Now all we need is a right cross, then an uppercut, and we'll be ready to move forward. Of course, I am using boxing lingo to describe what phase of the economic slowdown we are experiencing. Bellweather stocks like Ford (F) and General Motors (GM) have been knocked to the canvas and are slowly getting up to take another lick. WalMart (WMT), the nations biggest retailer/discounter, reported a 14 percent increase in first-quarter earnings, but warned that the second-quarter would not be very good.
After WalMart warned about Q2, oil prices sold off sharply. WalMart is now seen as the most accurate bellweather to consumer spending. Its hard to read whether WMT's warning was company specific, or really an accurate read on consumer spending. In WMT's report, the company cited higher energy prices as being one of the causes for the Q2 warning. If I had to guess, WMT's problems we're company specific, and not related to a pullback in spending by the consumer. When consumers begin to feel an economic pinch, they usually gravitate toward the discount retailers, not away from them.
The right cross I am expecting should come when "real" consumer spending drops off. We are seeing evidence of this slowdown in big ticket items. This is mainly due to higher energy prices acting as a tax on the consumer. Higher interest rates have not had much of an impact on the consumer because by historical measures, interest rates are still very low. The consumer will begin to feel the real pinch when the interest rate and payments on their adjustable rate mortgages, lines of credit, and second mortgages begin to rise dramatically.
The uppercut (not expected until 2006-2007), and final knockout punch, will happen when real estate speculators begin to run for the exits, and attempt to unload their speculative real estate before their properties come up for closing. This running for the exits may be due to a spike up in longer term interest rates and a simultaneous unwinding of leveraged Treasury Bond positions held by hedge funds. Treasury sales by China and Japan would of course add to the pain.
Once we recognize the uppercut, we may be back to the 2002 lows on the major market indexes. Oil should be below $40, the Fed will begin lowering rates, and stock and bond prices will be very attractive. This will be the next big buying opportunity, and the beginning of the next legitimate bull market. Until then, stay defensive.
