Melvin: The Consumer vs. Wall Street

Wall Street can issue all the upgrades and positive reports they would like. In the short run, the large institutions and funds have enough cash to prop up stock prices. What they cannot do is change the real outlook. They can't get people to go to the stores and buy new clothes. All the cheerleading in the world will not get a family who is struggling to afford Hamburger Helper out to the local Applebee's or Red Lobster. If Mom and Dad are losing sleep at night about rising prices and the real possibility of losing their home, there is not much chance they are taking Johnny and Susie to the beach this year.

If consumers are not shopping and spending, earnings at consumer-related companies will fall. It is ridiculous to point to rising retail sales as a positive when the rate of price and raw materials inflation is much higher than the sales increase. What these numbers have been trying to tell us is that consumers are shopping at discount outlets to relieve wallet strain, and that retailers are suffering severe margin compression.

The other thing that Wall Street cannot fix is the state of the nation's financial institutions. Banks and brokerages continue to report large losses form the credit and real estate mess. It seems that we get new write-offs and capital infusions every week. Last week Goldman Sachs pointed out that it is going to become increasingly difficult for banks to raise the billions of capital they need. Most of the equity purchases in bank offerings this year have declined in price, and large investors are naturally going to be reluctant to continue ponying up dollars for declining stocks. The market is getting flooded with specialty finance companies as financial companies attempt to sell assets to raise additional capital. In the last year, the industry has written off more than $300 billion in assets. The estimates of future losses is increasing virtually every day.

The consumer is scared, and our financial institutions are in turmoil. This is not a backdrop that makes for a bull market. The S&P 500 is only 100 points lower than we were last August, when the current mess began. While I can find an occasional too-cheap-not-to-own stock or appealing option trade, for the most part the consumer has it right. We should be a little scared at these levels. I continue to think we will go a lot lower over the next few months.

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