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Connecting the Dots

Consumer confidence sinks like rock
Consumers feeling the pinch
New home sales unexpectedly plunge
A trio of Fed heads warns about more rate hikes

The market spent the bulk of the day in negative territory, fighting the hangover from Hurricane Rita plus rising gas prices and interest rates.

The bulls shrugged off those problems after Easy Al Greenspan sang his versions of Don't Worry, Be Happy on TV in the late afternoon gave the market a shot of steroids and pushed the market sharply higher.

Just like effect of steroids in real life, Easy Al's attempt to reassure the market were short-lived and the market gave back almost all of its gains and closed with an unimpressive 12-point gain.

The Nasdaq, however, continued to under-perform and finished with a 5-point loss.

The overall feeling is that the tape is getting pretty heavy and that the stock market party is close to being over.

Consumer confidence sinks like rock. According to the Conference Board, consumer confidence falling fast. The Conference Board's index of consumer confidence plunged from 105.5 in August to 86.6 in September.

This is the largest single-month fall since October 1990 -- when our economy was officially in a recession -- and is also the worst reading since October 2003.

You'd think the Wall Street crowd would have expected a steep drop due to Hurricane Katrina, Hurricane Rita, and jumping gas prices, but the Jack-and-the-beanstalk crowd was expecting a mild drop to 94.9 instead.

Plain and simple, Americans are worried. Lynn Franco of The Conference Board said:

"Hurricane Katrina, coupled with soaring gasoline prices and a less optimistic job outlook, has pushed consumer confidence to its lowest level in nearly two years and created a degree of uncertainty and concern about the short-term future."

Going forward, the Expectations Index, which measures Americans' outlook over the next six months, dropped from 93.3 to 71.7. Since this survey is based upon pre-Rita September 20 data, you should look for even a bigger plunge next month.

This drop, by the way, mirrors the discouraging words from the University of Michigan, whose consumer sentiment survey showed a drop from 89.1 in August to 76.9 in September.

The bulls will tell you that this drop in consumer confidence is temporary, that the hurricane rebuilding effort will goose the economy, and that everything will be peaches and cream in a few weeks.

I don't buy it for a second.

And speaking of buying...

Consumers feeling the pinch. The ICSC weekly chain store sales index had enough good news to make the bulls happy, but enough bad news for us realists to worry about.

The bulls were eager to hear that the index showed that retails sales increased by 0.1% for the week ending September 24. Yippie said the bulls!

I suspect most of that gain is short-term spending because of Hurricane Rita.

The bad news showed that 54% of consumers are cutting back on spending because of higher energy prices.

The bulls still don't get it. Sky-high gas prices are busting millions of Americans budgets and will only get worse once the winter arrives. The double whammy of filling gas tanks AND heating homes is going to be more than many households can afford.

2005 could truly become the year that the Grinch steals Christmas.

New home sales unexpectedly plunge. Americans are cutting back. Not just on travel, but on homes too.

Sales of new homes fell by a much larger-than-expected 9.9% in the month of August and the supply of new homes for sale is at a record high.

New home sales dropped to an annualized rate of 1.37 million in July to 1.24 million units -- below the 1.34 million forecast and the slowest pace since January.

Sales fell all across the country. New homes sales were down 22% in the Northeast, 17.9% in the West, 10.6% in the Midwest, and 2.2% in the South.

The byproduct of those weak sales is an increase -- a very big increase -- in the supply of new homes for sale. Homebuilders are sitting on 479,000 unsold homes at the end of August

Those 479,000 unsold homes is a record high and represents a 4.7 months supply -- the most since June 2000.

Don't forget -- we're talking about the month of August. Since Hurricane Katrina didn't hit until August 29 and doesn't include Hurricane Rita at all, you can imagine how much worse the September numbers are going to look.

Americans are clearly getting very nervous about their financial situation and that is bad, bad news for our consumer-driven economy.

That situation will get even worse if interest rates keep rising.

A trio of Fed heads warns about more rate hikes. While Alan Greenspan has his own special brand of mumbo-jumbo, the rest of his Federal Reserve pals often talk in very plain English.

If you listen to what three of them said this week, there is ZERO question that interest rates are headed higher...a lot higher.

Fed Warning #1: On Monday, President of the Chicago Fed, Micheal Moskow, warned:

"We feel it's necessary to reduce accommodation."

Remove accommodation is just Fed-talk for raising interest rates.

Fed Warning #2: At a speech in Oklahoma, Kansas City President Thomas Hoenig warned:

Inflation is "high enough to get your attention."

"I believe it is also important for the Federal Reserve to stay focused on its primary mission for maintaining a neutral monetary policy that is both able to contain inflationary pressures and still-balanced growth. You can end up increasing inflationary pressures that could undermine the recovery if you are not careful."

Fed Warning #3: Halfway across the globe in London, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, issued the most aggressive warnings:

"The Federal Reserve must deliver -- again and again -- on its commitment to price stability."

"It is the job of a central bank to earn, through its actions, the public's confidence in its commitment to price stability."

"One option that is clearly not on the table is allowing an unacceptable rise in inflation."

Look, these Fed officials don't operate in a vacuum. I believe these comments are coordinated, intentional, and indicative of some serious underlying concerns about inflation.

They know something and whatever that something is has them very, very spooked. I have no doubt that interest rates are going to rise...higher and faster than Wall Street crowd is anticipating.

Once the bulls figure that out, the stock market will be very vulnerable for a very fast retreat.

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