lewis and some interesting interpretation
Retailers were mixed (and were mostly red at one point during the day) even after June same store sales came in fairly strong. WMT said its same store sales were up almost 14 percent year over year, which was even more than expected, and also guided up the current quarter by a penny. What was even more interesting than those numbers, however, was the way the market reacted to them. After opening up marginally higher, WMT actually drifted into the red for most of the day before recovering with the late rally in the market to end up only a percent. WMT is a key stock to watch from here I think. It represents the US consumer. If WMT breaks big to the downside, it will be telling us that the market thinks the consumer is going to be in trouble later this year, and the consumer has been the only thing between the US and a recession for the last couple years. This is what I expect we’re going to see and why WMT is down 15 percent from its high back in March (but amazingly still at over 35x trailing earnings?) even as the data continues to show consumer spending remains fairly robust. Why will we see the consumer give up the ghost? Because the market also appears to be telling us that the housing and refinancing market will be cooling off around the same time, and that is what has kept the consumer afloat. How do we know the housing and refinancing markets will be cooling off later this year? We know because the market appears to be telling us that with the recent collapses in FNM and FRE as well as the toppy nature of the homebuilders, which as I’ve alluded to before I think is telling us something about where long-term interest rates are headed once stocks put in some sort of Summer low. You can’t have the dollar enter a bear market and expect foreigners to continue to buy our debt, and that means that rates are going to rise once the domestic flight to “quality” bid is removed.
The other possibility is that the market is concerned about deflation, meaning specifically “deflation into the dollar,” as many have been talking about recently. That’s an important distinction to make because that is what most people mean when they say “deflation.” However, we see no signs of such dollar deflation except in investors’ minds. More important than what people are saying, we have to look at what the market is doing. The CRB remains in an uptrend and near the highs of the year. Gold shares have been rallying for 2 years now and gold is at multiyear highs. The dollar is collapsing against most currencies, and we have a yield curve that is a classically inflationary steep curve. Other than in the headlines, where do we see dollar deflation? We don't see it in the bond market either. Yields hit their lows back in 1998 and then revisited them just after 9/11. The S&P is back to levels it last saw in 1997, yet yields in the long end of the bond market aren't even back to their 9/11 lows? The bond market isn't exactly screaming deflation. Then there's the collapse in the utilities that is also signaling higher interest rates ahead. See, the Fed decided way back in 1998 that it needed to prevent deflation at all costs (just as a recent Fed publication called Preventing Deflation: Lessons from Japan's Experience in the 1990s describes as an imperative), and thus we are on this path that the Fed has chosen whether we like it or not. Can the Fed be successful in fighting deflation? The market appears to be saying that they will in fact be highly successful. In other words, the Fed is likely going to do a spectacular job of destroying the dollar and bringing about a nasty inflationary depression. I doubt they will be pleased with their handiwork once they realize what they've done. |
