Double-Dip Recession Signs

Today's Coffee

The signs abound this week - the US economy looks poised toward double-dip recession. Weak and weakening economic data piled on against the nascent growth trend, and by the end of the week a revision to Q1 GDP seemed to confirm that stocks are sitting on unsure supports.

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Double-Dip Recession

The Dow worked its way lower through the week as a consistent and intensifying message added more and more weight to the back of the market. The economic data flow has been supportive of our forecast for a double-dip recession, if not confirming it. We have been discussing the fundamental reasons for the market to reconsider recent gains for some time now, but early this week, our technical analyst exposed a head and shoulders pattern indicating an imminent downfall. The market did not disappoint either, and this is just the latest bit of prescient forecasting from our expert commentary. We hope you are benefiting.

Detailing the Data

The greatest sign of upcoming double-dip recession was seen in the real estate market this week. Existing Home Sales started the slide, as May's activity fell to an annual pace of 5.66 million, where economists were looking for 6.2 million. The pace of sales was 2.2% below April's rate of 5.79 million units. While the National Association of Realtors (NAR) tried its best to paint it pretty, there's a clear decline showing itself in the absence of tax credit incentive (expired in April). Existing Home Sales measure contracts closings, though, which should benefit from the tax credit through June. Still, sales declined in May; that's bad news, considering they should have come in higher. The NAR attempted to depict May sales levels as "elevated", but the decline from April is more relevant to investors, and so stocks started lower. Inventory of existing homes sit at an 8.3 month supply given May's sales pace, slightly down from 8.4 months in April. Some positive news was found in the price data as well, with 16 out of 20 MSAs showing gains versus year ago levels. The FHFA House Price Index also showed a 0.8% price increase in April over March of this year. Still, the main story was the drop-off in the pace of sales, and it was enough to dominate the tone of trade. (Interests NYSE: BAC, NYSE: WFC, NYSE: PNC, NYSE: TD).

Another sign of double-dip recession, New Home Sales were reported down 32.7% in May versus the month before. The annual pace of sales at 300K, matched poorly against April's rate of 446K. May's activity completely fooled economists, with the consensus estimate sitting far from reach at 400K. These two data points basically raised market awareness regarding a topic we've discussed here often this year. The US economy has been greatly dependent on crutches of support provided by the government, now being pulled away. Meanwhile, unemployment looks anchored, and outside of manufacturing recovery, there's been little to get excited about. And oh by the way, we see manufacturing expansion slowing now also. (Interests NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: DHI)

Yet another sign of double-dip recession, ICSC Weekly Same-Store Sales were reported this week down 0.5% week-to-week in the period ended June 19. It's been clear to us that as we move toward normalized absolute sales levels, activity will have trouble making gains in this laboring economy. While sales measured 2.5% above the prior year comparable, this growth rate measure should continue to drift lower in the weeks ahead as comps normalize. (Interests NYSE: M, NYSE: WMT, NYSE: TGT, NYSE: JWN, NYSE: KSS, NYSE: CHS, NYSE: LTD, NYSE: JCP, NYSE: ANN, NYSE: ARO, NYSE: GPS, NYSE: BBY)

Yet another double-dip recession warning bell rang on Thursday when Durable Goods Orders were reported for May. Durable Goods Orders decreased for the first time in six months. Orders dropped off by 1.1%, driven mostly by nondefense aircraft orders but the report offered other reasons for concern as well. Transportation orders fell the most of any component segment, falling 6.9% on the drop-off in high ticket aircraft orders. Excluding defense goods, new orders decreased 1.1%. The most troubling news came from non-defense new orders for capital goods. This segment illustrates business investment spending, an important economic indicator, and it decreased 2.8%. More reason for worry... (Interests NYSE: BA, NYSE: WHR, NYSE: F, NYSE: TM, NYSE: TYC, NYSE: HON)

Okay, so Weekly Jobless Claims improved by 19K over the prior week count when reported this week for the period ended June 19. The problem is that new benefits filers still amounted to 457K, and that's an awful lot people just hitting the unemployment line. Moreover, we've seen no indication of change over a period of years now. There is no real economic expansion beyond growth from the bare bottom activity reached. Also, there is no labor market growth representative of it. When reported next week, census hiring might once again help the nonfarm payroll count, but that is a temporary factor and its time is about up now anyway. A real labor market reading, excluding those temporary jobs, says unemployment is anchored. (Interests NYSE: RHI, NYSE: KFY, NYSE: MAN, NYSE: MWW, Nasdaq: JOBS, NYSE: JOB)

The stock market recovered late on Friday, because Congress pushed through a less intensive restructuring of the financial regulatory rules (the ones that allowed Armageddon, or at least near economic depression). Is that really good news? The market was enthused because it wants to believe people have learned their lessons and won't make those same mistakes again, or because the market is hoping the next batch of Ivy League financial geniuses to be hired by Goldman Sachs (NYSE: GS), J.P. Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), Deutsche Bank (NYSE: DB), Credit Suisse (NYSE: CS), etc. will figure a new game to play. Some will say the legislation was too harsh, and it certainly went overboard in some instances... The rally could therefore been indicative of a more expansionary environment that resulted. We'll examine the legislation and get back to you.

The real story Friday was less sexy. First quarter GDP was revised down to +2.7%, from 3.0% at last check and 3.2% on its initial reporting. And what is worse is that what drove the revision was lower personal consumption expenditures. So despite Friday's Michigan Consumer Sentiment reading, the real spending numbers show less enthusiasm.

An increasing number of the so-called financial gurus who spend more time planning their weekends than doing real research (trust me because I've seen it in person) are getting on board the double-dip recession band wagon now. Welcome fellas, and I hope you invite me to the Hamptons in return... Don't worry though folks... when it's time to get off the panic wagon and buy stocks in earnest, we'll be louder than the headless chickens - just like we were in the spring of 2009.



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