The Big Fake Out

Below, some important newly released government economic numbers and what I believe they mean:

— Consumer spending in the U.S. rose only 0.4% in June, the smallest gain this year. The typical American consumer is reining in their spending.

— In June, disposable consumer income (money left over after taxes), rose 0.6% while the savings rate rose to negative 1.5%! This means consumers are dipping into their savings to stay afloat.

— For the second quarter ended June 30, 2006, consumer spending grew at an annual rate of 2.5%–down sharply from the 4.8% rate in the first quarter of 2006. More evidence consumer spending is becoming weak.

— Sales at U.S. retailers fell in June for the first time since February. Again, U.S. consumers are pulling back on their spending.

— The price of gasoline averaged $2.85 a barrel in the second quarter of 2006, up sharply from $2.34 in the first quarter. The average American consumer is seeing higher costs at the pump which means less money for other consumer purchases.

What’s happening couldn’t be clearer. In fact, it’s the fruition of what I’ve been predicting for quite some time. The average U.S. consumer is cutting down on spending simply because they don’t have enough money coming in to continue at the rate they spent just a couple of years ago. Interest rates have risen sharply, gas prices too. Hence, we have the typical consumer dipping into savings to keep their spending habits. How long can that go on?

The bigger question: Why is the general stock market rallying in light of the weak consumer spending news? While I’m a big believer in small-cap, precious metal, and special situation stocks, I believe the “big” stocks in the Dow Jones Industrials and the S&P 500 are simply giving us the old fake out.

That’s how bear markets work. They want investors to feel as if all is okay, that stocks are moving higher, so retail investors come in with more money the bear eventually takes away. Don’t let it happen to you.