Wednesday, November 15, 2006

Dark Data + Happy Markets = Froth?

Another day, another rally. Stocks climbed again, boosting the S&P 500 past 1400 intraday. It was the first time in six years it had seen that mark. The Dow industrials ended the day at another all-time high of 12251.71. Everyone seems nice and happy.

Arrow Electronics is up 16.4% since I called it a buy in August, a 50% annualized rate, but still not as my buy call on Apple Computer June 12th, up 46% in less than 6 months. I would still say you have time to get into Arrow, but Apple is getting expensive. From my buy list I would still say ASFI, IPS, FDX, NOK, and DOW are certainly buys. LECO is not as undervalued as it once was but still looks undervalued.

When everyone is buying into rallies, it's time to start wondering if we've hit the top.

Yesterday's report on consumer spending sent the market up quite a bit. The total spending was down but people were cheered up that most of the decline was due to reduced spending at the gas pump (translation: people spent less on gas, but more on everything else). Prying more information out of the numbers leads to darker news. Retail sales fell 0.2 percent in October after a revised 0.8 percent decline in September.

The drop in spending on gas since July is $6.7 billion. Spending on everything else is up $2.9 billion, which means that people aren't just putting their gas savings into other categories.

First came the decline in home sales. Then home prices stopped rising and started to ebb. Sales of building materials followed suit, falling in six of the last seven months with what Ian Shepherdson of High Frequency Economics says is a typical three-quarter lag to home sales. In the three months ended in October, materials sales fell at a 10.9 percent annualized rate. As recently as March, they were rising at a 32.9 percent pace.

We are seeing a traditional cycle, with a lead in by the housing market. There has been some good news lately, but a lot of that news seems to be people putting a positive spin on questionable news -- always a sign that the market is forming a top.

Invest well,

FW
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