Will the Consumer Collapse?

Hi, Friends,

Happy 4th of July! I trust you’re having a good weekend and were able to convert it into a long one to enjoy the mid-summer break.

The celebration of America’s birth is always a fun time filled with barbeques and fireworks, but it’s also a good time to reflect on what that group of extraordinary men we call the Founding Fathers actually accomplished.

The American experiment in democracy is unprecedented in human history, and on the 4th I always think of George Washington’s chair in Independence Hall in Philadelphia. A picture of the sun on the horizon with its rays beaming across the earth is engraved on the back of that chair, and looking at the carving, Washington once remarked, “Is it a rising or setting sun for the United States?”

Of course it was a rising sun, and even today, with a seemingly endless list of problems and challenges, I believe that the sun is still rising.

Today we’re going to take a look at the American consumer who drives the economy and is in a classic squeeze play.

Here are some of the troubling facts from recent reports:

Ø Real Estate stays in the tank: Home sales down in May, again, by 3.5%. Home prices down by 2.7% year over year, the biggest yearly drop in 16 years. Housing market index, the barometer of the housing industry, at a 16 year low. Home mortgage delinquencies on the rise and the sub prime situation isn’t over yet. As one noted analyst remarked regarding the Bear Sterns meltdown and the sub prime threat, “If you see one cockroach come out of the wall, there are usually more.”

Ø Consumer Spending Slows: Retail Sales are up a tepid 1.2% year over year. New car sales down six straight months ending in June.

Ø Prices Up; Incomes Down: Consumer prices rose a blistering .5% in May, biggest one month gain in 17 months; take home income, adjusted for inflation continues to fall, and as we discussed last week, personal savings rate has remained negative for 26 months in a row.

So, the question is, “How long can this keep going on?”

I don’t have a crystal ball, of course, but logic tells me that sometime the consumer is going to have maxed out his credit cards, home equity lines of credit and tapped out his savings. And when that happens, he’ll only have two choices. Downsize his standard of living, which is painful, un-American and decidedly recessionary, or make more money through pay raises or working harder, longer or smarter. As this situation wears on, the old joke becomes even more pertinent, “What I really need are two working wives.”

So, we’ll have to see where it goes from here.

As for the stock market, we’re at a pivotal point as the corn struggles to reach “knee high by the 4th of July.” The overall trend is still up but clearly, as we said last week, short term weakness is rampant. The bulls and the bears are always in a tug of war, but right now there’s more grunting than usual going on.

Wall Street Sector Selector maintains a hedged position for this month as this tug of war plays out. For the 2nd Quarter ending June 30, we reported a 6.73% profit compared to 5.8% for the S@P 500, with a total of 10 trades and 70% of those returning gains. Summer is a tough time to make money in the markets, but, of course, we’re hoping for a positive July.

I’m heading for Chicago today, starting a brutal three week travel schedule, but we had a wonderful mid-week holiday. On Wednesday, my young son and I went on our annual “fishathon,” where we go to South Twin Lake for some lake fishing from a boat, Fall River for fly fishing and then on to Shevlin Pond, where you have to be 17 or under to get a line wet.

The trout gods were good to us and we had rainbows baked in a wonderful Greek olive oil and lemon recipe on the deck looking out at Mt. Bachelor in the sunset. On the 4th, we made our traditional trek to Drake Park in Bend for some lunch and music on the grass by the Deschutes River followed by fireworks at night from the top of Pilot Butte. There are many joys to living in Oregon, in general, and in Bend, in particular, and 4th of July is certainly near the top of my favorites list.

Have a great weekend wherever your travels may take you, and take a moment to celebrate the rising sun and the unprecedented opportunities and freedoms we enjoy as Americans.

Your partner in prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector
http://www.wall-street-sector-selector.com/