Market View – 05/17

Today we had slew of negative data points.  Here are some of the key data points for today

  • Housing starts fell in April to 523K from 549K in March. Expectations were for 570K. Housing starts measure the new residential construction activity. The housing market clearly remains in a funk and I don’t think anybody really is expecting much improvement yet. We have a huge oversupply of pre-existing homes. For the long run though, a lower level of new housing construction is what we really need get the supply/demand in balance. This is one main reason we have had lackluster employment growth and GDP growth in this recovery, as housing has not at all participated in the recovery.
  • Industrial production for April showed no gain from March, although this was a disappointment it is not very surprising considering a big drop in auto manufacturing due to issues in receiving parts from Japan.
  • Wal-Mart reported disappointing same store sales data in its earnings release. It shows that the consumers at the lower end are not performing well in this recovery and higher oil prices are hurting them. This contrast with the better performance of a little higher end retailers like Costco. I think the issues with Wal-Mart are not all due to macro issues, the company has had issues with its own execution also.

Looking at the reasons for some of the weaker economic data over the past few weeks, it appears high oil prices and disruptions in manufacturing from the Japanese earthquake were pretty big factors. We have already seen a reasonable drop in oil prices and the parts supply from Japan will eventually resume.  We have also seen a drop in prices of many other commodities. At this stage I think a cautious stance is warranted but I am not expecting a full fledged bear market(commonly accepted definition of a bear market is a 20%+ drop from the recent peak). I think there is very little slack in the economy, the weak sectors like housing are already at very low levels. So I have a hard time seeing a very big negative change in economic activity in the US.

The real risk of a bear market can come from emerging markets. Emerging countries have had a long run of strong growth and there are some indications that the real estate markets in places like India and China are in a bubble. So if there is a chance of a major shock, it will really come from the emerging countries. It is important to keep an eye on what is happening in the stock markets of the emerging nations.

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