Economy Showing Signs of Fatigue

Top Line:
The stock market showed some strength on Wednesday and should now be starting a pretty good up run into the early part of July. After we see some new highs in the Dow, we will be looking for a clear entry for getting short or getting out.

Market Action:
Since Friday morning, coinciding with the Blackstone IPO, the market has shown signs of bearishness. The Dow traded right at 13,550 on Friday morning and Wednesday morning (this morning) it traded down to near 13,250 which would be significant support. Monday and Tuesday had to shake the bulls’ confidence as the market was strong going into the lunch hour but gave way to selling going into the close. Bottom line is that 300 points isn’t really enough to scare any bull.

Economy:
The economy has shown no signs that the stock market is correct in its quest for higher prices. Wednesday morning, the durable goods orders, down 2.8%, were “surprisingly weak” according to one article we read on the subject. The durable goods orders are a fairly volatile reading but they can go down.

The housing sales were not pretty (our words) this last month either with new home sales down1.6% in May and prices were down some, too. You may recall that the April numbers were up about 12.5%, with April being the lone strength this year. Mortgage rates have risen about a half a point which is hampering sales a bit, too. Existing home sales were down as well with an annual rate of less than 6 million units and prices down year over year.

Consumer confidence, developed to measure the mode of shoppers, took a small dip last month to the lowest level since last August. This number still seems high but we don’t think it will be long before this number moves down strongly.

All in all, the economy is putting in a weak performance, not that you could tell by looking at the stock market.

The Fed:
On Wednesday, the Fed began yet another FOMC meeting to discuss the economy and the future course of interest rates. Do you remember the position of the Update? Well, let us remind you.

We have maintained a stance for some time that the Fed will no longer raise rates and will actually start lowering rates probably later this year. We say this due to the signals given by the economy but more fundamentally from the subprime mortgage situation. We see the Fed saying they are going to be tough on inflation tomorrow (Thursday) but that strong rhetoric will get a drastic change when the consumer decides to pack it in.

We believe that the consumer led recession is just now being felt across the economy. The ATM’s that people live in have gone through a metamorphosis (should we say they have morphed, that would certainly be easier) from the ATM to the debt repayment plan and people are not very happy about it.

Bill Gross published an article that is fully in line with our thinking, that being the subprime situation is still not contained. Mr. Gross presents his points in an entertaining fashion which you should enjoy. Please see Bill Gross’s July Investment Outlook at this site:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm

Opinion/Analysis:
As we come to the end of the quarter/month, we should finally be seeing a rally that will extend through the Fourth of July, maybe even a little longer. This move should be the last such move that the market can muster. As this up move matures, we will offer our analysis and if it ever gets to a tipping point we may just have to go back to daily posts.