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Two Pairs of Socks and 100 Shares of Cisco

Yesterday, the sun came up and the Fed cut rates. Today, the government reported benign inflation numbers. The CPI came in at 0.3% for April, lower than expected, but at 3.6% annualized, still above the 3.4% for the year 2000. The core index, for those who stayed home and fasted, rose 0.1%. A drop in the price of clothing dampened the inflation figure, as that component fell 1.3% in a single month. According to Bloomberg, that’s the biggest decline since January 1949. It’s good that someone keeps track of this stuff.

We should get the Cleveland Fed’s median inflation figure this week. The number excludes the outliers, at least in theory providing a more meaningful measure of inflation. The median CPI was 4% in March and has been trending higher for at least a year.

In other economic news, U.S. industrial production fell in April for the seventh month in a row. That’s the longest streak since 1982. Factories, mines and utilities operated at 78.5% of capacity last month, the lowest since the end of ’91 recession. Despite all the spiffy new software, inventories remain out of whack with the March inventory-to-sales ratio matching the February figure, the highest since January ’99. Factories have cut more than 370,000 jobs this year, triple the cuts made in the 4th quarter.

Despite its aura, the high tech industry may not be that much different from the oil bidness (as we Texans used to call it). According to Bianco Research, capital expenditures reached 13.85% of GDP last September, just below the record high of Dec. 1981. In those days, a disproportionate share of cap-ex was directed toward energy. Last year a disproportionate share of capital spending (more than half!) went to tech. The over-investment in energy resulted in low double-digit oil prices. Now, 50 pages of Cisco items are on sale at eBay.

Best laid plans department
Yesterday’s Fed rate cut resulted in a fed funds rate 2.5% lower than its year-end level. Mortgage rates, however, have refused to join the party. Fixed mortgage rates are around 7% compared to 7.2% at year-end. Credit card rates have done a little better, falling from 7.4% to 6.8%. But rates on home equity loans are down less than a percent this year.

The yield on the 10-year Treasury note has been especially immune to the downdraft in short rates. The 10-year yield is now above 5.45% compared to 5.14% at year-end. Since the April 18th surprise cut, the 10-year yield is up more than 30 basis points.

Barbarous relics up
It looks like this will be another week when Larry Kudlow won’t be able to say, "and the gold price is going nowhere" in his weekly "inflation is dead" speech on CNBC. Gold is now up more than 10 bucks since the April 18th surprise. Today gold shot through $270 despite the spike in the Dow.

The real Survivor
Never doubt the viability of a "reality based" TV show or the consumer’s willingness to keep spending. Retail sales rose 0.8% in April according to the Commerce Dept. estimate. This spending must have been a self-actualizing event as consumer sentiment improved as well, with the University of Michigan index rising to its January level. March retail sales were revised lower, however. As a result, it still appears to be a race between mortgage refinancing windfalls and layoffs. The number of refinancing applications has been drifting lower since late March, but they remain extraordinarily high. Mortgage rates, of course, are down substantially from a year ago, but have been stable to rising for almost six months now. Also note that the median age of loans refinanced in the first quarter was only 1.6 years, the lowest since at least 1997 (according to Freddie Mac). How much longer before the lights go out on the refinancing party?

When the consumer does bonk, watch out. In his May letter, Dr. Kurt Richebacher notes that consumer "dis-saving" from Q4 98 through Q4 00 added up to $300 billion. When you compare that figure to growth in nominal consumer income of $890 billion, it’s easy to see that spending above our means has been a big boost to the economy. What happens when the savings rate returns to 3 or 4%?

Target shoppers soon will be able to pick up shares of Cisco along with their underwear and flashlight batteries. Despite shrinking transaction volume, E-Trade is installing kiosks in 20 SuperTarget stores. E-Trade says it will offer other financial services in addition to stock trading. Hasn’t anybody told these guys that Pay Day Loans are where the money’s at?

Too juiced to drop
The housing market is still hanging in there. Although prices fell slightly over the month, home prices in Orange and Los Angeles countries were still 10% higher in April than a year ago. In San Diego County, there was no let up. The median home price rose in April and was up 18.9% over the prior year. In fact, today’s San Diego paper ran a rare story about the difficulty homeowner wannabes are having finding an affordable house. Mary Otero, director of the San Diego Home Counseling Center said San Diegans looking for a piece of the American dream are finding "nightmarish conditions." So you have Fannie and Freddie claiming to give more Americans a shot at owning a home (by lowering down payments, etc) while facilitating a credit boom that’s sent home prices soaring. Marginal buyers who do qualify find themselves paying inflated prices and saddled with an outsized mortgage.

Here in Dallas, existing home sales fell in April (year over year), and have slid three months in a row. Inventories have spiked about 25%. But this comes on the heels of a tight housing market. In fact, the median home sold for 6% more in April than in the prior year.

Shame, shame
Has anybody told the straight-shooting, friendly folks on the Gateway commercials that it looks like their company has been ripping off their valued customers? The FTC announced yesterday that Gateway and Juno settled charges of offering customers free internet service but dinging them anyway. The FTC accused Gateway of charging customers $3.95 an hour to use the company’s allegedly free Gateway.net service. A Gateway spokesman said the events described are two years old and that the company has taken steps to remedy the problem. Let’s hope so.

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