I have no doubt we are moving toward a one-world government or at least that's what the intellectuals and their billionaire benefactors desire but there is something odd obstructing the view of this future utopia. In fact, that object is not only blocking out the sun on their dream of lowering everyone else's dreams for the sake of the greater good, but that object is also moving. It's a brick or should I say BRIC hurling at speeds not seen since a cloud of dust somehow exploded packing the power of a million nukes which resulted in the creation of our universe. This big bang is aimed at shattering the old guard or old world order. There may not be any way to slow it down or change its trajectory. Although their economies aren't as dynamic as western nations or Japan, part of their economic growth will actually come from developing homegrown markets while also exerting more muscle around the globe.

Tough Auction

In light of what is universally being called a disappointing auction there is greater angst that quantitative easing isn't going to work or will simply be too expensive. We saw a disastrous mortgage applications report and there still isn't true evidence housing is improving. The lackluster response to the auction and the surge in yields pressured the equity market which got a bailout from a better-than-expected Beige Book report. The powers that be at the Fed and Treasury and the White House face a true conundrum. Sure, there is no way the dollar is going to be dumped but a trend could start that will have negative and expensive consequences. While the President has been wooing the Middle East and giving away financial rewards to Europe ($100.0 billion IMF, Chrysler, and $100.0 billion in at-par payments to banks via AIG) the upstarts have been getting louder and more rambunctious.

In the meantime Treasury yields continue to edge higher:

* 10 year hit 3.99% (highest since Oct 2008)
* 30 year hit 4.83% (highest since Oct 2007)


Comments this morning by Paul Volker on the state of the economy could have a detrimental impact on the market, it seems they took the steam out of a series of okay to hopeful news including the Beige Book, foreclosures decreasing, retail sales in line and initial jobless claims coming in better than expected.

Economic Data

Retail Sales

The Commerce Department said total retail sales rose 0.5%, the first advance in three months, lifted by strong gasoline and building material receipts. Sales fell 0.2% in April. Spending, which accounts for about 70% of U.S. economic activity, rose 1.5% in the January-March period, after a 4.3% dive in the fourth quarter. Gasoline drove retail sales but there was also a giant leap in building materials and garden supplies, too. Higher oil and gasoline prices could spell disaster for the "green shoots" as any disposable income that was going to be spent to fuel the economy, will instead be used to fill up the gas tank. Maybe the run up in oil prices is a little overdone?



Initial Claims

Earlier today, the Labor Department reported that initial claims for the week ended June 6 totaled 601K, which decreased from the 625K revised figure reported for the prior week and landed below the Street's estimate of 615K. The four-week moving average of insured unemployment for the week ended May 30 totaled 6,751K, representing an increase of 57.3K week to week. While initial claims were better than expected, the number of insured unemployment continued to tick higher, which continues to support the belief that the unemployment rate will continue to rise in the coming months (and quarters). Just late last week, a government report showed that 2.9 million jobs had been lost so far in 2009 and that the unemployment rate now stands at 9.4%, its highest level in 26 years. While the unemployment rate increased to 9.4% in May from 8.9% in April, the actual situation is actually more severe than this. If we include "part time for economic reasons" of 9.1M and "marginally attached to the labor force" of 2.2M to the unemployed number, we calculate an unemployment rate of 16.4%, which increased from April's figure of 15.8%. Although unemployment is a lagging indicator, we think there may be a feedback effect that may attenuate growth in the long term.

Foreclosures

The housing market will be seeing a bit of relief today as RealtyTrac has reported that foreclosure filings decreased by 6% from April to May. The number of filings decreased to 321,480 from 342,038, although this is the first time in the report's history that filings have been above 300,000 for three months in a row. One thing worth noting in the report is that bank repossessions increased by 1.7%, and this figure is likely to continue to rise, as a number of previously delayed filings resulting from moratorium plans are filtering to the latter stages of the foreclosure process. As a result, supply is likely hitting the market at a faster pace. Once again, Nevada had the most foreclosures per capita, while California bumped Florida from the second spot.



Beige Book

Notes from the WSS Research Desk

Carlos Guillen

* Japan's current recession as measured by GDP was better than previously thought, shrinking at 14.2% versus the preliminary figure of 15.2%. However, the slight improvement in the revision released Thursday does nothing to change the reality that Japan's economy is in its steepest recession since the end of World War II. Japan has been severely hurt by the U.S. sharp decline in demand. This nation's exports plummeted a record 26% in the first quarter from the fourth quarter.

David Silver

* Talk about conflicting data... CSX announced this morning that it wasn't seeing as many "green shoots" as other economic data was showing and railroad operator Genesee & Wyoming (GWR) cut its outlook for its second quarter amid stronger than expected traffic declines.

Brian Sozzi

* If you are looking to invest in the retail sector keep a close look out on cap ex. In an effort to make an earnings number somewhere around consensus estimate, retailers have slashed operating costs. To make the overall picture appear rosier, most companies have drastically lowered cap ex. plans. What this will mean is a strong ramp up in spending, say in 2011, so say goodbye to that lofty free cash flow balance.

David Urani

* Analysts currently estimate that California has 50 days before it enters financial meltdown. State revenues for may fell by 17.7% from a year ago to $1.14 billion, and were $827 million short of Governor Schwarzenegger's budget. Personal income tax revenue fell by 39.3% year over year. Unless something is done, the state will reportedly run out of cash within a couple of months. I hate to say it, but could this be the next big bailout?