First, the good news (our recent IC’s have been so negative, we wanted to start on a positive note). As this is being written:
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- Oil is trading at $111 per barrel, down from $120 earlier in April.
- Gross Domestic Product increased in the first quarter 0.6%.
- Personal income increased 0.4% from February to March.
- Personal consumption increased 0.3% from February to March.
- The Federal Open Market Committee elected to decrease the Fed Funds lending rate by ¼%, reducing it to 2%, hoping to further stimulate our economy.
- The Dow Jones Industrial Average and the S&P 500 both increased almost 5% in the month of April.
As much as that might excite you, we continue to find it difficult to ignore events that won’t bode well for the future of our economy.
- According to the Commerce Department, sales of new homes decreased 8.5% last month to their lowest levels since the housing recession of the 1990’s. Builders have their biggest backlog of unsold homes in a quarter century.
- In February, prices for existing homes declined 12.7% from a year earlier. And here is the scariest part – U.S. home foreclosures DOUBLED in the 1st quarter of this year. There were 650,000 homes in some stage of foreclosure, which is 1 in every 194 U.S. households. Another $460 billion in adjustable-rate loans are scheduled to re-set this year.
- Even though GDP increased the 1st quarter (above on the positive list), virtually ALL of the increase was exports and increases in inventories. Most domestic economic sectors of GDP declined in the 1st quarter.
- Jobless claims increased for the 4th consecutive month. In April, they increased by an additional 35,000 to 380,000.
- And even though oil declined to $111 from $120 in mid April, it was trading at $106 at the beginning of April and $66 just 1 year ago! The average price of a gallon of gasoline is over $3.50.
- In addition, the price of several commodities (rice, wheat, soybeans) have doubled in price in the past 12 months.
- Vehicle sales were announced – GM, Ford, Chrysler and Toyota ALL reported double digit declines.
What do we make of all this? Consumer demand is almost certainly going to be under more pressure. As the ARM’s re-set, more homeowners will default, there will be more foreclosures and more properties thrown into a real estate market that is already the worst in many, many years. Home prices will likely continue to decline. And think about this….if you are a potential home buyer and it becomes obvious to you that prices just keep falling, what might you be inclined to do? That’s right, you might be inclined to wait, further drying up the tiny pool of potential buyers…..continuing to put downward pressure on existing home prices.
Higher unemployment, higher credit card debt, lower home equity. This deadly combination almost has to result in declining consumer demand. We don’t think this is adequately reflected in the equity markets. The recession which we are in may last longer than most expect and will almost certainly provide us with some attractive opportunities in the equity markets if we continue to be patient.
Having said all that, if economic indicators during the month of May and June don’t confirm much of what we have written above, we may be further through a recession that turned out to be milder than we had anticipated.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.