This Week: Consumer Alarm Bell Has Sounded

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With last week's wake up call, the investment community realized that the American consumer has effectively walked away from the table. Without her spending, economic recovery cannot occur, not with any fervor anyways.

Last week's economic data showed retail sales swung downward in dramatic fashion in July. Where economists were forecasting a sales rise of 0.8%, July instead offered decline of 0.1%. The month's dismal performance also compared poorly with June's revised sales gain of 0.8%. (See Retail Sales Report details). While there's no doubting the numbers showing "Cash for Clunkers" is stimulating vehicle purchases, in a demand desert, that may be at the cost of the rest of retail.

Without question, the greatest driver of consumer spending softness is the highest jobless rate since The Great Depression. Excluding the government's assumption that many unemployed folks have decided to retire to a life of chosen camping by the riverside, as illustrated by the lower labor force count in July's Employment Situation Report, the army of the unemployed is still recruiting. Unemployment, especially the long-term sort that is plaguing our nation now, is also consistent with spending restraint. Needless to say, when Friday's Reuters/University of Michigan Consumer Sentiment figures showed a sharp drop in consumer confidence, few should have been surprised. However, on a light end of week/middle of summer trading day, the Dow, S&P 500 and NASDAQ Composite all sank approximately 1.0%.

I would bank on this latest portion of the wall of worry the market consistently climbs to prove a significant challenge. In this problem, you find your fundamental catalyst for the technical perspective expressed last week by our Econometrics & Programmatic Trade Analyst, Steven Ferguson. In other words, looks like time to take some short-term money off the table and for March's market seers to bank a bit of those big capital gains.

This Week

Monday

The New York Federal Reserve reported Monday morning that manufacturing in the region expanded for the first time in over a year. In fact, the month's reading was the highest since November of 2007, nearly two full years ago. August's Empire State Manufacturing Report produced a General Business Conditions Index of 12.1, versus the modest economic contraction seen in July. Economists were looking for improvement, but to a lesser degree of 5.0, based on Bloomberg's Survey (Barron's reports 2.2). The Inventories Index rose, but not into positive territory, while Shipments and New Orders gained further ground therein. The indexes are derived from a survey, and so it helps to know that with regard to the General Business Conditions number, 30% of respondents said conditions had improved, while 18% reported deterioration.

The Department of the Treasury reported on the flow of funds into and out of US securities. The Treasury International Capital Report for June showed net foreign purchases for long-term US securities of $90.7 billion. The inspiring inflow compared against May's net outflow of $19.1 billion. Net foreign purchases of US securities amounted to $123.6 billion, compared to American purchases of foreign securities of $32.9 billion. Foreign holdings of Treasury Bills decreased by $11.3 billion.

The National Association of Homebuilders published its Housing Market Index on Monday afternoon. The HMI improved 1 point, to 18 for August. All geographical segments of the nation saw gain in HMI, except the South.

Builder enthusiasm should lag the broader real estate sector, given the still heavy load of new and existing home inventory. Considering the excesses that occurred in housing and home building, the hangover should be likewise powerful in convincing builders to lay off the good stuff for a while. That's not to mention stricter lending standards, tighter regulation of mortgage brokerage and banking and increased joblessness. However, we should also be careful not to ignore the impact of significant government stimulus for the sector, including the first-time home buyer tax credit. It's been more than a year since the index has been this high (June 2008), and builders see hope for the months ahead inspired by the tax credit.

The Federal Reserve approved an extension of its Termed Asset-Backed Securities Loan Facility (TALF). The Fed also stated that no further types of collateral were expected to be added to the program.

The corporate earnings schedule includes Agilent Technologies (NYSE: A), Cellcom Israel (NYSE: CEL), Comstock Homebuilding (Nasdaq: CHCI), Emcore (Nasdaq: EMKR), First Marblehead (NYSE: FMD), GeoPharma (Nasdaq: GORX), Global Sources (Nasdaq: GSOL), Goldleaf Financial (Nasdaq: GFSI), Hastings Entertainment (Nasdaq: HAST), Industrial Services of America (Nasdaq: IDSA), LiveDeal (Nasdaq: LIVE), Lowe's (NYSE: LOW), Merrimac Industries (AMEX: MRM), New Oriental Energy & Chemical (Nasdaq: NOEC), Omega Navigation (Nasdaq: ONAV), Ore Pharmaceuticals (Nasdaq: ORXE), Peoples Educational Holdings (Nasdaq: PEDH), Pet DRx (Nasdaq: VETS), Pyramid Oil (NYSE: PDO), Repros Therapeutics (Nasdaq: RPRX), Simcere Pharmaceutical (NYSE: SCR), TechTarget (Nasdaq: TTGT), Telkonet (NYSE: TKO), Trina Solar (NYSE: TSL), Valspar (NYSE: VAL), Yadkin Valley Bank (Nasdaq: YAVY) and others.

The "Week Ahead" copy you have become use to will resume, but for this week, please find daily previews or summaries here...


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