Daily State of the Markets
Wednesday Morning – August 5, 2009

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Good morning. Stocks inched higher again on Tuesday in response primarily to a report on pending home sales. The report came in with a fifth straight monthly gain and was largely better than consensus expectations. But, for the most part, it was a fairly quiet day as investors appeared to be taking a break after the wild ride to the upside over the past three and one-half weeks.

So, with most traders probably thinking more about summer vacation than anything else at the moment and stocks clearly in the midst of a very nice uptrend, we would like to turn our attention this morning to the question of the day: Is the consumer likely to come out of their shell sometime soon?

Although the economic data we watch shows that the recession is ending right here, right now (which explains the recent run for the roses in the stock market), the outlook regarding the strength of the recovery remains a big question mark. And since the consumer is responsible for something on the order of two-thirds of this country’s GDP, the mood of the consumer is going to have a large say in what kind of recovery we’ll be looking at.

If yesterday’s economic data told us anything it was that consumers in the U.S. still appear to be missing in action. Personal incomes fell by -1.3% in June, which, while it sounds bad, was actually payback for the one-time payments from the American Recovery and Reinvestment Act. Despite this “ya-but,” it was the largest drop since January 2005 and it is worth noting that the expectations had been for an increase of 1.2%. And then when you factor in May’s downward revision, it becomes clear that American’s don’t appear to have extra income to spend at the present time.

However, being the good little shoppers that we are, consumers did manage to push the needle higher on the gauge of Personal Spending in June. But, the Cash-for-Clunkers program was probably at work here as the government used up nearly $1 Billion in incentives to get people to buy cars. The plan clearly worked as vehicle sales jumped 16.5% in July. Unfortunately though, the bottom line is that when you adjust for inflation, real spending was actually down on the month.

So, with the jobs picture still looking bleak, it is a safe bet that the consumer isn’t going to return to their free spending ways of a couple years back. And even if they wanted to, we should remember that credit will be MUCH tougher to get and the housing market will no longer act as an ATM to finance all those discretionary purchases. Thus, we probably shouldn’t expect the consumer to provide a dramatic boost to the economy going forward.

The point, you ask? In short, if the consumer remains in hiding, the recovery may be subpar and/or short-lived. So, while we can definitely enjoy the fun in the summer sun as far as the stock market is concerned, we will suggest that this is not time to be asleep at the switch.

Turning to this morning, the private sector jobs front appears to be getting “less worse.” ADP reported that the private sector lost 371,000 jobs in July, which, while lower than the expectations for losses on the order of 350K, was better than June’s job loss totals of 463K.

Running through the rest of the pre-game indicators, the major overseas markets are mixed with Asia down and Europe up a smidge. Crude futures are moving down with the latest quote showing oil trading off by $0.18 to $71.24. On the interest rate front, we’ve got the yield on the 10-yr trading up big at 3.75%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 20 points; the S&P’s are down by about 1 point, while the NASDAQ looks to also be about a point below fair value at the moment.

Try smiling at everyone you meet today and until next time, “may the bulls be with you!”

David D. Moenning
Founder TopStockPortfolios.com

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