Personal income is putting a damper on consumer spending and on the markets in general.  Recent drops in consumer spending is hurting retailers and the banking industry as people are shopping less and paying less on their consumer debts.  We’ll analyze what these numbers mean and how they’ll affect the market going forward.

Personal incomes dropped by .7 percent in July, this comes with an expectation for a .1 percent drop.  A .6% difference is no small difference when it comes to government reports.  Consider that personal incomes had dropped six times greater than expected with oil prices at their highs and its no small wonder why a .6% drop in income plays such a huge role in the economy as a whole.  Consumer spending rose by .2% in July, even though personal incomes fell by 3 times that much.  This is probably the result of higher oil and food prices which have since fallen before the statistics were fully known.

We should also consider the amount of money that the government, and the federal reserve has pushed into the economy to keep growth numbers in the positive and recession fears in the back of minds rather on newspaper headlines.   With a hundred billion dollar stimulus package and a variety of loans made to banks to collateralize bad loans,  personal income numbers should have risen rather than fallen.  There is more money running around now than at any time in history, it seems almost impossible for personal income statistics to fall.

Retailers are possibly the worst sector to be buying when personal incomes are dropping.  As incomes fall, so do the profits, and profit margins, of large retailers which may only make a few dollars per large customer.  Wal Mart and Target are certainly at the top of this list.  Target is going to have a harder time monetizing its traditionally more wealthier clientele.  Likewise, WalMarts customers are typically blue collar workers that are having trouble finding jobs or even to have enough money to spend on the necessities or the gas to drive.

One of the most important factors that is certainly lowering retailers expectations is higher gasoline.  Not only do high gas prices take money out of the customers pocket, it also limit’s the number of shopping trips or spontaneous purchases that American consumers make.  67% of drivers in a recent survey stated that they had limited or changed their driving activities as a result of higher gas prices.  People go to places to spend money, not to spend money to go places.  A trip to Wal Mart for many families costs $5-6 just to get there, that’s $5-6 they’re less likely to spend.  Multiply that by the thousands that may make a weekly homage to the grocery store, and its easy to see how margins are so easily squeezed.

The love for Google is starting to wane as its stock price is outgrowing its profit potential.  In the early days of $100 share prices it didn’t matter what Google was doing on the backend, its stock was going to soar as analysts piled on for reasons that might have seemed a bit frivolous.  Even today the stock is selling for a PE ratio of 32 that outpaces most tech stocks.  With a PEG ratio of .87 which is small but still high for a stock with so much risk to its earnings, Google might not have much room to grow in this web 2.0.

Consider all of its high class flops and large investments into sectors that seem a bit loose handed.  Its $1.5 Billion purchase of Youtube has led to little and its Google Apps eat more bandwidth than they do add to the bottom line.  Simply, Google cannot monetize the internet like it can search.  Strike that as problem one that threatens its business.

Next up you have the fact that internet advertising spending is slumping.  There are more websites than people and more advertising space can be created just by adding a page to a website.  Online advertising is a tough business to handle when more of it can be created just by adding pixels and code to a website.  Emarketer, a prominent research firm for online advertising has released revised numbers on expectations for online marketing.  The firm dropped its expectations on US online ad sales by $1 Billion to just under $25 Billion to rest at $24.9 Billion in 2008.  This also drops its growth rates to 17.5% from a figure of 22.2% in the US online advertising business.

What this means for Google and other online advertising sellers is that generating profits will have to come from the ability to sell rather than relying on good fortune.  Growth in the internet advertising sector automatically adds a base growth of 17.5% to advertising firms, thus additional growth has to come from either more customers or higher prices for its advertising.  Emarketer also stated that it expects online video revenue to come in at 66% less than originally expected to $505 Million from $1.4 Billion.  Sorry Youtube but you’ll have to work harder for your money.  The firm also expects little change in search engine advertising, which means that the organic growth of the online marketplace is essentially nil.  The fallout of the real estate market and less spending from automakers was cited as a reason for slowed advertising spending.  Real estate advertising is some of the most profitable advertising on the internet, especially on localized advertising sources.

Organic growth on the internet will not be around to prop up Google’s bottomline this time around.  Though it looks particularly cheap compared to others, the growth it has shown in the past will likely fall to levels equaled to that of tech stocks with tangible products such as Intel or Cisco.

An investment in commodities is not speculative, nor can it truly be called an investment.  Commodity players looking to hedge themselves against inflation are not investing or speculating but instead bracing themselves for the day that inflation truly becomes priced into the market.  Holding hard assets like gold or silver may seem like an investment, but it won’t pay off until a growing money supply and unchecked Fed powers are truly priced into the metals.

The rapid decline in the value of commodities seems a bit out of tune with reality.  Though the economy of the United States is faring better than that of Europe and Japan, there is still much work to do to restore full value to the US dollar.  Investors are fleeing the Euro and the Japanese Yen for the US Dollar which is comparatively performing well but the operative is comparatively.  The US markets are facing the same problems and delimmas as that of the European and Asian economies, it just so happens that recent numbers showed that the US wasn’t doing as bad as Europe but still doing poorly.

It should come to a surprise to any investor to see the great drop in commodities that has shaken the market the past few weeks.  Certainly it should have been expected that oil would fall from its highs, too many hedge funds and leveraged investors were snapping up oil without considering its intrinsic value as energy and not as a speculative investment.  This is the same kind of thinking that brought homeownership from a necessity of survival to a highly leveraged investment vehicle.

Though commodities are well off their highs, we believe that the bull market has truly just begun.  This coincides with the belief of famed investor Jim Rogers that the commodities market is just a few years in to what will amount to a historically repetitive 20 year bull market run.  What is happening with commodities is that investors are turning to assets rather than currency and instead of buying truly hard assets in the form of physical metals instead hedging themselves with exchange traded funds and mining stocks.  Paper assets are beginning to reflect the price for hard assets.  Try going to a bullion broker to buy physical gold or silver, chances are that its almost impossible to find.

Another reason for the fall may be a return to naked shorting of practically every metal across the board.  For a very long period of time, institutions and investment banks were holding more silver short than could possibly actually exist, creating phantom ounces of silver and gold and driving the price down.  Physical metals are indeed in a shortage due either to limited mining or a craving from investors.  Either way, the fundamentals that generally drive commodities prices are being ousted by paper trading on the worlds markets rather than consideration for hard assets.

As commodities continue to fall this looks like a great time to build a long term position into a bull run that will continue as soon as the world sees the lack of value in currencies and the value of commodities.  With gold under $800 and silver at the $12 level, investors need little outside reason to consider building a position.