The Big Picture

Amazing, isn't it?

Tuesday, May 16, 2006 | 07:35 AM

One of the more astonishing things about the market is how something that should matter doesn't for the longest time . . . and then it suddenly does.

I find it incredible that suddenly, the denial we have been living with for so long gets removed. The robust inflation has been denied, ignored for so long. Despite all the evidence, the price increases on ordinary goods, medical services, housing, insurance, all the while commodity prices run amuck has been overlooked, as if its irrelevant.

Then suddenly, it matters.

Meanwhile, we see Housing, the prime (domestic) driver of the economy for the past 4 years, rapidly cool -- and the market has yet to discover this as an issue. If the Housing slowdown continues, expect Consumer spending in Q3 to be very soft. Target showed revenue growth of 12%, but missed earnings estimates due to increased costs -- (but there's no inflation). Hey, we still have a full 6 months before we have to start thinking about Xmas spending yet -- that could be way off also, if present trends accelerate.

It may be too early to "officially" say the end of this cyclical Bull market is upon us, but the past few days is certainly a warning shot across the market's bow. As noted, I sold my QQQQ puts yesterday to lock in some ~~games~~ gains; This is an expiration week, and that often sees option trader hedge by going long common against thier puts. I am still long SPY puts for June and September, and actually bought some Qs for a bounce trade.

My first half targets for the year (and you know I think all forecasts are nonsense) were looking pretty good for a while: Dow 11,800, Nasdaq 2600, SPX 1350. The past few days makes them increasingly unlikely by June 30.

I do, however, suspect the next move up is shortable.

By year's end, I still expect a correction of at least 25%. I believe we are very parallel to late 1972/73 right here.

Meanwhile, here are a few Real Estate headlines that I believe Mr. Market is in the process of discounting:

• Homebuilder sentiment lowest since 1995

• Real estate cools down

• Growth in U.S. Home Prices Slows

• More are struggling to pay the mortgage

• Bankruptcy filings soaring again

UPDATE May 16, 2006 10:42am

Lots of good comments, so I wanted to address them sooner rather than later:

-A 25% sell off in the SPX or Dow is actually a modest correction historically; Consider the 1966-1982 period (which I believe is parallel to this, following as they both do a multi decade bull), there were five selloffs of 24% or greater;

-Consider this: There was a 10% SPX selloff every year from 1995 - 2000; We havent had one of those since March 2003;

-Inflation is quite simply a measure of the purchasing power of the dollar. That has been going down -- domestically for some time now, and internationally more recently; "Real interest rates" are less relelvant to my analysis than the calculus of "What is your money worth?"

-As to things going down in price, I have to ask what? The only items I see dropping in price have nothing to do with deflation, and everything to do with manufacturing technologies, consumer adoption curves, and economies of scale.