Consumer Spending/Savings

The following is from RGE Monitor (Nouriel Roubini):

Personal income fell less than 0.1% in July 2009 after falling 1.1% in June 2009, while disposable personal income fell less than 0.1%. Real disposable income fell 0.1% in July after falling 1.6% in June. Personal spending rose 0.2% in July after rising 0.6% in June, while inflation-adjusted spending rose 0.2% after rising 0.1% in June. Real spending on durable goods rose 1.8% in July after rising 0.8% in June, led by purchases of motors vehicles under the "cash for clunkers" program. The saving rate fell to 4.2% in July from 4.5% in May. (U.S. Bureau of Economic Analysis)

The IRS Is Thinking About Cutting 401(k) Contribution limits

Because of the low inflation rate in the U.S., the Internal Revenue Service likely will reduce the $16,500 limit on 401(k) contributions to $16,000 for next year. The limit is based on a formula tied to inflation that the IRS is required by law to follow, according to an analysis by human resources consultant Mercer. Unless Congress changes the law, the IRS probably will have no choice, said Bill McClain, a senior consultant at Mercer. USA TODAY (26 Aug.)

A Wild Ride A-coming

Are we in for a wild stock market ride? If the past is any kind of an example - then yes.

From seekingalpha.com

John Mauldin's most recent weekly missive (registration required and highly recommended) contained the following graphic depiction via Ed Easterling of the ups and downs seen in the last secular bear market in stocks during the period from 1966 to 1982.

That gives the nearly 50 percent rally since March a whole new perspective, particularly given the fact that we are only nine years into a cycle that typically runs much longer.

Some parallels to the 1972 peak are cited in the analysis, but a repeat of the 1975 peak would surely disappoint recent stock buyers as well.

CCM Comments:
Well let's look at recent history. On 10/10/2007 the S&P 500 was (1562) from there we declined to (676) on 3/09/2009, a return of -57%. Or what I call "negative compounding". From 3/09/2009 the S&P 500 has increased to (1028) a return of 52%. In less than two years we have experience one "wide ride". If history is any indication of the future then get ready for a more wide rides to come.

Banks Continue Tighten Lending Practice

The Federal Reserve’s latest Senior Loan Officer Survey of 55 domestic banks and 23 U.S. branches and agencies of foreign banks revealed a continued tightening in lending standards amid weak demand for all types of loans during the second quarter. According to the Fed’s survey, about 30% of domestic respondents, on net, reported tighter standards on commercial & industrial (C&I) loans to large firms, and about 35% claimed to have tightened lending standards to small firms. The household lending situation continues to be restrictive as 35% of those polled tightened standards to consumers. Loans and conditions on credit card and other consumer loans were also tighter, though not as tight as in April. This just doesn’t seem like an environment that will result in greater organic economic activity. As low as rates are, the lending channel remains clogged and there’s currently no incentive to lend or borrow.

Source: Argus Research, 8-25-09

Double-Dip Warning

Roubini: Double-dip recession risk is rising. In an op-ed in the Financial Times, economist Nouriel Roubini warned there is a growing risk of a double-dip recession. Lawmakers are "damned if they do and damned if they don't," since unwinding stimulus policies too soon could undermine a recovery but running large deficits could push up borrowing rates and cut off economic growth as well. The economy also runs the risk of a contractionary shock if speculation drives oil back over $100, and energy, food and oil prices are rising faster than fundamentals warrant.

Foreclosure Rates and Negative Home Equity

The linked articles paint a continuing negative picture for home values in the US. Karen Weave of Deutsche Bank is forecasting that approximately half of all homes with a mortgage will have negative equity by 2011. Currently 14 million home mortgages are said to have negative equity. Karen is projecting this to rise to 25 million by 2011.

The biggest question is will the negative equity have a transforming behavior change for the US consumer. Crew thinks so, with a potential for long lasting impact.

If you'd like additional insight give us a call.

http://finance.yahoo.com/tech-ticker/article/307793/One-In-Three-Chance-You%27ll-Soon-Owe-More-Than-Your-House-Is-Worth?tickers=xhb,tol,len,kbh,dhi,phm

http://www.businessinsider.com/henry-blodget-half-of-us-homeowners-underwater-by-2011-2009-8

US Recovery "V", "L", "W" or "Q"

The link below is a great article. It provide a very compelling argument for the shape of US Recovery going forward. It's one that I happen to agree has a strong probability of occurring.

http://seekingalpha.com/article/156736-understanding-the-q-recovery

Please forward for others to consider.

Is China Tightenting it's Credit??

China is not tightening credit, economists say. Although loan growth in China cooled during the past month, economists said the slowdown should not hinder the country's economy. "We do not think that the rapid credit expansion since early 2009 is sustainable and expect normalization for the remainder of the year," said Qing Wang, China economist at Morgan Stanley. "This slowdown in loan growth, therefore, should not be interpreted as policy tightening." FinanceAsia.com (12 Aug.)

Please make sure to review yesterday's post.

Other important items:

Statistics signal U.S. recovery with no new jobs nor pay hikes
Economic indicators suggesting the U.S. recession is ending are increasing by the day, but those same indicators point to the likelihood that recovery will not mean good times for many Americans. The statistics indicate a recovery with no new jobs, no pay increases, and no growth in tax receipts for cash-strapped state and local governments. "It's going to be a recovery only a statistician can love," said Mark Vitner, senior economist at Wells Fargo. The Washington Post (12 Aug.)

Geithner Asks Congress for Higher U.S. Debt Limit

As reported on SeekingAlpha.com 8-10-09.

Now does that sound like everything is moving in the right direction??? If the US were a corporation the bankers would call the loans. Hopefully China doesn't.

US Promoting Consumer Spending - a Ponzi Scheme?

The link below provides an interesting dialogue on the subject. This article is a continuation on my theme this week: The US Economy needs the consumer to grow. The US Consumer needs confidence to get back in the game to spend. The US Government and the media is doing just about everything it can to supply and support consumer confidence. Some economic data is turning positive or at least slowing its negative descent. But the US Consumer JUST ISN'T BITING. I think being Madoff'd is fresh in their memory.

http://seekingalpha.com/article/154621-confidence-games-and-ponzi-schemes-no-way-to-run-the-world-s-largest-economy?

In summary the US Consumer has had one big party and now it's time to pay the tab and get down to business. That being said the recent stock market recovery looks over extended. The largest agreeing percentage group (30%) of the economist attending the annual economic summit at Leen's Lake this week believe we will face a "W" recession. And based on this and the last two post I Agree.

Continuation on Consumer Spending, Savings and Disposable Income

Please read the link below from SeekingAlpha.com. It extends the discussion from yesterday. If the trends continue we will be heading back to a period very similar to the post Great Depression Era and therefore a "reset" of US consumer behavior.

Given the reset, the US Stock Market may be a head of itself.

http://seekingalpha.com/article/154253-investing-implications-of-higher-consumer-savings-rate?

Consumer Spending Reset - Linchpin to Recover

Below is a to a good interview regarding consumer spending "reset" habits with Andy Bond, ASDA (a European Division of Wal-Mart). Just copy and paste it to your browser.

http://seekingalpha.com/article/153918-will-consumers-ever-revert-to-pre-recession-spending-levels?

It is important because "Consumer Spending" is the linchpin to economic recover. Consumer spending habits after the "Great Depression" slowed the economic recover with the shifted to savings from consuming. This transition behavior is replicating its self again. The degree of replication is the big question to be answered and the linchpin to the economy and investing. As personal evidence, just recall how your own parents and grandparents consumed and saved.

First Half 2009 Federal Government Tax Receipts in a Free Fall

This morning Fox News reported that Federal Government Tax Receipts are down $338 Billion. Individuals represented a little over $170 Billion of the total with corporate tax receipts being the residual. On a percentage bases individual are down 22% and corporations are down 57% for the first half of 2009.

Tax Hikes A-Coming

Here come the Tax Hike!

Though it is contrary to President Obama's campaign rhetoric, he sent his economic staff out over the weekend to float the idea of a middle class tax hike. Come on, you didn't believe him during the campaign, did you? If so, just remember, if a politician is moving his/her lips they are lying. OK, that is a little strong, but there is a foundation to that comment. Note I didn't favor any political party, I said politician.

We have just gone through one of the the biggest parties in economic history, call it the "Roaring 90's", remember the "Roaring 20's" from history class? What followed? So now it's time to pay the tab. An it's a big one. So look to slow to no economic growth. Because we are faced with higher taxes and no leverage.

But in the end this might be a good lesson for us all to learn, though it will be a little painful.