Navarro's Broad Market Outlook: Jobs Report Report
Well, the jobs report landed with a huge thud on Friday and the stock market rallied on the simplistic idea that since the Fed is going to stop raising rates soon, everything is going to be all right.  Maybe, but it has got to be a little frightening that two of my favorite indicators - the ISM and the ECRI Weekly Index - are headed steadily down into the dumper.   

This whole situation - what with the 10-year note diving below 4 and the flattening yield curve signaling a slowdown - got me searching beyond all the usual provincial U.S. crap I listen to on CNBC to a more global take on what's going on.  To my surprise, I discovered that the world is not round as Columbus figured out or flat as Thomas Friedman now insists.  Rather, it is humpbacked.

Check this out for yourself.  Just look at all the GDP and industrial production graphs from countries from around the world and you will see almost everywhere a nice upward movement from 2002 through 2003, a peak, and then a steady downward trend.  In some places, its worse than others, but all across the globe (except maybe for China and India), the humpback rules.

In the worst shape is Europe, particularly France and Germany which are effectively in recession and fighting double digit unemployment rates.  With the euro depressing exports and China kicking Europe's butt, that ain't getting better any time soon.

So if I had to roll the forecasting dice, my bet is on recession by 2006 - unless Greenspan finally engineers the fabled “soft landing” that thus far as been more the stuff of story books than the beige book.

Last Take: I've stumbled on to Jim Cramer's Mad Money show several times now.   It's the most embarrassing spectacle I've ever seen in the financial news space and a hamster with its random droppings on the stock pages lining its cage would have a better chance of picking a winner than this ode to obsessive compulsive silliness.

Portfolio Musing: Moment of Truth for Zila

I've been sitting in the red on a small stake in ZILA waiting for this dog to hunt.   It's got a great set of test kits of cancer, it got a big bump a few months ago, but it languishes around the 3-buck mark know.  Watch the earnings report on June 9.  At some point, this stock could become a legit ten-bagger - or get swallowed in the abyss…..

Hedging Your Bets With Matt Davio: Summer Breeze…
Under the leadership of Chairman Alan Greenspan, the Fed has been very transparent, and their measured pace has been well projected by the FOMC.   Using a baseball analogy, the Fed is in the eighth inning of the tightening game, and has been clear in their plan to hike rates by 25 basis point per inning.    We have the ninth inning coming up in June.  In other words … GAME OVER ???

That's the way it is, at least according to 'new' Dallas Fed Regional Bank President Richard Fisher.  In fact, the comments highlighted above are nearly verbatim, extracted from Fisher's commentary posed during today's television interview with CNBC's ‘pit-bull' Steve Liesman.

Indeed, by prefacing his CNBC bombshell analogy with Sir Alan's name, it seems almost plausible to suggest that a trial balloon has just been ‘floated' by the FOMC itself … within the context of introducing their newest, articulate, straight-shooting member.

The markets are sure acting in kind, with the 10-Year US Note yield finally cracking the 3.98% level.  They went to 3.80% on Friday and rallied on the close @ 3.98%.

BUT, there is MUCH MORE going on here than meets the eye … as pertains … specifically … to the intensified global trade competition, and slowing final domestic demand OUTSIDE of the USA.  (see Navarro's “hump backed world take above)

Perhaps … the FOMC realizes … that the US consumer will again be NEEDED to support the global economy, which from many angles not visible to the domestic US eye, looks like it is barely clinging to a precipice, with a ravine of disinflation bubbling below.  In this regard, the FOMC might realize it can go NO further without risking an ugly downward tilt in the global economic balance, which is held together by an increasingly THIN ‘thread'.

So, the US consumer … and … the US HOUSING MARKET … will chug along, as the Fed acquiesces to the peripheral reflation bubble as a codependent partner, as pertains to continuing to ‘float' the US consumer.   OR maybe not!

Just check out these fearful comments on the housing bubble from Atlanta Fed Regional President Jack Guynn last week:

… “There are some markets, especially in coastal Florida, where I have heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation. It makes me very uncomfortable. Some buyers, some builders, some lenders, are going to get burned in some of these local markets.”

BUT, Guynn totally forgot to mention the most important cog, the consumer/homeowner, many of whom are ALREADY GETTING BURNT, as defined by a SOARING ‘Foreclosure Rate', nationwide. Indeed, note the following statistics drawn from Realtytrac.com that may well have gotten the attention of the FOMC:

• During March and April, Foreclosure Rates rose in 47 of the 50 states.

• During March and April, cumulatively, nationwide Foreclosure Rates rose by +19.6% … or … at a + 117.6% annualized pace over the last two months.

• Arizona, Nevada, and Florida …three of the HUGE new ‘golf-development' states that we highlighted in an April Money Monitor focus … are in the TOP FIVE states, foreclosure-wise, and ALL THREE post rates more than TWICE the national average.

• Texas had the highest proportional foreclosure rate, with one property out of every 694, into foreclosure.

Particularly hard hit have been key urban areas such as New York City, Chicago, Philadelphia and Boston, where ‘working-class neighborhoods' are experiencing a rapidly rising number of foreclosures.

Note comments made Monday by the US Comptroller of the Currency Julie L. Williams …

“We are clearly seeing a spike in foreclosures in a number of our major urban areas. If we are not careful, the American dream can quickly turn into the American nightmare.”

Could it become … welcome to my nightmare … for the Fed ???

Yes, the number of New Jersey properties that entered foreclosure during April soared by 40%, from March.

SO, now we can add rising distress ala foreclosures that are actually taking place … to the HUGE build in the supply of unsold inventories of homes that have not even been ‘started' … to create one hell of a potential nightmare scenario for the US consumption-demand-dynamic.

VOILA … evidence the following statistics released last week by Foreclosures.com:

• Single Family Homes for Sale in Las Vegas … up + 71.4% yr-yr in April.

• Foreclosures in Las Vegas … up +8.3% month-month in April.

Note comments from Foreclosure.com President Alexis McGee …

“Investors represented over 25% of the homes sold during 2004. Foreclosures are up in the first quarter, and now speculators have cut down on buying, and are cashing out.”

Ouch. Florida, Vegas, Arizona … foreclosures up, speculators looking to cash out, unsold supply through the roof … welcome to the American dream turned nightmare !!!

Well, perhaps another slide in mortgage rates can save the day in terms of filling demand for all those foreclosed, and not yet-started homes that are coming onto the sales block, an event already in motion thanks to the signals being sent by the Fed, and the global economy. Perhaps even CHEAPER financing can reflate the foreclosure disinflation trend, right ???

Perhaps NOT.

Note the subtle, and MOST OMINOUS macro-message that may be emanating from within today's Mortgage Banker's Association's weekly Mortgage Index data:

• Purchase Index … 462.7 … down (-) 4.1% in the latest week … and … down a sizable 63.5 points in just the last three weeks, a decline of (-) 11.8%.

The OMINOUS part of the message comes from the FACT that the decline in mortgage demand for home purchase comes DESPITE a 16 basis point DECLINE in the MBA 30-Year Mortgage Rate.

Indeed, since the first week of April, Mortgage Rates have PLUNGED from 5.95% (week of April-8) to the current level of 5.61%, a deep decline of 34bp … during which time the MBA Purchase Index has fallen by (-) 2.5%

Ahhhhhaaaaahhh … a new Fed conundrum, on the disinflationary flip-side ???

And, the thing that makes this ALL the MORE interesting is the FACT that lenders are STILL ‘easing' their ‘credit standards' for consumer installment loans, as per the April Fed Senior Loan Officer Survey … despite the rise in foreclosures, and the slowing demand for loans. Observe the RECORD EASY stance by banks, when it comes to making consumer loans, as defined in the chart on display at the top of the next page, extracted from the Fed's web-site.

At the core … is competition.

Peter Navarro is a business professor at the University of California-Irvine (www.peternavarro.com).  Matt Davio is a managing partner at the hedge fund, Infinium Partners, and be contacted for hedge fund services at infinium@peternavarro.com.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.