The stock market rallied today in response to the unemployment insurance claims dropping by 33,000 to 342,000. Also, durable goods orders at negative 0.3%, & non-defense unchanged, were a little better than some were expecting. This led to the belief that the economy might just avoid a recession altogether or at worst the recession would be mild. If this scenario were to unfold the Fed would not have to continue cutting rates or may cut one last time next week (one and done).
We are actually impressed that the market participants finally realize that the Fed's almost panic easing is not a good long term solution to our credit and debt problems and has only led to a weaker dollar and stronger commodities based in US dollars. As we stated in the last special report, "How We Got into This Mess" on the left side of home page-- "Superficially, it would seem as if the Fed can come to the rescue again. The problem with the Fed continuing to rescue the economy and stock market is that the total U.S. debt (both public and private) has increased substantially over the past 5 years to $49 trillion and the public sector debt is less than $8 trillion. The debt that has been generated by the private sector has grown to such a level that the Fed no longer has control. In fact, the main thing the Fed is accomplishing with these rate reductions and other "liquidity" measures is to drive down the US dollar. Soon they will realize that this is all they are accomplishing." The chart of the total debt as a percentage of GDP is attached, and as you can see, the excesses are even more extreme than during the great depression.
We would like to become more bullish on the markets as well, but we have some concerns that continue to worry us. We still believe that unemployment insurance claims declining is not a significant barometer of economic strength. The reason for this is that the number of people employed relative to total population coming out of the recession of 2001 lagged every post war recovery with the exception of the 1957 recession. And that recovery was short lived. When you don't have a recovery in employment, you probably won't get as many people in the unemployment insurance lines-(see attached second chart). Durable Goods Orders are so volatile it is very hard to put too much emphasis on one month's numbers especially when they were not what you would call strong.
The area that we do concentrate on is housing, and how the decline in housing prices could effect the real economy. Remember, housing values are much larger than anything else that could affect the psychology of consumers. We predicted in an earlier special report that real estate would be the catalyst for the deflationary bear market and recession we expect. And the housing news this week was not what you would call glowing. Bank of America's net tumbled 77% due to increasing losses on home-equity loans and the company made a glum forecast for the rest of this year. Ambac shares dropped 43% to $3.46 after losing $1.66 billion, or $11.69 a share in the first quarter (nearly 8 times worse than estimates). The biggest surprise came from the $1 billion in loss provisions on mortgage securities. California foreclosures soared in the first quarter to 130% vs. the first quarter of last year according to La Jolla based Data Quick. Lenders also sent out 20,339 default notices to homeowners compared to 8,843 last year.
Earlier this week the National Association of Realtors reported that existing home sales dropped by 2% in March to 4.93 million units, and prices dropped by 7.7% from a year ago. That was the second-biggest year-over-year price decline following a record 8.4% drop in February. Inventories rose 3.1% to a 9.9 months supply and 18% of homes being listed for sale have negative equity.
Today's news was even worse. New home sales plunged to the lowest level in 16 ½ years and prices dropped the largest amount in 38 years. The Commerce Department reported that sales of new homes dropped by 8.5% last month to 536,000 and the median price of homes sold in March dropped by 13.3% to $227,600 vs. a year ago (and that doesn't subtract incentives). This is the largest decline since 1970. Inventories rose to an 11 month supply and that is the largest since 1981. We may be the only ones alive believing that after an unprecedented 85% surge in home prices from 2000 to 2006, that prices will unravel enough to cause a major disruption in the stock market and economy.
By the way, the S&P 500 did not break out of its trading range and sold off at the end of the day.
