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Not as Anticlimatic as it Appears

|Includes: Home Depot, Inc. (HD)

The S&P 500 concluded last week back at the January highs. Core retail sales came in hotter than consensus, indicating that somehow, someway, the U.S. consumer is spending. We had a great internal debate on the research desk centering on where this type of spending is arising. For the subset of the U.S. population struggling with overleveraged balance sheets or a lack of a job, it's about finding ways to make it from day-to-day; do I water down the infant formula so I can put the savings toward rent? In all likelihood, therefore, it's those who did not succumb to the recession and lose their employment and are experiencing somewhat of a wealth effect in light of the bounce in home prices and the 70% recovery in equities markets since the low last March. It's plausible that pent up demand is being released on the economy. We are hearing of demand recoveries in California, Florida, and Arizona from retailers. In fact, the recoveries have quietly been building steam since the summer of 2009. Unfortunately, for a sustainable recovery to take hold, we will need those feeling the impact of structural labor market changes to find new employment and those with jobs and improved asset base values to continue to spend. Each of those happening in harmony is still circumspect.

Entering this week, I sense an aura of blahs on the part of investors. By that I mean investors may be in a state of trance as there is perceived to be less anticlimactic economic data on the docket. To that notion, I say think again. The FOMC gathers on Tuesday and it's a foregone conclusion that the "extended period" language will be in the statement. I agree that the statement will include such language given the signals from Fed governors since the last FOMC gathering. But let me approach this from a different angle. With equities almost back above pre-Lehman fall out levels, what does it say about the economy at this point in the recovery if we require a seemingly open-ended Fed commitment to cheap money? Playing devil's advocate, would the removal of such language suggest the recovery is strengthening, thus supporting equities further? Even acknowledging the next phase for the FOMC is one of policy tightening, the way I think about it is that historically accommodative interest rates are in the cards deep into 2011, allowing for strong reinvestment rates by corporations and, hopefully, great bank lending (lending is still non-existent if one were to look at the money multiplier data).

In stating the economy has turned, and with inflation not apparent (inflation readings due out later this week), the removal of the "extended period" commitment may be just the sign investors need to push the market higher. Risks, of course, exist in the form of the Fed closing up shop on its mortgage buying program at month's end (could be an interesting first part to April) and the U.S. imposing tariffs on China in the face of continued concern on their currency (this weekend, Premier Wen Jiabao seemed to rule out a change in currency strategy and sounded much tougher than in prior months). I thought it interesting that Premier Wen Jiabao took a shot at the U.S., noting it should "take concrete steps to reassure investors" as it pertains to dollar assets.

Has American Dream Been Redefined?

I once thought that living the American Dream was to rise from the ashes of one's surroundings through perseverance and become a success (in the community or the ole bank account or in the eyes of other family members who struggled). However, I suppose that living the American Dream means different things to different people. There apparently is a new American Dream, one that I observed first hand by watching a home remodeling show this weekend. According to the show's host, the American Dream was to purchase too much home in 2005 in Malibu, assume a second mortgage to inject renovations into the property in the form of a surround sound system by the pool, and then sit back and make a $10,000 a month payment (first mortgage, second lien holder, taxes) only to find the market has shifted sizably and the use of other people's money (aka bailout) is required. Times sure have changed. Spending within our means was once important. Do you think our parents or their parents would be mailing in keys to their homes? Although many learned lessons in 2008 and 2009 when it comes to managing their finances, I sense if the opportunity arises again, the charge card will be pulled out at Home Depot (NYSE:HD) and the local clothing shop without hesitation. In the end, we may be back in the hole that we are trying to dig ourselves from currently. But, unlike the lead up to the Great Recession, we will have a huge structural deficit (bailouts, healthcare, etc.) that constrains our ability to respond to crisis. Much could be said for non-bubble growth...

Disclosure: none