Friday, December 01, 2006

The markets

"Manufacturing in the U.S. unexpectedly contracted last month for the first time in more than three years, taking away a pillar of economic growth" (from Bloomberg this morning).

New home sales are falling and home inventories are rising. Building permits and housing starts fell sharply last month. Last week saw mortgage application fall heavily.

The Chicago manufacturing index, a leading economic indicator, is now below the critical 50% level.

After being up in October, durable goods orders plunged in November.

As discussed last week, Wal-Mart's same-store sales dropped a tenth of a percent on the latest reading. WMT is consider by many to be a bellwether for store sales.

One important indicator of the job market, initial claims for unemployment benefits, are up substantially.

Consumer debt continues to rise as consumers continue to spend more than they are taking in.

The dollar is under pressure from Europe as their healthy economy points to coming higher rates in the Euro-zone.

"Mortgage Bonds in U.S are buffeted by Loan Delinquencies, Home-Market Slump. The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years" (from today's Bloomberg).

The markets are comprised of what everybody knows about everything. Thus, from an economic standpoint, the markets are the world's best discounting mechanisms. But wait -- we read the list that I have posted above, and we ask, "If all those problems have surfaced, then how in the world could the Dow have just risen to record highs?"

The bad news on housing and the economy continues to drift in. The market knows all about the bad news, and still it holds up. My guess is that the markets have enormous faith in the Fed to "make everything all right." Is this much faith in the Fed justified? Guess we're just going to find out.

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