Which stocks should we be watching most closely to gauge the health of the economy in the coming months? A year ago we'd have topped the list with Citigroup, which seemed destined to thrive as long as the Fed was in easing mode. However, a glance at the chart below shows that Citi shares have fallen steeply even as monetary policy has shifted once again toward aggressive stimulus. In theory, as long as the central bank continues to push administered rates down, Citi and other banks should be able to rake in mountains of 'free money' by borrowing short and lending long. In practice, though, the tightening of mortgage lending standards has drastically limited the supply of qualified borrowers, which in turn has caused CDO markets downstream of U.S. real estate to become skittish and tight. Moreover, recent court decisions in the U.S. threaten to turn these markets upside down, since it's unclear who holds legal title to homes that have been financed, ultimately, via securitized debt. The big surprise in all of this is that the consumer economy has continued to function more or less normally despite a growing deflationary crisis in the real estate sector. We can only surmise that the phrase 'Shop till you drop' has become literally true for America, and that retail sales will not collapse until unemployment surges to recessionary extremes. In the meantime, the stock market continues to act as though just a few companies, most evidently Apple, Google and Research In Motion, are the economy. Although we seriously doubt this illusion can persist for much longer, there is no gainsaying its ability to outlast the hubris that gave it life. ### Your Last Chance! 'While perusing some of your posts chronologically from months back, I'm truly struck by the remarkable prescience of
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