Farrell: Caution, We May Be Getting Ahead Of Ourselves

Retail sales? I don't think so. It's the heavy hand of government

Retail sales were reported for last monthand were viewed as disappointing coming in down 0.4% when most were hoping for a flat performance. But for reasons we listed yesterday when chain store sales were announced, we felt that the recent uptick in consumer performance was not sustainable. There were some one time spurts to incomes that helped in the very recent past, but the consumer is still overleveraged, worried about jobs and will continue to save more as uncertainty requires a pool of savings to fall back on if times get tougher. Unemployment is high and rising, and wage growth is stunted. It's hard to see retail sales, or the consumer in the overall, spurring economic growth.

The market sold off and the reasonable explanationwas that the cause was the poor sales showing. That was undoubtedly part of the selloff. We have been digesting better than expected news with the optimism that comes with rising stock prices. But now we have had a run and bad news is being treated as bad news and depresses the market which is the mark of a correction. There is another more troubling feature to the news of the day than just bad retail sales though.

I think the bigger, more troubling headline was the word that the administration is looking at ways to regulate and restrict financial paychecks. Cap and trade seems to be back and alive and well, and major health care reform is on the way. This sure sounds like the world is going to be directed out of the Oval Officeand I thought central control of an economy has been discredited by the failure of every country that has tried it. I find this so troubling that words fail me (well almost, I have never run out of words.) This is very bad news, and it will be very hard politically to stand against this with the populist fervor running through the country. I was almost completely despaired by this administration today when news came at the end of the day that charges are being prepared against Angelo Mozilo, former CEO of Countrywide. Some faith has been restored, but only some.

Word out of the Financial Timestoday was that the EU will follow the US' lead and stress test their banks. The European banks have allegedly been conducting their own tests privately and decided that was not good enough. There are lots of opinions about the US stress tests but on balance the results have been well received. Europe needs to catch up.

Our March trade deficit releaseda few days ago showed exports down 17% year-over-year and imports off 27% over the same time frame. This strikes home that global trade continues to contract. China's news wasn't any better. Its numbers showed their exports fell 23% in April alone. China is in the midst of a major internal stimulus program so its growth looks solid for a year but Fan Jianping, a government economist, said correctly that "government investment alone won't be enough to sustain a recovery. The market has to do its job."

It would be wise to remember that the news we have had lately has not been good; only "less bad."

While I believe the ship is turning, I also believe the market, as is its tradition, has run ahead of reality a bit. The flood of stock and bond offerings the last few weeks is not because corporate managements think prices are going to a lot higher in a few weeks. They are smart enough to grab the cash while its possible. I think the financing window is already closing as the last few deals required bigger discounts than managements had hoped for.

I think this will be a normal correction of one third-to-one half of the recent run-up and I hope the market will dig in and form a higher low than we have seen the last year around the 100 day moving average in the lower 800's on the S&P.

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