the US Dollar can be elevated in price is by artificial stimulation by the Federal Reserve, not from organic growth within.

The economy is much worse now than it has been in a very, very long time. Any upward movement in the dollar will be quickly lost once the economy is left to function on its own. And, an economy that needs to be constantly stimulated artificially is akin to someone being on life support.

This morning�s GDP revision up to 0.9% is so out of touch with real economic factors that you can mark this date and come back to this and see if I am correct in what I am about to say. This summer, when the Government can issue a final revision to this quarter GDP I can assure you that it will be revised downward.

And unemployment is still rising; continuing claims are growing every week. Recently we learned that teenagers in this country are finding it difficult to find summer work. The reason is obvious, older workers are having to get a second (or third) job to make ends meet. Or it is unemployed workers taking whatever they can get, even flipping burgers at the local fast food joint. So this leaves the country with the 16 to 19 year olds unable to find work at historic levels.

U.S. JOB MARKET: TEEN SUMMER JOB MARKET WEAKEST IN MORE THAN 50 YEARS - CENTER FOR LABOR MARKET STUDIES AT NORTHEASTERN UNIVERSITY IN BOSTON

- According to The New York Times: "Little more than one-third of the 16- to 19-year-olds in the United States are likely to be employed this summer, the smallest share since the government began tracking teenage work in 1948, according to a research paper published by the Center for Labor Market Studies at Northeastern University in Boston. That is a sharp drop from the 45 percent level of teenage employment reached in 2000."

There is no fundamental reason at all for the equities market to be trading at -11% from the October 2007 high (S&P 500). The fundamentals of the economy as they stand currently should have the forward market trading at levels at least 20% down. And not only that, the economy is still deteriorating further, and at a faster pace. I said in a recent commentary that retail sales for the quarter we are in now will be very bad. Consumer spending has taken a substantial hit and so will the retailers. Sears/Kmart (SHLD) reported this morning numbers that were abysmal. Same store sales down over 11%. Now, I know Sears is nothing great. But, it is one of those kinds of stores that usually has a constant, albeit light, sales revenue year after year. The products they offer attract a certain type of buyer who goes there when they need a new vacuum cleaner, dishwasher, or power drill, a steady flow of revenue. One can say that their sales declines are just a result of bad management (which someone in the media did say), or perhaps it is due to the economy� hmmmm.

There is talk that the Federal Reserve is finding itself in a vice, they need to keep interest rates as low as possible to keep the pipes open as best as possible for money to flow from bank to bank, and to help stimulate the economy, even if it is just a little bit. But, now they are already talking about raising rates "sooner than later" as one Fed speaker said recently. All due to the rising inflation pressures which for so long they kept saying "is anchored". This is partly the reason you are now seeing bond yields taking off to the upside. Rising yields will be like tree roots breaking into the pipes and clogging up the very system the Feds are trying to keep open. The housing market is in shambles, banks have drastically tightened up credit lending, and if you add rising interest rates to this mix you will simply add to the housing market decline and send it further down the rabbit hole.

Large companies are making adjustments to their production lines (General Motors, Ford, etc) to adjust for the rising inflation and manufacturing costs. Dow Chemical announced that they are forced to raise the retail prices of most of their products by 20% due to rising manufacturing costs.

If inflation (i.e. oil prices) was simply a short lived bubble as the media is now saying it is, then why is it that large corporations are making expensive adjustments to their long term plans? They don't go and make those kinds of changes if they think oil prices are just a bubble. No, they make those kinds of long range changes based on expectations of the situation lasting for a protracted period of time. The only ones who say that oil prices are a bubble is the talking heads in the media. You don't hear that coming from the companies that are trying to survive.

And what about the rest of the world? That which has been touted as being the savior of the US stock market.

JAPANESE DATA SHOWS INFLATIONARY PRESSURES, SLOWING GROWTH

- Japanese household spending drops by the most in 19 months: (JP APRIL HOUSEHOLD SPENDING YOY: -2.7% V -0.9% expected, -1.6% prior) "Today�s figures are bad news for the Bank of Japan as they confirm that the economy is deteriorating while inflation maintains a rapid pace," said Kyohei Morita at Barclays Capital.

Japan's manufacturers� PMI declines to a 6 year low: (JP MAY NOMURA/JMMA MANUFACTURING PMI: 47.7 V 48.6 prior; (New exports orders index lowest since Nov 2001) "The latest PMI data suggests that the punchy growth signaled by official data for Q1 is unlikely to be replicated during Q2," said Paul Smith, an economist at NTC Research. "Risks are seemingly skewed to the downside for production going forward," he added.

SOUTH KOREA�S VICE FIN MIN CHOI SAYING THAT THEY MUST CONSIDER WIDENING THE CURRENT ACCOUNT DEFICIT

- 2008 inflation likely to exceed forecasts
- Says external risks are rising for South Korean economy

(UK) GFK MAY CONSUMER CONFIDENCE -29 VS -25E (ECONOMIC EXPECTATIONS WEAKEST ON RECORD)

- May Consumer Confidence Lowest Since Nov 1990
- Major Purchase Intentions Weakest On Record

SPANISH ECONOMY MINISTER: 2.3% GROWTH FORECAST FOR THIS YEAR MAY NOT BE MET

These were just from tonight! A lot of other countries around the world are having their own economic declines. If other large industrialized nations are declining, then who is left to do all of the buying that is supposed to prop up the markets?

Judgment day is coming for the markets, and when it hits it will not be pretty. Bear market rallies are vicious, dirty, and downright cruel. And when they break you had better be prepared, for it will be a dozy of a sell off.

Contact Information

Chuck Young | RebelTraders.net | Palmyra, NJ USA | Email | Website