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Five Things You Need to Know: S&P 385 Index; Size Matters; Full Tank of Gas Now Status Symbol; Spend Less Money; Subprime Delinquencies Better as People Who Shouldn't Be Lending No Longer Making Loans to People Who Shouldn't Be Borrowing


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. S&P 385 Index Hits Record High

A total of 115 stocks in the S&P 500 are still below their levels in March 2000, according to data from Bridge Information and S&P, that despite the fact the index finally exceeded its old 2000 peak last week.

  • Even though the benchmark S&P index last week finally took out its old high from March 2000, investors who own 23% of its stocks have completely missed out, according to the USA Today.
  • Even worse, the newspaper notes, these stocks aren't just a little bit off their old highs, they're about 45% off of those old highs on average.
  • The article points to "excluded giants" such as General Electric (GE), Wal-Mart (WMT), Microsoft (MSFT) and Pfizer (PFE).
  • At the 2000 market top, GE, Pfizer (PFE) and Wal-Mart had price-earnings ratios of 42, 35 and 38, respectively, according to Howard Silverblatt of S&P.
  • Their P-Es have since fallen to 16.9, 12.9 and 15.7.
  • As large cap fans, this is just the type of negativity in mainstream publications we want to see.

2. Size Matters

Speaking of small cap versus large cap, below is a point and figure relative strength chart comparing the Russell 2000 (RUT) to the S&P 500 (SPX).

  • Note the following:
    1) This year it's made a lower high compared to its March 2006 peak
    2) It's now in a column of Os indicating the S&P 500 is outperforming the Rusell 2000 (RUT).
    3) A move by this ratio to 53 would be a triple bottom sell signal, the first sell signal for this ratio since August 2004, and the first time the ratio has fallen below the rising trendline since the cycle of outperformance began.

    RUST/SPX Relative Strength

3. Full Tank of Gas Now Status Symbol

An article in the USA Today this morning takes a look at the disproportionate impact higher gasoline prices are having on consumers.

  • The average price of a gallon of regular gasoline nationwide was $3.164 Sunday, up 31 cents from a year ago, and 6 cents below the unadjusted for inflation record high, according to AAA.
  • The all-time high, adjusted for inflation, was $3.292 a gallon set in March 1981, according to the Energy Department.
  • The rule of thumb is that every penny increase in gasoline prices drains $1.3 billion out of consumer wallets.
  • On average, U.S. households spent 3.6% of their after-tax income on gasoline in 2005, the most recent yearly period for which the data was available.
  • But spending on gasoline ate up more than 9% of after-tax income for households in the lowest income bracket in 2005, the USA Today says.
  • Of course, for many Americans, higher gas costs represent only a minor crimp in family budgets, the newspaper notes.
  • But for those living paycheck to paycheck, rising gasoline prices can mean the difference between being able to pay bills and going into debt.
  • In other words, the latest status symbol is now a full tank of gas.

4. Spend Less Money

So gasoline prices (and food prices) are crimping some budgets worse than others? If you're among the group most affected, what to do? The reader comments on the USA Today Web site pick up a common theme we see gathering on the horizon: Spend Less Money.

  • Comment Poster "Citizen Anon" writes:
    "Spend less money on everything else. Don't eat out, drop the cellphone services completely, don't shop at Wal-Mart, don't buy toys and gadgets, don't go on vacation, and don't buy as much food. Try it for just one week, and then you'll see you can do it for 2 weeks, then 3 then a month and soon you'll realize you didn't need all of those "luxuries" anyway. However, the economy will be affected in a negative, severe way if everyone does it, so just you and I should do it, ok? :P"
  • The mixed message in the comment by "Citizen Anon" is interesting from a socionomic standpoint.
  • "Citizen Anon" seems to almost accidentally stumble upon an economic contradiction, then struggles to fit it together; that "luxuries" one can't afford are "unnecessary", even as the broad economy depends on the consumption of unnecessary luxuries to avoid being affected in a "negative, severe way."
  • For now, that's simply an interesting economic contradiction.
  • In our view it has the potential, however, to transition into a more combustible observation as the class divide widens.

5. Subprime Delinquencies Better as People Who Shouldn't Be Lending No Longer Making Loans to People Who Shouldn't Be Borrowing

On Friday Washington Mutual said that its subprime mortgages originated this year were performing better than those issued last year.

  • "What I've seen so far in the way of first payment defaults, early payment defaults and early delinquencies suggests materially improved performance over what we saw out of the '06 book of business," Chief Executive Officer Kerry Killinger said Friday at a Sanford C. Bernstein & Co. conference in New York, according to Bloomberg.
  • Sweet! How did they do it?
  • Simple, really. Subprime mortgage originations in the first quarter of 2007 plummeted to their lowest level since 2003.
  • The tighter credit conditions and restricted lending standards weren't isolated to subprime either.
  • Overall, single family mortgage originations by banks fell 20% in the first quarter, according to the FDIC.
  • Since late last year 77 major U.S. lenders have gone under.
  • So to sum up the "good news" from Washington Mutual, defaults this year are far better than last year thanks to the fact that people who shouldn't be lending money are no longer writing loans to people who shouldn't be borrowing money.
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