Here we go!

This week promises to be exciting.

We'll lead off with Citigroup, which reports earnings tomorrow. A hint to where earnings might come in can be found with their recent decision to lay off huge numbers of people, and move the positions of thousands more outside the United States to "lower cost" places (like India, for instance)

You have to believe their earnings are going to suck. After all, what else could possibly be the "take away" from such a move, coming only a week before the earnings release?! Of course that could be a bad read - but I wouldn't bet on it.

We also have retail sales out in the AM. That number is unlikely to mean all that much, although you can bet the market will react to it. Why doesn't it mean much? Because Easter was pushed into March (its usually in April) this year, which means that you'd expect a strong number. Of course if its weak all hell will break loose, but it probably won't be - simply for that reason. Revisions may come to the previous numbers too - we'll see.

Let's step back a bit though, and look at where we are right now in the markets as a whole.

1,460 was the high in the S&P 500 back in February. We are now within spitting distance - literally - of that number - 1/2% away. As we rallied in the last two days though momentum has been lagging, which is not a positive indicator. Earnings will provide the impetus to either blow through the February highs or to buckle at the retest. Essentially, its going to happen now, one way or another. During the next two to three weeks.

Second, let me point out a couple of graphs that I've alluded to in other postings (one of which I copied outright); if you click them you'll be taken back to the source, as its not fair to link a graph without proper credit - but these are things you need to look at and consider:




Now let's sit back and think about this for a minute.

The consumer - the almighty consumer - is 70% of US GDP. That is, what you, I, Joe Sixpack and Grandma Jane spend is 7/10ths of all spending in the United States (the rest is the Government doing things like buying F18s, Smartbombs, Public Works projects such as roads, etc)

Since 2002 when the recovery started to take hold after the 9/11 terrorist attacks and the tech bubble implosion it has been consumer spending, largely driven by equity withdrawals from people's homes, that has fueled the economy! How do we know this? Here's the reason:



What is a "real" hourly wage change? Its the change in earnings including the official inflation rate. Note that the official inflation rate intentionally excludes inflation in energy and food, but of course real people both eat and consume energy, and both have been on a tear in real terms - nearly doubling in the last 10 years (look at your grocery bill lately?)

Yet the GDP has grown by about 3.5% during the last few years! This year's estimate is for less than half that - around 2% - and with each revision, it keeps falling.

We know that people's real wage growth has in fact been negative, for all but the very wealthiest. And let's face it - when we're talking about the "high income" earners, we're not taking about a significant number - in percentages - of Americans. Just 5% of all earners fit that category. Its Joe and Jane Sixpack that make the economic engine of this nation move - not the Donald Trump's - simply on the numbers.

So where has the money come from? It can only be from one place - home equity withdrawals.

But now the big Household ATM Machine has a sign on it - Sorry, Out of Cash!

Oh, one more indication of cracks in the dam - California's tax receipts have come up massively short of forecasts. Personal income tax and sales tax collections are both down. A healthy consumer eh? Where home equity withdrawals have been the highest? Hmmmm...

To break my hypothesis - that the economy must slow, that home prices must decrease, that consumer spending must decrease significantly and thus that the US Equities Markets are headed for tough times ahead, you must find a way for the consumer to keep spending more money.

Can the party continue for a short while? Sure. Another quarter, maybe two, maybe even until 2008. How? We are a nation of credit card holders and an awful lot of those refinances during the last two years were used to pay off credit card debt. Do you really think that the consumers cut up the credit cards when they refinanced? Bah! You and I both know that 9 out of 10 did not!

But sooner or later Joe Sixpack comes up against his credit limit and now, he can't refinance (again) to pay it off a second time. No more can he sock it back into his mortgage's principle balance. Now he's stuck - with both the home equity line of payment and the 15% interest rate on the credit cards.

Now let's add to this the NASD's warning this last week that Margin Debt has reached record levels. While there are some who have poo-pooed this warning, when the NASD, which of course wants you to trade more (how else would they make money?) issues such a warning, you better take it seriously. Margin calls are serious business - if you get one, you are looking at tremendous losses in your portfolio. While some will say that as a percentage of total assets outstanding it is not an excessively large figure, that belies the snowball effect it has on market sentiment when margin calls begin to be issued - selling begets selling, as people try to cover their margin debt, some with forced liquidations. I had friends in the '00 tech wreck that were wiped out due to margin calls. "Would you like some fries with that?"

Where is the tipping point on all of this?

I'm not at all certain, and I'm not going to try to tell you that I know. What I do know is that unless there is some magic genie that makes it possible for the consumer to keep spending more and more money, the carnival ride of higher and higher stock market indices has to end, as companies begin to show negative comparisons year-over-year for both sales and, ultimately, profits.

I know some of this sounds repetitive - especially when added to my "Weekly Recap". However, I felt that it was important to flesh out some of the components on my thinking here - especially those concerning the economic engine that drives our economy and ultimately our markets - the consumer.

Trade and invest wisely in the coming week - I'm sure there will be plenty to say once we start to see the numbers come out tomorrow, along with the market's reaction.