The Dow worked its way lower through last week as a consistent and intensifying message added increasing weight to the back of the market. In fact, the economic data flow has been supportive of our forecast for a double-dip recession, if not confirming it. We have been discussing the fundamental reasons for the market to reconsider recent gains for some time now, but early last week, our technical analyst exposed a head and shoulders pattern indicating an imminent downfall.
The greatest signs of a double-dip recession were seen in the real estate market this week. Existing Home Sales fell to an annual pace of 5.66 million in May, where economists were looking for 6.2 million. The pace of sales was 2.2% below April's rate of 5.79 million units. While the National Association of Realtors (NAR) tried its best to paint it pretty, there's a clear decline showing itself in the absence of tax credit incentive (expired in April). Existing Home Sales measure contract closings, though, which should benefit from the tax credit through June. Sales still declined in May despite that fact, and this was relevant to investors, who sent stocks lower. The inventory of existing homes sit at an 8.3 month supply given May's sales pace, slightly down from 8.4 months in April but still too high. (Interests NYSE: BAC, NYSE: WFC, NYSE: PNC, NYSE: TD.)
In a second report, New Home Sales were reported down 32.7% in May, running at an annual pace of 300K, well short of April's rate of 446K. May's slip in activity completely fooled economists, with the consensus estimate sitting far from reach at 400K. These two data points basically raised market awareness regarding a topic we've discussed here often this year. The US economy has been greatly dependent on crutches of support provided by the government, and those crutches are now being pulled away. (Interests NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: DHI.)
The ICSC Weekly Same-Store Sales data were reported down 0.5% week-to-week for the period ended June 19. It has been clear to us that as we move toward normalized absolute sales levels, activity will have trouble making gains in this laboring economy. While year-over-year sales measured 2.5% higher, this comparison should continue to deteriorate in the weeks ahead against more normal comps. (Interests NYSE: M, NYSE: WMT, NYSE: TGT, NYSE: JWN, NYSE: KSS, NYSE: CHS, NYSE: LTD, NYSE: JCP, NYSE: ANN, NYSE: ARO, NYSE: GPS, NYSE: BBY.)
Durable Goods Orders decreased for the first time in six months this May. Orders dropped off by 1.1%, driven mostly by nondefense aircraft orders, but the report offered other reasons for concern as well. Transportation orders fell the most of any component segment, falling 6.9% on the drop-off of high ticket aircraft orders. We found the data for non-defense new orders for capital goods most concerning. This segment measures business investment spending, an important economic indicator, and orders within it decreased 2.8% in May. (Interests NYSE: BA, NYSE: WHR, NYSE: F, NYSE: TM, NYSE: TYC, NYSE: HON.)
Okay, so Weekly Jobless Claims improved by 19K over the prior week count when reported this week for the period ended June 19. The problem is that new benefits filers still amounted to 457K, and that's an awful lot of people just hitting the unemployment line. (Interests NYSE: RHI, NYSE: KFY, NYSE: MAN, NYSE: MWW, Nasdaq: JOBS, NYSE: JOB)
After starting the day lower, the stock market recovered on Friday despite the weight of economic data. The reason was because Congress pushed through a less intensive restructuring of financial regulatory rules. The real story Friday was unfavorable. First quarter GDP was revised down to +2.7%, from 3.0% at last check and 3.2% on its initial reporting. And what's worse is that what drove the revision lower was a reduction to personal consumption expenditures. So despite Friday's Michigan Consumer Sentiment reading gain, the real spending numbers show less enthusiasm.
Disclosure: No positions