morning note/As Axl Rose sang, Where do we go now?

As we begin a new month with
the S&P’s sitting 31% off its lows, here’s a quick view of the factors that
got us here to help give us clues about where we’re going. Slowing
deterioration in economic activity, with a modest bounceback in consumer
spending and a huge drawdown in inventories giving hope of a subsequent build, was the main catalyst for the rally with the capital market activity and
mortgage business boost to Q1 bank earnings also helping. Too, signs of life in China
helped the Asian region and those who export there and helped to create a healthy bid to commodities. But, what got us into this mess were falling home prices, delinquencies and the subsequent massive consumer deleveraging that may have changed the contribution of the US consumer to economic growth for many years to come. These big picture issues have shown no signs of reversing as the US savings rate is still less than half previous highs, household debt to income is near record highs and home inventories are still almost twice the historical average with home prices still falling. Thus, on pure fundamentals, we’ve seen a bear market suckers rally in banks and consumer discretionary IMO.

BUT, with my Cubs analogy of a few weeks ago, excess Fed money printing can
result in further nominal gains giving the appearance of health but at the cost
of inflation, therefore hard assets like commodities and anything dependent on them have seen their lows.

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