Farrell: Everyone Loves A Train Wreck

Everyone loves (hates) a train wreck. But love 'em or hate 'em very few can turn away from one. Whether real or some embarrassing reality show stage-up where people will go to any depth to get on TV, we seem to line up to watch the pain. Maybe that is why Chrysler showrooms are reporting a pronounced uptick in activity. That, or the prospect of a last minute deal as showrooms gasp their last breath, is drawing in the bargain seekers. There was also a report in the online version of the Wall Street Journal(yes, I do go online; reluctantly, and with enough help, I can) that stated investors are showing up with cash in some of the most bombed out housing markets in the country and buying up "scores of foreclosed properties." At some price, however ugly, trades happen and that is a good indicator that the housing market may be bottoming.

What will be ugly to watch will be the rise in unemployment claims sure to follow the Chrysler and now likely GMbankruptcies. Claims come out every Thursday and if not this week then soon enough we will see a rise. It could well be acerbated by layoffs at the auto parts suppliers so dependent upon the Detroit makers. I fear we will see claims climb above 700,000 on a weekly basis and I don't think we are focused enough on that. This might not be a passing uptick if the bankruptcies drag on and the impact on the suppliers spreads.

We have had plenty of "green shoots" lately that show a lessening in the rate of decline in economic activity. There are some outright bad news signs as well. We mentioned previously that German GDP fell at a 15% annual rate in the first quarter. Not to be outdone, Japan reported almost the same Q1 results. Patrick Melton of Soleil's Alternate Products Group deals with some interesting people. Our International Shipping consultant, John Gately, pointed out an article in the "Journal of Commerce" that said average spot rates collected by ocean carriers for a 40 foot container from Hong Kong to Los Angeles fell to a new low of $949 down 53% from $2036 a year ago. It's believed this is the lowest price since they started keeping the data in 2005. It is quite a (discouraging) statement on world trade.

The Financial Timesbelieves the economic output gap - the difference between what the U.S. economy can produce and what it does produce - will remain large for some time. While that implies a lower rate of growth as we struggle to rebound from the recession it also means the Fed will not be forced to consider raising interest rates for some time.

Greg Valliere, our Washington Policy strategist, had an interesting piece out May 19th entitled " When do the tax hikes begin." Greg fears the Bush tax cut expiration could be accelerated, there will be Congressional action on taxing multinational profits, and the Social Security payroll tax cap could be increased. It's a short, to the point piece you might want to look at.

While I like the technical boost given by the 50 day moving average crossing the 100 day (that's technical stuff) and the good behavior of Bank of America after a super sized stock offering, I am troubled by the poor volume and the fact volume deteriorates if the market turns down. I continue to be wary and cautious about the near term.