Credit Crunch Alive and Well

Yesterday produced evidence that the tentacles of the credit crunch are contniuing to spread. The latest victim is American Express (AXP) which is seeing losses climb on credit cards and is forecasting a gloomy near term outlook. From marketwatch.com:

American Express reports 38% drop in net income
Credit card company says it won't meet targets until economy improves

American Express reported a 38% drop in second-quarter earnings Monday and warned that it won't be able to meet long-term financial targets until the economy improves.

The credit card company said that even its most creditworthy, long-standing customers felt the effects of the economic slowdown that's currently sweeping the U.S.

Without giving specifics, AmEx said it plans to cut staff and reduce other costs, noting that the resulting charges will will hit results in the second half of 2008. American Express shares fell 11% to $36.56 in after-hours trading following the report.

"With bad debt occurring even in the superprime card segment, AmEx's earnings clearly show that the credit crisis is going upscale, which does not bode well for the U.S. economy," Red Gillen, a senior analyst at consulting firm Celent, commented via an email exchange.

American Express is known for catering to wealthier customers, so some investors expected the company to withstand the economic slowdown relatively well. However, Gillen noted that richer clients were often given cards with bigger credit lines. Now that some of these customers are missing payments, the losses are bigger, he said.

American Express said second-quarter net income came in at $653 million, or 56 cents a share, vs. $1.06 billion, or 88 cents a share, the same period a year earlier.

The latest results include $600 million that the company added to reserves to cover bad loans in the U.S., the company said. There was also one other $136 million charge and a tax benefit of $101 million.

Of course this was all too predictable. The credit implosion that started with subprime was always going to spread to credit cards, auto loans and commercial real estate.


Also banks are still losing money hand over fist and the analysts don't have a clue how bad it is. Consider Washington Mutual's (WM) latest results today.

WaMu reports $3.33 bln quarterly net loss

...WaMu's (WM) net loss in the second quarter came to $6.58 a share. That compares to net income of $830 million, or 92 cents a share, a year earlier. Excluding one-time items, the lender said earnings per share would have been $3.34 in the second quarter....

....WaMu was expected to lose $1.05 a share, according to the average estimate of 12 analysts in a Thomson Reuters survey...

Only a miss of $5.53 a share, not to worry. In addition, Moody's is thinking of downgrading the stock. On to Wachovia (WB)

Wachovia jumps 30%; CEO says won't sell stock

Wachovia Corp shares, rebounding from double-digit losses in the previous session, soared almost 30% after the bank said it would work its way out of a credit quagmire without diluting current shareholders' stake in the company....

....Wachovia said it would again pare the dividend after it posted a loss of $8.86 billion, or $4.20 a share, for the second quarter, compared with profit of $2.34 billion, or $1.20, in the year-earlier period.

On an adjusted basis, the latest loss was $1.27 a share; analysts polled by FactSet Research had expected a loss of 71 cents a share.

The firm added $5.6 billion to its loan-loss reserve to cover net charge-offs and to increase the reserve by $4.2 billion.

The bank's dividend -- which had been raised three times since 2005 -- is being reduced to 5 cents a share, saving $700 million of capital per quarter. In April, Wachovia cut its quarterly dividend to 37.5 cents a share from 64 cents a share.

Another miss of more than 50 cents a share and the dividend all but eliminated. However, one analayst went out on a limb.

"We think Wachovia's poor second quarter 2008 should mark a bottom," Deutsche Bank analyst Mike Mayo wrote in a research report after the report.

Oh goody another bottom call. The stockmarket rallied on the news and sent bank shares considerably higher. The stockmarket is calling a bottom in financials, you see the worst is over. However for those of us who have been paying notice, we've seen this movie before and it doesn't end well.

P.S I am currently on holidays for a month and doing a bit of travelling in Australia so Blogging may be intermittent for a while.

RBA Done Raising Rates - Westpac

More evidence that the Australian economy is cooling came from the monthly reading from the Westpac – Melbourne Institute Indexes of Economic Activity report. From the University of Melbourne Institute website:

Growth rate in Leading Index falls further

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.1% in May, well below its long term trend of 3.9%. The annualised growth rate of the Coincident Index was 3.0%, also below its long term trend of 3.8%.

“In short, the growth profile of the Leading Index is consistent with our view that spending growth in the Australian economy will slow substantially through 2008 and 2009. Furthermore that slowdown is broadly consistent with the RBA's own forecasts and indicates that it will not need to further raise interest rates in this cycle."

Also today, RBA govenor Glenn Stevens suggested that the RBA may be done raising rates. from the smh:

Dollar eases on Stevens' inflation optimism

The Australian dollar fell from a 25-year high and two-year government bonds advanced after Reserve Bank of Australia Governor Glenn Stevens signaled interest rates may be high enough to keep inflation in check.

Australia's dollar snapped a four-day gain after Stevens told economists that the chances of ''keeping inflation low over the medium term are good,'' suggesting the RBA may have finished raising rates. The currency also declined as the yield premium on the nation's two-year debt compared with similar-maturity Treasuries narrowed 6 basis points to 4.17 percentage points....

....The RBA's outlook on inflation ''does involve a period of significantly slower growth in demand in Australia,'' Stevens said in a speech in Sydney today. ''We still expect inflation to fall back to 3% by mid-2010, and to continue declining gradually thereafter.''

As seen below the cash rate futures market certainly took notice of Stevens words, they are now pricing in 0% chance of a further rate rise in the forseeable future and are now look for a quarter percentage point cut by the end of 2009.


The RBA knows that the 2Q08 inflation number due out next week will be bad but they are looking past that to a slowing economy over the remainder of this year and into next. I think the question now becomes, how deep will this slowdown be? Not many are talking about a possible recession in Australia next year but I'm betting we will start to hear more of that kind of talk as the economy continues to slow over coming months.

US Retail Sales Fizzle Despite Rebate Checks

The jubilation over the strong US retail sales figures for May was short lived as it wa reported yesterday that sales for the month of June rose a tepid 0.1%. Not only that, the original estimate for May was revised lower by 0.4%. From the Census Bureau:

ADVANCE MONTHLY SALES FOR RETAIL TRADE AND FOOD SERVICES
JUNE 2008
The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $384.2 billion, an increase of 0.1 percent from the previous month and 3.0 percent above June 2007. Total sales for the April through June 2008 period were up 2.6 percent from the same period a year ago. The April to May 2008 percent change was revised from +1.0 percent to +0.8 percent.

Retail trade sales were up 0.1 percent from May 2008 and were 3.0 percent above last year. Gasoline station sales were up 24.5 percent from June 2007 and sales of nonstore retailers were up 8.1 percent from last year.

It's worth noting that gasoline sales were up a huge $2 billion or 24.5% in the month of June, obviously reflecting higher prices. Auto sales dropped to levels not seen for at least 2 years. It will be interesting to see the state of retail sales when the rebate checks are gone. I doubt they will be impressive.

Good Ole Fashion Bank Run, Who's Next?

Above is a picture taken outside the Laguna Woods branch of IndyMac Bancorp yesterday. Obviously plenty of retiress and others have more than the $100,000 limit of FDIC insured deposits on deposit. If you're an American and you've got more than 100k in one bank, you should be looking to spread it around.

Now to the more important question, who's next? From today's market action I'd suggest it could be Washington Mutual.

WaMu Says It's `Well Capitalized' After Share Slump

Washington Mutual Inc., after dropping the most since its initial public offering in 1983, said it is ``well capitalized'' with more than $40 billion in liquidity and $150 billion in retail deposits.

The company's tangible equity to tangible assets ratio is 7.8 percent as of June 30, Seattle-based Washington Mutual said in a Business Wire statement after the close of regular trading. Details will be provided on its July 22 earnings call, the company said.

Washington Mutual led a slide in home lenders after IndyMac Bancorp Inc. was taken over last week in the second-biggest seizure of a financial company by U.S. regulators. Lehman Brothers Holdings Inc. predicted today that Washington Mutual's cumulative losses this year will reach $26 billion as the mortgage crisis worsens.

Washington Mutual rose 10 percent to $3.54 in extended trading after tumbling 35 percent at 4 p.m. on the New York Stock Exchange. The shares have lost 76 percent of their value this year, the second-biggest decline in the 24-member KBW Bank Index. National City Corp. has dropped 77 percent.

What a relief, WM is well capitalized, So I guess that -34% decline in the stock price today was an over- reaction. But wait a minute, wasn't IndyMac well capitalized? How about Fannie Mae and Freddie Mac? As I remember it Countrywide and Bear Stearns were well capitalized too. Let's rewind to August 2nd last year and see what Countrywide had to say:

"Our mortgage company has significant short-term funding liquidity cushions and is supplemented by the ample liquidity sources of our bank," Sieracki continued. "In fact, we have almost $50 billion of highly-reliable short-term funding liquidity available as a cushion today. It is important to note that the Company has experienced no disruption in financing its ongoing daily operations, including placement of commercial paper.

"Countrywide's financial condition remains strong, as evidenced by over $14 billion of net worth, significant excess capital and our strong investment grade credit ratings," Sieracki concluded. "Two independent credit rating agencies, Moody's Investors Service and Standard & Poor's Rating Service, this week re-affirmed their ratings and stable outlook for Countrywide, its bank and its mortgage company."

As we now know, if it wasn't for Bank of America, CFC would have filed for bankruptcy months ago. The long and the short of it is that you can't believe anything that the management of these large financial institutions say. Fear is rife and a bank run on any institution could spell disaster.

The fallacy that Australia can continue riding the commodities train to untold prosperity built on leverage and cheap credit is quickly evaporating. House prices are inevitably following the same path in Australia as they have in other over inflated housing markets around the world. From the heraldsun:

Melbourne recession fear as property hit

PROPERTY values in Melbourne and every state have slumped, with more than 50 per cent of Australian homes losing value last month.

New figures obtained by the Sunday Herald Sun from property analyst Residex prompted recession warnings.

The last time all the states fell at the same time was just before the Great Depression and Residex chief executive John Edwards warned of tough times ahead.

"It looks as if we're moving into a one-in-100-year event," Mr Edwards said.

"To see an adjustment on a wholesale basis across the whole of the nation is incredibly unusual. Never in my life have I seen so many converging negative events."

Mr Edwards said the Australian property market had broken away from its normal pattern of interstate diversity that traditionally protected it from widespread downturn.

"It points to a situation where unless the Government and Reserve Bank take action, Australia could move into a recession," he said.

"The only other times this has occurred are before we've moved into severe recessions.

"I am a bit frightened by the numbers and . . . by the speed at which things are happening."

I think the speed with which the Australian economy is turning is going to surprise a lot of people including the RBA. Unlike the US, turning our economy around is not like turning the titanic, it can happen a lot faster.

The figures show negative capital growth for almost every urban and rural centre in Australia.

Houses and units, in Melbourne and country Victoria, lost value last month and in the last quarter.

The bad news is hitting the top end of the market as well as the middle and outer suburbs.

In Toorak, house values dropped 2 per cent in the three months to June compared with capital growth of almost 23 per cent last year.

In Brighton, Prahran, Mont Albert, St Kilda, Malvern and Glen Iris the data is similar, with house prices declining last month and in the past quarter.

In suburbs such as Port Melbourne and Richmond, which are strongholds for residential units, prices also have dropped over the past month and quarter, reversing the trend of last year.

Several bayside suburbs that are traditionally strong housing areas have also declined, with Mordialloc, Moorabbin, Mentone and St Kilda East and West suffering unit price falls.

Estate agents throughout Victoria said prices had fallen up to 10 per cent this year from the highs of 2007.

The market scare comes as bank interest rates continue to rise, further flattening a limp market.

Agents said the market was quieter now than during a normal winter and that buyers were sitting on their hands, even after inspecting a property that matched their needs.

Victorian property is now firmly in a buyer's market because the shortage of supply during winter is not generating competition among buyers.

The damning statistics add to a week of gloom for the economy, with figures showing housing construction has declined for the fourth consecutive month and demand for home loans fell 25 per cent in the four months to the end of May.

Soaring petrol prices, rising interest rates, the share market slump, increasing mortgagee sales, the rental vacancy crisis and housing affordability woes have been met with a drop in consumer confidence to its lowest level since 1992.

"There is no Australian family that isn't hurting," Mr Edwards said.

"If you have a mortgage, you're hurting. If you're renting, you're also hurting."

The Federal Government and the Reserve Bank had "dismally failed" Australians by focusing on inflation while failing to control credit.

"I think they need to let inflation run a little. That means adjusting interest rates down and they need to control credit," Mr Edwards said.

"It's too late to control it by interest rates.

"You control it by interest rates and you'll send us into depression."

The property market dragged its feet yesterday with an auction clearance rate of 62 per cent failing to excite vendors and estate agents.

Winter and the school holidays added to the market's woes as many buyers took a back seat at auctions.

click on the link for the full story.

IndyMac Harbinger of Things to Come

For some time I have been saying that the real concern of the current crisis in credit and financial markets is one of solvency, not liquidity. The failure of IndyMac is a harninger of many more bank failures to come in the next couple of years. From Bloomberg:

IndyMac Seized by U.S. Regulators Amid Cash Crunch

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mailed statement today. Customers will have access to funds this weekend via automated teller machines. Regulators intend to eventually sell the company.

The Pasadena, California-based lender specialized in so- called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. IndyMac's home state, where Countrywide Financial Corp. was also located before it was bought last week, has been among the hardest hit by foreclosures.

``Given their focus on Alt-A and a heavy concentration in California, they would have suffered meaningful losses in almost any scenario,'' Brian Horey, president of Aurelian Management LLC in New York, said before the seizure was announced. Aurelian is short-selling IndyMac shares to gain from declines.

Had IndyMac ``applied some common sense and changed their approach to underwriting as the housing market peaked, they might have lived to see the next cycle,'' Horey said.

click on the link for the full story.

Aussie Employment Bounces Back in June

Despite recent evidence of a slowdown in the Australian economy, the labour market showed resiliency in June, bouncing back from the job losses in May. From the abs:

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

EMPLOYMENT

• increased by 29,800 to 10,715,700. Full-time employment increased by 24,000 to 7,664,600 and part-time employment increased by 5,800 to 3,051,100.

UNEMPLOYMENT

• decreased by 2,800 to 473,800. The number of persons looking for full-time work decreased by 300 to 317,100 and the number of persons looking for part-time work decreased by 2,600 to 156,700.

UNEMPLOYMENT RATE

• decreased slightly to 4.2%. The male unemployment rate remained steady at 4.0%, and the female unemployment rate decreased by 0.1 percentage point to
  4.5%.

PARTICIPATION RATE

• increased by 0.1 percentage point to 65.3%.

It may seem surprising that employment continues to be strong in the face of recent contractionary service and manufacturing reports, 16 year lows in consumer sentiment and a declining real estate market.

However we should remember that employment is a lagging indicator and that firms don't really start laying people off on mass until the writing is well and truly on the wall.

Home Loans Fall Sharply in May

Data released by the abs today showed that finance approvals for owner-occupied housing declined for the fourth straight month in May, down a seasonally adjusted -7.9%. The chart above excludes refinancings, that number fell a seasonally adjusted -7.1% in May and is now down -27.1% from the peak in June 2007.


The value of loans for owner occupied homes excluding refinancings fell a seasonally adjusted -5.8% in May and is now down -28.8% from the June 2007 peak. Falls in both the number and value of loans for owner occupied homes has been accelerating in recent months. Year over Year numbers as shown below have dropped sharply.


There can no be argument now that the RBA's interest rate hikes have been successful in reigning in domestic demand along with help from the tightening of credit as a result of the global credit crunch.

Slowly but surely the Australian economy is following the lead of the US economy and more recently places like the UK, Ireland and New Zealand. Australia particpated in the global real estate bubble built on a mountain of cheap credit and it will not be immune from the fallout.

The fallacy that we are different down under because of our abundance of natural resources demanded by the developing BRIC countries will be shattered as we slow along with the rest of the global economy in the second half of this year and into 2009.

Australian Business Confidence Drops in June

Accoring to NAB's monthly business survey, the confidence of Australian business operator fell to lows not seen since the September 11 terrorist attacks. Here are the highlights of the report:

• Business conditions deteriorated sharply and unexpectedly in June.

• Sustained slowdown in sales & profits begins to slow job gains & lowers capacity usage.

• Near term negative confidence weakens significantly further & forward orders subdued.

• Survey implies domestic demand up 2½-3% during 07/08:slower than Nab & most forecast.

• Economy-wide purchase costs rising a lot, while current inflation edging higher.

• Australian GDP growth is still expected at around 2¾% for both 2008 & 2009 – supported by personal income tax cuts, a rebound in farm output & stronger commodity prices.

• Substantial downside risks to growth at home & abroad, but sustained higher oil/ energy prices add to medium term inflation risks.

• RBA to look thru high inflation in near term & remain on hold for rest of 2008. Nab expects cuts to cash rate during 2009 in response to sustained slower growth & lower “core” CPI.

This report jibes with what we heard in both the PSI and PMI indexes released recently. Economic activity has slowed markedly in recent months, although as the chart at the top suggests, it has a long way to go to reach the recessionary levels of the early 1990's.

On the outlook for interest rates NAB had this to say:

Nab expects the RBA to look through the short run pick up in core inflation in the near term – including another large rise in both the core and headline CPI for Q2 (due to be released on 23 July) and remain on hold as demand moderates significantly further this year.

I concur completely. The RBA will take into account the lagged inflationary effects and instead concentrate on the slowing in domestic demand. Furthermore, NAB expects the RBA to cut interest rates between 100 - 125 basis points in 2009.

Aussie Job Market Softens Further

More signs that the Australian economy is slowing came from two employment indicies released today. From the smh:

Jobs market softening

Signs of a slowdown in Australia's drum-tight labour market are appearing, in an indication that the high interest rates are certainly working.

The two indices of employment published today, by the ANZ and Seek, show that the number of new jobs being advertised is falling rapidly - potentially indicating the strong rate of employment could be about to end.

The ANZ index, which charts jobs advertised in major metropolitan newspapers and online, revealed a 3% decline for June, the second fall in two months following May's 1.7% decline.

The slowdown has been most pronounced in newspapers, with the job ads down 18% from June last year.

The Seek measure, which charts only online vacant positions as a ratio to applications, showed the seventh consecutive decline as advertisements were off by 5.1%.

The two unofficial employment indices are usually a sound indicator of where the Australian labour market is heading.

The unemployment rate will be announced on Thursday and economists are predicting that another 20,000 jobs were wiped during June, following on from May's soft result when employment fell by 19,700.

The result was the first negative reading since October 2006, and sparked the theory that the labour market had reached its peak.

click on the link for the full story. If payrolls fall again in June (the numbers come out on Thursday) it will give the RBA yet another reason to remain on the sidelines. Only a monster inflation report later in the month has a chance of changing that outlook.

June NFP's Down 62,000 in June

US non-farm payrolls fell -62,000 in June, slightly worse than expected but not as bad as I had expected. Given recent data I thought we may see a triple digit decline. However that said, the report still wasn't positive and I believe it will only be a matter of a time before we see triple digit declines. The details were as follows:

Construction -43,000
Manufacturing -33,000
Retail trade -8,000
Professional and business services -51,000
Service providing +7,000
Leisure and hospitality +24,000
Government +29,000

As usual, the controversial Birth / Death adjustment warrants a shake of the head. Apparently 29,000 new construction jobs were added in June along with 86,000 in the hospitality sector.


Now let's look at why this was a less than impressive report. Downward revisions to April and May totalled -52,000. The 0.5% jump in the unemployment rate seen last month that was assumed to be a statistical blip because of teenagers entering the workforce stayed at 5.5%. That was despite 300k teenagers leaving the workforce in June.

Initial Jobless claims jumped to a seasonally adjusted 404k in the latest week and as can be seen below, the 4 week moving average, excluding Hurricane Katrina hit their highest levels since September 2003.

Also the ISM non-manufacturing index fell below the 50 level marking the dividing line between expansion and contraction. The Employment component of that index as shown below plunged from 48.7 to 43.8, not a good sign for employment.



All in all, there is very little to be encouraged by in the latest data on US employment. Next month should interesting as it includes a semi annual revision that will proabably show the BLS has been under reporting job losses so far this year.

Aussie Services Sector Contracts in June

Given the increasing signs of a slowdown in the Australian economy, it is becoming increasingly likely that the RBA will not hike rates again in this cycle, even if the 2Q08 inflation numbers are worse than expected. The latest piece of information on that front came from today's AIG/Commonwealth Bank Performance of Services index.

The headline number fell to 45.4 well below the 50 level which seperates expansion from contraction. In addition to the headline number, as shown below Sales, Employment, Inventories, New Orders and Deliveries all fell below the 50 level signalling contraction.

Here are some key points from the report:

Services sector activity slowed further in June, with record petrol prices and high interest rates continuing to stifle consumer and business demand.

Firms pointed to weak consumer confidence and concerns over future economic growth as major contributors to the soft levels of activity.

Activity was weak across a wide range of both consumer and business-related sectors.

The rising price of oil led to the fastest rate of input cost growth since the survey’s inception.

Victoria was the only state to record growth in services, with activity falling in all other states, except South Australia where it was steady.

Seasonally adjusted, activity expanded in just two of the nine sectors in June (down from four in the previous month).

You can click on the link above for the full report but good luck finding much in the way of positive data. Combined with the manufacturing report released on Tuesday, there now can be no argument that the RBA's rate hikes, higher food and energy costs and lower business and consumer sentiment are taking their toll on the Australian economy.

ADP Report Points to Triple Digit Declines in NFP's

Last week I noted that given recent data on employment, we may see triple digit declines in US non-farm payrolls. The ADP employment report released today also suggested that could be the case. From adpemploymentreport.com.

Nonfarm private employment decreased 79,000 from May to June 2008 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from April to May was revised down from an increase of 40,000 to an increase of 25,000.

This month’s decrease in employment was broad based across industrial sectors and suggests continued weakness in employment.

Employment in the service-providing sector of the economy declined 3,000, the first decline since November 2002. Employment in the goods-producing sector declined 76,000, with manufacturing employment falling 44,000, marking their nineteenth and twenty-second consecutive monthly declines, respectively.

Large businesses, defined as those with 500 or more workers, saw employment decline 51,000, while medium-size companies with between 50 and 499 workers declined by 35,000. Employment among small-size businesses, defined as those with fewer than 50 workers, advanced just 7,000 during the month.

Since the ADP report doesn't include govermnment jobs, the rule of thumb is to add around 25k jobs to account for growth in the government sector. That would give an estimate for the BLS non-farm payrolls of a decline of -54k for the month of June.

However, as seen in the table below, in recent months the ADP report has tended to overestimate job growth by an average of 93k jobs per month.


The ADP report has been notoriously unreliable as a predictor of non-farm payrolls recently but it is not completely useless so on balance expect to see some decent job losses in the BLS non-farm payroll report tomorrow. Also pay attention to revisions to previous months which will probably be to the downside.

Other evidence suggesting a softer job market came from the monthly survey of job cuts from Challenger Gray and Christmas, from Bloomberg:

June Job Cuts in U.S. Up 47% From Year Ago, Challenger Says

Firing announcements rose to 81,755 last month, up 47 percent from 55,726 in June 2007, Chicago-based Challenger, Gray & Christmas Inc. said in a statement today.

Companies are trimming staff in order to counter rising raw-material expenses and decreasing demand. The Labor Department may report this week that the U.S. lost jobs for a sixth straight month in June.

``Downsizing in the financial sector has remained heavy, but now we're seeing increased job cuts in other non-housing- related industries, mostly due to the added burden of skyrocketing oil prices,'' John A. Challenger, chief executive officer of the placement company, said in a statement. ``The overall economy could continue to experience net losses for several months to come.''

Also, depsite the fanfare over the better than expected ISM manufacturing report yesterday, the employment component of that index fell from 45.5 to 43.7 suggesting further weakness in the goods producing sector.

To be sure, the ISM non-manufacturing employment component is a more important indicator, however the first decline in the services sector in the ADP report suggests the broader US labor market continues to soften.

How Good Were May Retail Sales Really?

According to a report released by the ABS today, retail sales rose a seasonally adjusted 0.7%. That was well above consensus estimates of a rise of 0.2% and is the strongerst month on month change since November 2007.

However, digging a little deeper shows that more than half the gain came from food which was up 1.0% month on month and most of that was due to price rises. Department Stores, Clothing and Soft Goods and Household Goods all declined.

If there was any doubt about a softening in retail conditions Just Group's profit downgrade today should have put that to rest . Here are the money quotes from that announcement:

Despite positive same store sales growth in the month of June 2008 by Dotti, Smiggle and Jacqui E, overall same store sales for Just Group’s Australian and New Zealand stores declined. Overall gross margins also fell in June 2008 due to the increased level of industry-wide discounting.

The revised Directors’ pro-forma forecast for FY2008 assumes that lower sales, gross margins and profit will also be achieved in July 2008 compared to that anticipated at the date of Just Group’s Target’s Statement.

Just Group’s management believe that the trading conditions are likely to remain difficult for at least six months, at levels lower than those previously anticipated.

Whilst the financial year is over expect to see more of those kinds of statements about the outlook for 2009 when FY08 results are released. Australian consumers are clearly feeling the pinch of higher prices for food and energy and that is set to continue for the medium term.

UK Home Prices Down 6.3% in Year to June

Surprise surprise, UK home prices fell for a 6th month in a row in June. Prices fell -0.9% in June from May and are now showing a year over year decline of -6.3%.

Expect those year over year declines in home prices to exceed 10% before the year is out. For more on the state of the UK housing market take a look at this gloomy article from the UK Telegraph:

UK house prices in grip of slump that experts expect to deepen

Britain is in the grip of a housing slump as bad as at any stage since the 1970s, property experts warned, as data suggested that first time buyers had all but disappeared from the market.

Click on the link for the full story.

Aussie PMI Shows Contraction in June

The Australian Purchasing Managers index fell to 47.0 in June. A reading under 50 suggests contraction whilst a reading over 50 suggests expansion. The weakness was across the board with many components moving into contraction mode. Production, Employment and New Orders all fell and are now all well below the 50 mark.

Capacity Utilisation also fell sharply from 75.85 in May to 70.85 in June whilst Input Prices rose sharply from 70.6 in May to 84.9 in June. The RBA left interest rates on hold at today's meeting and the June PMI reinforces that view.

XAO Takes a Dive in June

June lived up to its reputation as the worst month for the All Ords declining for the 15th time in 24 years. The XAO fell -7.6% in the month of June. Taking out January this year when the XAO plunged more than -11%, June was the worst month since August 1998.

Despite the largest monthly decline in almost 10 years, there was a noteable lack of panic as the market declined in a very orderly manner. There seems to be some complacencyy among investors that we have seen the bottom in the stockmarket. I contnue to believe we have not seen the lows yet and that what we witnessed last month was simply the failure of a bear market rally in April and May.

So what about July? Over the last 23 years July has been a reasonably good month for the All Ords rising twice as many times as it has declined. However that in no way implies that this July will see a rise in the XAO. That said we are about due for a short, sharp clearing rally of the kind that you typically see in bear markets.

On the economic front Thursday's US non-farm payroll report will probably show that US employment declined for the sixth straight month. Given recent jobless claims numbers and the up-tick in the number of workers that think jobs are hard to get, we may see a triple digit decline. However, with the rebate checks being mailed out we can expect strong spending numbers for next couple of months.

On the earnings front, we will start to get some 2Q08 earnings reports and pre-announcements. Once again the financial sector will be ugly, however the key to this earnings season will be the outlook for the rest of 2008. My feeling is that things won't be as cheery as the cheerleaders would have us expect.

And that is why on balance I have to go against my better judgement for a bear market rally and call the XAO lower in the month of July. Also if you inclined to do so, please vote in the poll at the top of the left sidebar to have your say on the likely direction of the XAO in July. The poll will remain open until Friday.