JULY 18, 2005

The S&P is up 28 pts from my last post, from 1196 to 1224. The prime mover in my mind being that so far there has been no visible impact on the economy or earnings from either higher oil or higher short term interest rates. Those of us, and we are legion, who thought the consumer was overleveraged, underpaid, undersaved, and would be hurt by low income growth in wages and salaries, and squeezed by higher oil prices and rates, Not!!!!! Neither higher gas prices or heating bills or air condidioning for that matter, which have increased substantially, look no further than the huge increase from utilitiies in the latest industrial output report, have made much of a difference lately, Look no further than the latest strong retail sales report. Think pent up demand has been spent, think sales have been pulled forward. No evidence in sight yet. Look at the appettite for SUV's during GM's latest sales incentive.

The consumer cuts back his standard of living very reluctantly, even during recessions, studies have shown. The housing bubble has let homeowners extract ever increasing amounts of cash out of their equity according to BCA Research in their July 7 report. As postulated in an earlier post, and end to this process could likely be the trigger for the inevitable economic slowdown. As has been shown in Holland and the U.K. even just a flattenting in home prices can be quickly felt in retail spending. Even super bears are starting to throw in the towel or waffle on their timing, like Michael Metz last week. There are a few signs, like the dollar stores are underperforming the retail index, and they of course cater to the lowest strata of shoppers. Fewer new home buyers can qualify for loans due to higher home prices in hot markets. Signs like these will have to become more wide spread for the market to take heed. We will be patient in the meantime.

Friday and today the market seems to have stalled. The leaders, oil stocks an homebuilders have sucumbed to profit taking. Oil inventories seem comfortable and the hurricane fears have receded, so taking some chips off the table seems reasonable. All this talk of the Fed not stopping soon provides a similar excuse in the homebuilders after some big moves. Today Citi also dissapointed, in the biggest sector of the market. Last week Fifth Third as well. The Contrarian Investor.com had a great report foreshaowding these results.

I'm still short bonds. Nothing has happened to change my mind, that until we see some economic weakness the curve will have trouble flattening further, and the Fed will push rates higher. The dollar will be supported as long as higher rates are expected.