The big market picture....
- April Fools Day kicked off the second quarter
yesterday, with the Nasdaq playing a clever little joke
on the short-sellers. The struggling index pretended to
be falling early in the trading day, and then reversed
course to gain 17 points to 1,863.
- The Dow wasn't quite so clever. Although the blue
chips managed to rebound from their worst levels of the
session, they still fell 41 points to 10,363. Ah well,
there will probably be many more opportunities this
quarter to make fools out of investors.
- "The kids on Wall Street wonder what kind of eggs they
can expect in their second-quarter Easter baskets."
Stuart Crampton writes in the Daily Reckoning's Weekend
Edition. While the mostly bullish analysts on Wall
Street "are expecting the fattening, cream-filled
Cadbury kind," says Stuart, "a quick recovery for
corporate profits is a hair too much to expect." His
skepticism is clearly the minority opinion. Bullish
forecasts are multiplying like bunnies.
- The first quarter is in the record books, and although
it did not set any records for growth, it has been a
record-setter for producing bullish economic growth
forecasts. Investor attitudes about the economy changed
dramatically during the first three months of 2002. The
pervasive Sturm und Drang at the beginning of the
quarter became unbridled joie de vivre by the end.
- Most Wall Street economists now predict one of the
most bountiful economic spring times ever. But we would
offer a word of caution: Don't venture too far from home
without a winter jacket!
- The Japan Meteorological Agency recently reported that
balmy weather in the Land of the Rising Sun brought the
flowering cherry trees in Tokyo into full-bloom in mid-
March, the earliest on record.
- In the same way, our economy - fertilized by
Greenspan's lavish money supply growth and watered by 11
consecutive rate cuts - blossomed unseasonably soon
after recession. But some of the blooms may be fading
already.
- "There are a few signs the economy has slowed a
touch," says ISI, "most notably unemployment claims have
been unchanged for six weeks. Others include the leading
economic indicators being unchanged in February, DRAM
prices declining 22% over the past two weeks, and our
company surveys declining the past two weeks."
- The possibility that consumer spending might wither
quickly is so obvious that even Wall Street brokerage
firms are discussing the idea. A recent report from
Goldman Sachs entitled "Consumer Spending: Three
Cushions Now Set to Deflate," presents a very compelling
argument that consumer spending may soon run out of
steam.
- The three "cushions" Goldman discusses are lower
taxes, lower energy prices, and mortgage refinancing.
"Although consumers' staying power has surprised
everyone," the Goldman economists write, "its financial
basis is not hard to discern. Spending found support
from three cushions which inflated consumers' spending
power at time when the determinants of real disposable
income had weakened."
- Examining each of these one-time fillips in turn,
Goldman asserts that the beneficial effects of both last
year's tax rebate and the various other tax cuts have
largely run their course.
- Next up, as anyone can easily observe, last year's
steadily declining energy prices have given way to this
year's steadily rising energy prices. "Consumers' energy
bills tumbled more than $50 billion over the past year,"
says Goldman. But the recent rallies in crude oil and
unleaded gasoline have more than erased last year's
benefit. If anything, soaring energy prices will amount
to a brand-new tax on the consumer this year.
- Crude oil ended last week at $26.31 a barrel, the
highest price in more than six months. Meanwhile,
gasoline prices surged an astonishing 44% during the
first quarter of 2002.
- Lastly, says Goldman "Households are widely presumed
to have liquefied scads of home equity via 'cash out'
refinancing and used the money to boost spending." But
this manna from heaven is drying up as "applications for
refinancing have plummeted in recent weeks."
- "The loss of these cushions would not be too
worrisome," Goldman winds up, "if real disposable income
- the main driver of real spending - was otherwise set
to accelerate. However, this does not appear to be the
case."
- Indeed, there is ample evidence that companies
continue to focus on containing costs, rather than on
beefing up their payrolls in anticipation of resurgent
demand.
- The reliably spendthrift American consumer that
Greenspan & Co. believe will lead the economy to
recovery might instead be leading it down Double-Dip
Recession Avenue. |
