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August 30, 2001

The Overall Trend Is Down

Today's consumer spending news is more evidence that the economy is not turning around any time soon. In fact, it's the biggest piece in the "fate of the economy" puzzle. Until now, consumers have carried this broken economy on their backs. But in July, despite an uptick in income, consumers showed that they are becoming scared to spend, and soon they'll pare down spending to the barest of necessities.

Americans have seen a growing wave of layoffs lately. And many are scared that they'll be the next to get hit and won't find new employment quickly. For the second week in a row, those collecting unemployment benefits remained at the highest level in nearly nine years. And the layoff wave could grow even bigger as consumer spending slows further and wipes out the earnings of even more companies.

Investors got it right today when they knocked the Dow below the 10,000 mark, and punished the Nasdaq with a 2.8% drop. Most stocks are overvalued given their dismal earnings and dark outlook. Stock will have to fall dramatically to reach normal valuations. It may not be straight downhill from here, but it's a snapshot of what's to come.


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