The Most Important Article You'll Ever Read
May Employment Status Report:
The monthly report from the Labor Department showed nonfarm payrolls increased 157,000 in May, a solid pace not indicative of the weakening employment environment that your preferred independent equity research provider has been pointing towards. So, what's the take then...
We are early. The consumer is still digesting expensive gasoline and food costs, and just learning that credit is more difficult to come by. He's still employed, since the service sector has yet to feel the bite of lighter consumer spending in earnest. However, we believe the months ahead will expose a consumer with less propensity to spend and a saturated service sector and retail environment that will have to consolidate. Now, I'm not telling you to head for the hills or stash your cash under your mattress. I'm telling you that now more than ever, you need to be diversified and beta protected. At the same time, you can still find great stocks.
During my time as an analyst in a special role as an idea generator, I selected great stocks through the period 2000 to 2005. That period included a meltdown, which I remind you of in case you have blocked it from your memory. So, you see, you can still find great stocks in tough times. However, you have to recognize your operating environment and tailor your selections, or find stocks that can override market weakness based on some individual catalyst the company may possess. MARKET WEAKNESS!? "This Greek is truly tragic", you must be thinking. Look, I believe that even if the consumer survives this latest test, he faces a frightening scenario late this year or early next year, when Israel or the United States bombs Iran. I don't want to get into it in detail again, but for those of you who are new to the site, Iran supplies the far east with important energy, and in an environment of tight demand/supply, Wall Street Greek believes China will run dry. Despite attempts to deal, Israel will not live with a nuclear neighbor and Iran will not back down from a project decades old and significantly progressed. These are proud cultures, and they're not going to budge. Iran is likely to lash out at its neighbors, which in case you have forgotten, include Saudi Arabia, Kuwait and the U.A.E. Need I say more? What does China do when its stock market crashes, economy falls into depression and factories gather cobwebs? China is aggressive, and a starving dog finds food.
THE MOST IMPORTANT PARAGRAPH YOU'LL READ IN THIS GENERATION:
So, whether it's in a month or driven by the Iran catalyst nine months down the road, the future is driven by dynamic factors unique to this period in history. We can no longer rely on history to guide us. Block out the robots that quote historical stock market performance to you as a reason to buy buy buy. Look around at your world, and recognize changes as they occur. Don't fall victim to the herd mentality. Be individual and think for yourself.
I'm not trying to scare the bejeavers out of you, just slap you in the face with the reality before you. Hedge, diversify and be prepared. It's not paranoia, it's logic. It's not panic, it's preparation. It's not hysteria, it's intelligent.
More On Labor:
Unemployment rated 4.5%, as anticipated, and average hourly earnings rose 0.3%, in line with expectations. Everything looks hunky-dory within the labor market...
April Personal Consumption and Income:
Personal income fell by 0.1% in April, after a 0.8% increase in March. For the most part, economists expected around a 0.3% rise. So, what's going on? It's possible that before hiring ceases and layoffs occur, wage growth could slow. It's logical, but this figure is not enough to base that view on. Income would fall as senior workers are replaced with new employees as well. These are cost cutting measures, and Wall Street Greek believes cost cutting measures will lead some service sector firms to reduce workforce this year and drive unemployment higher.
Personal consumption rose 0.5%, above the expected 0.4% increase. Spending benefited from rising prices of goods, including gasoline. Still, the Fed's favorite inflation gauge, the core PCE indicator, rose just 0.1%, and was below the forecast for a 0.2% rise. The year over year gain was 2.0%, within the Fed's preferred range of 1-2%. There is a serious and tremendous flaw in focusing on this core figure. We must ask, will prices rise or decrease going forward. Odds are, increasing materials component and energy costs, which are both important and driven by secular issues, should continue to pressure prices higher. Remember, Wall Street Greek argues that excluding food and energy from price metrics made sense in the past when fluctuations were mostly driven by seasonal patterns. In current times, however, secular supply/demand drivers are moving prices higher, and it's foolish to ignore these drivers. If you see or hear market "experts" discounting food and energy, I would end my relationship with those firms and experts, as they are missing an important factor and are typical of mindless robotic behavior of individuals set in their ways and too comfortable in their day job to be valuable to you any longer.
University of Michigan Consumer Sentiment:
In the past, we pointed out a trend this year in the Michigan Sentiment reading. The trend is declining consumer confidence. We had an uptick this past month, but I believe that was mostly driven by the gains of the stock market. I expect the trend lower to continue and override this blip. May sentiment was revised lower to 83.3, from 88.7, so the improvement was not even as good as previously thought.
Pending Existing Home Sales:
The index fell 3.2% to 101.4 after a revised 4.5% decline in March. Yes, housing still "sucks," and will continue to suck for a while longer. It's a titanic of a ship, and it doesn't turn on a dime. When direction is set in motion, it continues in motion until significant effort alters that direction. Economists were looking for a rise in this metric! We continue to expect prices to decline, inventory to remain saturated and sales to drag.
ISM May Manufacturing:
We told you manufacturing would continue strong and be the last peg pulled from the table thanks to foreign demand for U.S. goods. The index rose to 55.0 from 54.7. The weaker dollar continues to help sales of U.S. goods overseas, but we restate, the American consumer butters the bread of American manufacturers. Eventually, this portends to impact manufacturing, should my expectations play out.
I am truly sorry for spoiling your weekend party, but I have to call it like I see it. 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. Also, eventually, rising prices and expenditures are going to impact capital flow and liquidity. Investors are going to contribute less to their 401k plans, in order to fuel their vehicles and pay for their dinners. This is a factor just broached here, but you can expect me to point to it often in the future. "Yeah sure Greek! You told us the market was headed lower before." Yes, but I also suggested investors find value in the large multinationals within the Dow and S&P 500. I'm not a bear, I'm an analyst. I don't favor any one team here, I'm just looking for the best players.
Below, please find the articles in today's "Key Headlines" sidebar section of the site:
Bloomberg: May Employment Status Report
CNN Money: Michigan Consumer Sentiment
AP/Yahoo!: April Personal Income and Consumption
Bloomberg: Pending Existing Homes Sales Fall
CNBC: May ISM
CNBC: Dow Jones is for Sale
Financial Times: Russia Delays BP Decision
Yahoo! Earnings Calendar
Forbes: Dell's Plan
USA Today: China Stocks Take Another Big Fall
Bloomberg: Europe's Growth Slips to 3%
CNBC: Hovnanian's Loss
Iran Daily: Tales from the Dark Side
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