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Tuesday, August 17, 2010

Morning Market Report

Everyone with an opinion seems to be weighing in on the possibility that we're headed toward a double dip recession.

Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January,” according to a recent Wall Street Journal poll.

A growing and vocal minority of economists believes that there will be a double dip recession primarily because of the intransigence of high unemployment and the rapidly faltering housing market. The notion of a “jobless recovery” has been around since the recessions of the 1950s and 1960s. It is a concept built on a relatively simple idea: employment lags during a recession but it is always part of a recovery cycle. Production rises as businesses see the end of a downturn and anticipate improving sales. They are reluctant to hire new workers until the recovery is confirmed, but once it has been, hiring picks up.

The 2008 – 2009 recession was – if it is indeed over – different from any other because of its depth and causes. The first trigger was the drop in housing prices, which robbed many people of their primary access to capital. As that access disappeared, so did the availability of credit. Consumer buying power evaporated and business cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.

For his part, Phil Nuciola, of Scottsdale Capital, considers a double dip recession a real possibilities. The confluence of three events, according to Nuciola, makes this a real possibility. First, housing is off 20% and more in many places. Second, people's credit has been shot and so they can't get loans to buy anything new. Third, there's no jobs.

So, people have been forced from their homes and their back to renting. With no jobs, people will have trouble paying the rent. Where do you go when you're renting? Meanwhile, the weak dollar has pushed many commodities, a la Gold, to near record highs. So, gasoline is up above $3 a gallon in most places. So, the same people that have no jobs, no place to live, will now have to pay more and more for basic household items like gas.

Nuciola says that he's watching the S & P 500 for guidance. The magic number is 920. If the S & 5, now at 1080, falls to 920, that's the signal for him that we're in a double dip recession because

you've set a new low during a recovery.

It's phenomenon that we also saw in 1932. After seeing a recovery from Black Monday, October 1929, market indices fell back setting similar new lows during that recovery, and a full blown depression was on.

If, in fact, we do fall back into a double dip, Nuciola sees disaster. That, he thinks, will lead us into a depression. The analogy is to a prize fighter, or for 24 fans, a prisoner under interrogation. Falling back into a recession will "break" so to speak the economy, and we'll go into freefall.

Despite the doom and gloom, Nuciola sees individual opportunities in this market. For instance, he loves Intel. (INTC) Intel finished at $19.47 a share yesterday. It has a 4.25% dividend at this level. Like many tech stocks, their sales and earnings have survived this storm. Nuciola says,

where's this company going

In other words, it's staple, the Intel chip, will be featured in most PC's for years to come.

Another security Phil Nuciola likes is Blackrock International Growth Fund. It traded just slightly above Net Asset Value. It finished at 10.30, whereas Net Asset Value is at 9.90. It's a mix of staples of world companies including Honda and Royal Dutch Shell.

Meanwhile, it was a relatively quiet day in the market. All three indices neither gained nor lost even a quarter of a percent yesterday. Markets look a half to three quarters of a percent better at the open ahead of a slew of earnings this week.

Bonds are taking a breather after another big day yesterday. The ten year is up four basis points to 2.60%, but that's after it lost almost eight basis points yesterday. It set all time records pushing 2% in January of 2009. That was following a similar announcement that the Fed would be buying hundreds of billions of treasury bonds. Are we headed toward similar record? The yield spread between the two and ten year is steady at 2.1%. Bonds in Britain and Germany were both relatively unchanged today.

Crude oil is up nearly a buck a barrel to $76.02 this morning. Gold is up again to $1228 an ounce. Meanwhile, the Dollar is mixed this morning. It's down .48% against the Euro, up .13% against the British Pound and down .02% against the Japanese Yen.

Good day all around in the markets in the world. The Hang Seng was up .12% while both the NIKKEI and Straits Time Index were down, but they were the only two indices down in both Europe and the Far East.

Finally, the financial world is still buzzing from the news yesterday that China surpassed Japan in total GDP, but we also need some context. The per capita income in China is $3600 yearly. It's more than ten times that in both Japan and the U.S. There's many ways to look at that. When the average citizen's income is $3600, your economy is NOT near a power YET. This despite almost two decades of outstanding growth. So, either China's only begun to grow, or even after all that growth it's still an impoverished nation.

Domestically, the housing trend continues to show weakness.

Housing starts rose less than forecast in July and building permits fell to the lowest level in more than a year, indicating little evidence of a rebound in U.S. construction following an expired tax credit.

Work began on 546,000 houses at an annual rate last month, fewer than the 560,000 median estimate of economists surveyed by Bloomberg News and up 1.7 percent from June, Commerce Department figures showed today in Washington. Building permits dropped 3.1 percent to a 565,000 pace.

The number I'm most interested in is the weekly mortgage application number. Even as the rate on the thirty year fixed hovers near records everyday we've seen applications off. That hasn't happened until now even in this market. All throughout 2008-2009 and 2010, when rates fell, mortgage applications rose. Now, that is not even happening. That's not a good sign at all, to say the least.

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