Today's Coffee - Don't Go Away Mad, Just Go Away

On Friday, in "The Most Important Article You'll Ever Read," we stated, "I believe the usual summer drop-off of volume and ongoing geopolitical troubles and mixed data should now start the market lower without the catalyst of multinational earnings to drive further rise." The Dow is down 111 points at this hour.

That Bernanke and his big mouth...
Ben Bernanke addressed the International Monetary Conference in Cape Town via satellite, and indicated his view that the U.S. economy was due for rebound. He also continued to express that his main concern remains inflation. The market took offense, considering a rate hike might be more likely than a cut at this point.

Treasury yields are the real catalyst...
Treasury yields edged higher, approaching 5%. This is the real catalyst threatening stocks and bonds. As the cost of capital increases, things are getting tighter. A rising rate environment is detrimental to equities and bonds alike, and it especially threatens those same multinationals that had previously been benefiting from a declining dollar. It's time to take a break my dear friends.

You know how everybody and their mother tells you that an inverted yield curve portends recession? Not every inverted curve does, but I think the one bearing down on us now does. I think it's time to take profits from your recent equity gains, and look to defensive names for safety.

ISM Nonmanufacturing proving the Greek wrong, or just early?..
Today's report from the Institute for Supply Management, indicating that the service sector is as strong as ever, would make me look bad if I wasn't early. I stated in "The Greek's Week Ahead - When the Liquidity Dries" that it's too early still. I said that the months ahead would expose a burdened consumer with less propensity to spend, and this would be evidenced in data like the ISM report we received today and retail sales data. But, I said the numbers should start to reflect that sometime between now and nine months from now, depending on the catalyst and the consumer's resiliency.

Today's ISM nonmanufacturing index for May read 59.7, up from 56 in April. Combined with the increase in the manufacturing sector, this enthused a range of folks. But, what pea did the Greek find in the data... Well, it seems that while the metrics for new orders and inventories (this one by a lot) grew, backlog declined. Remember when we heard the economy could get a boost from a lack of inventory on hand to meet any new demand that could show up... There it is. But, backlog declined!

So, the fly in the ointment is this. Retailers apparently hired people at a strong pace in May, as did the service sector on the whole. Sure, they have to in order to keep up the pace of their new store additions, that in turn drive revenue growth and brings that bottom line in to meet analysts expectations. But what if the consumer spends less... What if declining home equity, tighter credit standards, rising interest rates, increasing gasoline prices and food costs actually do impact consumer spending, as you would expect. Well, we will find ourselves with too many stores and restaurants to handle demand. It will not be just the horribly run stores like the Gap (GPS) that go out of business, but the marginally weak ones as well. And all that hiring that took place in May will just as easily be converted into firings.

Oh, and guess what, the prices paid portion of the ISM metric went up. That's what drove yields higher, inflation, and that's what is adding to the catalyst driving stocks and bonds to give back some profits now. Sell in June and go away! Don't go away mad though, just go away.

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