Today the retail sales numbers came out at a much lower expected number than the market had expected. What this now shows is consumers are tightening their belts and becoming more deliberate on how they are managing their money. The fact that we went into negative territory pretty much cements the notion that we are in a recession. Take a look at the below chart:

Now that we are below 0 we know that the economy will continue to contract and contract fiercely. You may say that this is only a slight readjustment but given the fact that the US consumer is 70 percent of the economy, any slight movement to the downside has global implications. The market was trending lower and was actually down nearly 200 points today:

Now what sent the Dow surging upwards reversing the market by nearly 300 points? Take a look at this:

“All three major gauges had tumbled through the early afternoon, as investors mulled the bevy of signs suggesting slowing economic growth and rising inflationary pressures.

But Wall Street stabilized as the afternoon wore on, with financial shares cutting losses and technology, healthcare and homebuilding shares spearheading an advance.

Helping to spark the turnaround was a report out of S&P’s ratings arm that said banks are about halfway through to a forecasted $285 billion in writedowns. The report offered some reassurance to investors who have been spooked by the lack of a timeline in terms of the potential end for mortgage writedowns.”

The market actually interpreted it as being a bottom but S&P was only predicting that we were halfway through the credit correction. Given the current market sentiment any information is good information. There is no way that we are even remotely close to any semblance of a bottom. Southern California came out today with abysmal sale numbers showing that the region is now down almost 20 percent:

“We may be swimming in muddy waters regarding the credit bubble, CDOs, CRE, MBS, and the entire alphabet soup of credit problems but nothing can be clearer than the above chart. What we see in the above chart which is a tiny snapshot of the market, is that short sales jumped 92 percent since September of 2007. The rapidity of the market deterioration is astounding. Short sales now make up 11.51 percent of the entire Southern California home inventory. The trajectory of this is only increasing and until short sales start decreasing, not much is going to change. According to the DataQuick report for last month, only 10,777 homes sold. There are currently 148,103 homes for sale in the Southern California market. At the current sales rate, that means we have 13.7 months of inventory! No where are we remotely close to a bottom. Let us take a look at another section of the report.”

The market is quickly heading toward the worse now that we have gold hitting $1,000 and oil going up to $110 a barrel. Not exactly a vote of confidence for the economy. Given current market indicators, I would remain extremely cautious before the Fed meeting next week. If they cut by .75 basis points which looks to be the probability, we are going to see the US Dollar Index get hammered and oil and gold continuing to go up. From the Fed probability chart, it looks like we are either going to get a .75 or .5 cut next week:

Talk about being stuck in between a rock and a hard place.

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In two days, the market relinquished all weekly gains and looking at market fundamentals there really is very little doubt as to why this occurred. This past week, the two large mortgage behemoths Fannie Mae and Freddie Mac announced record quarterly losses. We also got a report that the housing market dropped at its fastest rate in 2007 from anything that we have on record. But there are areas that are on a massive tear and will continue going up because of inherent imbalances in our economy. In Investing in Foreign Currencies: Recession Proof Investing we discussed various ways you could protect your portfolio from recessionary forces.
First, we need to highlight what our forecast is for 2008.

• Continued Housing Weakness
• Credit Market Distress
• Commodity Prices Increasing
• Dollar Declining
• Yen Unwinding
• Higher Unemployment

The reason for this forecast is the insurmountable debt that we carry as a nation. If you want to look at household credit market debt outstanding, just take a look at the below chart:

The problem with the above goes in two ways. First, with the massive deflation in housing many people are now finding that their mortgage is worth more than what they initially paid for their home. What we are now seeing is an epidemic of people simply walking away from their homes. What this does in effect, is a destruction of money which is deflationary. Think about it for a minute. Someone somewhere has on their books a home that is valued at $300,000 and a corresponding mortgage for $300,000. Now let us assume the home is now “worth” $250,000, does the mortgage adjust instantaneously? Of course not. And as we all know, many people were using home equity lines to fuel the consumer economy and this is no longer an option.

Now what does this mean for our economy? First, it means the Fed is going to probably go toward a zero interest rate policy and with each cut, you will see gold and oil surging higher. We also have seen the Japanese Yen surging this year with the currency unwinding. It only makes sense since the Japanese are one of our biggest creditors and our debt is growing more and more devalued as the year progresses.

There is a great piece over at Econobrowser by Professor Jim Hamilton:

*chart source: Econobrowser

Incredibly, nearly every major commodity class is not only rising, but surging at unbelievable rates. If the Fed continues to cut rates which seems very likely, you can expect to see foreign currencies rise and commodities explode. Invest accordingly.

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