Investment advisor Sy Harding agrees with the bear thesis. Expects a weak July bounce followed by heavy downside action this fall.
BEING STREET SMART
by Sy Harding
GET OUT THERE AND SPEND! June 22, 2001.
Don’t need a new TV? Already have a new car? Then how about a new computer? Come on now, get out there and buy something.
Consumers are being asked to undertake the heavy lifting to pull the slowing economy out of the muck, since corporate spending can no longer lift its share of the load. With demand for its products slowing both at home and abroad, corporate America not only has no need to increase spending for materials, equipment, buildings, or employees, it is in fact going in the other direction, cutting its spending in all those categories.
So Washington says it’s up to consumers to get out there and spend to get the economy turned around. Lack of cash is no excuse. The Fed, well aware of that problem, has been cutting interest rates aggressively since January to entice us to get out there and do it on credit. Not having had much luck with the five rate-cuts they’ve made so far, they’re expected to cut rates again at their FOMC meeting next week.
Congress is on the job with its own plan. Congress will send most of us a pocketful of actual cash beginning in July, tax rebates of up to $300 per taxpayer. All they ask is that we get out there and spend it.
Will it work?
The thought of it may at least work well enough to produce a summer rally of some degree in the stock market.
But don’t expect too much in the way of actual results on the economy. We consumers just may not be able to party much more at this point. We’ve been on a binge and it’s hangover time. A lot of us may even feel compelled to use our tax rebate to make an overdue debt payment.
The Federal Reserve reports total credit-card, automobile-loan, and other consumer debt, rose to a new record of $1.58 trillion in April. Mortgage debt amounts to another $5.2 trillion.
It now requires 14.3% of consumers’ take-home pay to make the payments on that debt, the highest percentage since 1986. That was not a big problem when the economy was booming, jobs were plentiful, and companies were providing lots of overtime. But with the economy now slowing, people losing their jobs, companies cutting back and even closing down operations, it’s becoming a problem. The situation is aggravated by the fact that household saving rates in the U.S. have been non-existent for several years, leaving many consumers without that old-fashioned remedy of a rainy day reserve to draw on in times of trouble.
As a result, bankruptcy filings are at a new high. Mortgage delinquencies are up 20% in the past year. Bad-debt write-offs by credit-card issuers have risen to 12-year highs. The National Foundation for Credit Counseling reports the number of people seeking counseling on handling their debt problems is rising at a rapid pace.
Of course Washington can’t expect corporations to jeopardize their financial condition by increasing their spending at a time when they’re also carrying record debt loads, and don’t really need to buy anything. So Washington says it’s up to consumers to do so.
But economists are concerned that consumers may have reached their limit and are no longer willing, in fact are perhaps unable, to step up to the cash register with the required enthusiasm. Retail sales continue to decline in spite of five aggressive cuts in interest rates and Congress’ promise that actual cash is on the way to consumers.
The problem is aggravated by dismal export sales as consumers abroad, with their own economies slowing down, are also not rushing to the stores to buy U.S. products. The Commerce Department reported this week that U.S. exports fell 1% in April, not moving in the desired direction.
The stock market took some hope from Thursday’s report that new applications for unemployment benefits declined 34,000 last week. However, a look behind the numbers reveals that the underlying employment picture is still deteriorating. The number of workers filing for continuing benefits, that is those who have been unable to find new jobs, rose by 83,000.
What’s it all mean for the stock market?
Nimble investors enjoyed a significant rally from the market low on April 4 to the rally peak on May 21. But from that peak the S&P 500 and Nasdaq gave back exactly 50% of their gains, after corporations began warning their June quarter results are not going to meet Wall Street’s estimates, even after those estimates were lowered significantly as a result of similar warnings last quarter.
The question now is whether the 50% retracement of the previous rally’s gains have set up conditions sufficient to produce a summer rally of some degree from here. July does have a history of being a positive month most of the time.
However, unlike my bullishness in late March on expectation of the April/May rally, I believe the upside in a summer rally will be quite limited, and that the bear market has unfinished business on the downside that will produce lower lows by October or November, as realization grows that consumers are not going to pull the economy out of the muck as soon as is currently envisioned.
Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at WWW.StreetSmartReport.com, and author of Riding the Bear - How to Prosper in the Coming Bear Market. |
