Today's Key News - Stubborn Bull

The broader indices are lower today, despite the recent cheer leading of Henry Paulson regarding the state of the subprime sector and major media's positive spin on a weaker than expected durable goods report. Housing news today was on the surface positive, but spurring sales by reducing prices 11% is not such a clear positive as indicated by today's popular press. Your independent equity research source here has no agenda but to provide you with a value added service. That said, a serious catalyst is not in place to start correction now. Pending existing housing data, though probably not as positive as today's new housing data, shouldn't be powerful enough to start a trend lower. A three day weekend with the U.S. Navy involved in military exercises in the Persian Gulf is enough to inspire some profit taking though. Next week's GDP report, which is widely expected to be relatively poor, and could show a revision lower from the initial report showing just 1.3% growth, that could be a catalyst for further profit taking next week. The eventual catalyst, recession or not, to drive global equities into severe correction, is the war with Iran that is clearly nearing. With geopolitical issues back in focus, we are planning a special article.

Our take on today's key news:

• *** Oh Magoo, you've done it again! Alan Greenspan correctly, in my opinion, warned that Chinese investors are in store for a dramatic correction. Sounds similar to Wall Street Greek's recent article pointing toward a 1929 style market crash and resulting Chinese depression.
• *** In true communist fashion, the party ran pickup trucks through the streets with megaphones warning citizens to stop buying so much stock, and also to turn in their first born daughters. Well, something like that. Rather, the government warned investors to study a little bit more about the risks of speculation.
• *** Chinese shares continued to weather the storm, as the capital flow provided by the opening of some 250,000 new brokerage accounts a day is unstoppable for now. Chinese equities barely flinched today.
• *** Durable goods orders rose 0.6% in April, short of consensus forecasts for a 1.0% increase, but you wouldn't know it by watching popular media. Instead, I see a lot of cherry picking of good bits of data from within the overall miss. The focus is on the prior month's revision higher and the growth of 1.5% if you exclude transportation. Your independent equity research provider here has pointed out that durable goods orders should continue to benefit from global demand for cheaper American goods overseas. We remind you now that an expense pressured, capital dry consumer should lead to decreased service sector profits, which should precede slower growth of new hiring and a later increased unemployment. Feeding upon itself, weakening corporate profits driven by further consumer weakness could send GDP into recessionary territory. Remember, multinational or not, it's the American consumer that butters the bread of American companies. So, the catalyst that should slap the market in the face is surprisingly slower retail, restaurant and other service sector earnings in coming quarters. I may be too early here again, or underestimating the consumers' spending capability, but we need to keep a close eye on the consumer to root out weakness or strength in the near future. We have to figure out if the consumer can really survive rising food, energy and soon other prices, in my view. I doubt it, and continue to believe recession is a serious possibility. Still, as long as there is a disconnect between much of the data and this likelihood, stocks should remain unpressured.
• *** Initial weekly jobless claims rose above forecast levels, to 311,000. Remember, nonfarm payrolls should provide the first sign of a deteriorating employment situation, not jobless claims.
• *** New home sales were surprisingly stronger than expected in April, but if we take a closer look, we see why. Prices have adjusted significantly further lower. Prices declined 11%, on a median basis and compared to prior year levels. The inventory of homes for sale, though improved, still "sucks," to use the words of several home builder CEOs. At the current pace, it would take 6.5 months to sell through all the inventory. Still, there are buyers, and that's a good thing. Who cares about those folks taking losses on their investments and slipping into negative equity, or the banks that are forgiving that difference in order to avoid costly foreclosure sales. Who cares about that? How about banking sector investors next quarter...
• *** Toll Brothers (TOL) reported earnings for its fiscal second quarter, and showed a profit decline that missed consensus expectations. TOL continues to cut back on production and lots, but showed an improving cancellation rate. Still, that could be partly benefiting from the fact that less people are entering into contracts they would later cancel, as a byproduct of the weak housing environment. Contracts signed into continues to track lower than prior year results, but sequential data is more important now. Wall Street Greek believes new housing benefits from a higher propensity to offer incentives and cut prices, so existing sales should not show the kind of upside surprise seen today in new housing.

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

Financial Times: In Communist Fashion, Chinese Government Warns Investors
Forbes: The Greenspan Effect
Bloomberg: Durable Goods Orders Miss Mark
CNBC: Initial Weekly Jobless Claims Decline
CNN Money: China Trade Talks Result In Not Much
BBC: U.N. Warns of Iran's Nuclear Schedule
CNN: Israel's Worst Mistake
Yahoo! Earnings Calendar
AP: Toll Brothers' Earnings Ugh
Iran Daily: Tales from the Dark Side

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