Monday, April 30, 2007

Michigan sentiment tops expectations but continues trend lower.<

- GDP a downer but market hangs onto gains to close an important week.
- 2007 output starts softer as housing, trade deficit shave growth rate, offsetting solid consumer & business spending.
- Michigan sentiment tops expectations but continues trend lower.
- Earnings trend is solidly higher through the busiest week.

Fireworks mostly over by Friday as market coasts into the weekend.

Once more there was some adversity, some intrigue to try and upset the market. MSFT beat on earnings and was up, but there were a number of other techs (mainly chips) that missed, acting as a counterbalance. As for the economic side of the coin, GDP was rather crappy at 1.3%, the lowest growth rate since Q1 2003. After four years of solid growth the economy is taking a breather, thanks in part to the Fed, thanks in part to its own success.

After the solid surge midweek that continued the nice April advance this kind of news was enough to put most investors on the sidelines. It simply was not the kind of news to get investors running after stocks with their checkbooks out again. Quite frankly it would have been hard to top the excitement from earnings. Perhaps if the inflation component was weaker instead of stronger . . . but that is a moot point as inflation continued to skulk around in the shadows.

With that backdrop stocks still managed to open positive, and added some gain on the stronger than expected Michigan sentiment report (though still steadily lower the past several months). Once more, however, the midmorning dips hit, and the indices were negative by as the first hour ended. Once more, stocks bottomed and started a steady, albeit somewhat shakier, recovery well in to the afternoon. A last hour round of selling pushed the indices negative, and a late bounce could only turn NASDAQ and DJ30 modestly positive.

For the week, however, the action was solid once more. A Wednesday burst pushed NASDAQ to a new post-2002 high and back into its prior uptrend channel. DJ30 and SP500 moved back home as well, and in truth, they were the drivers of the week as the 'old economy' stocks of the 1990's are the new economy stocks for the rest of the world as noted Thursday. We heard more than one floor trader humming 'Back in the Saddle Again' to end the week.

Technically, it was just an 'end of the week after a gain' day: mushy. For the week it was excellent action: new all-time highs for the NYSE indices, new post-2002 high for NASDAQ, breaking back into the channels. The market continued to overcome potentially distressing news in favor of better than expected earnings. There was solid price/volume action as the indices broke sharply higher. There was big leadership from those 'old economy' stocks. There are more stocks setting up to move higher as the money moves through the market in waves.

There are still issues to confront the market though ignoring them has been in vogue this month as investors throw money at stocks. That is that 'head down' rallying we refer to when it doesn't seem to matter what the news is and stocks just continue higher. Oil is surging (closed at 66.46, +1.40 Friday with gasoline leading the push into our wallets). The dollar is falling hard (hit a new all-time low versus the euro Friday). No poor dumb government ever won prosperity by devaluating for its country. It won it by making some other poor dumb government's currency seem less valuable through policies that strengthen the economy and make the country a more desirable place to invest. Devaluating only fuels inflation. Any wonder inflation is not giving in? Aside from a weaker dollar, economic data continues to come in softer overall. Earnings are indeed much better than expected, but in the bigger picture they are still decelerating. Sure they are much stronger than thought this quarter, but that doesn't mean they will surprise again, particularly with the economy still slowing some. Indeed, a lot of the strength shown in Q1 results was found in the multinationals where currency played a role to the tune of 25% of the earnings.

Plenty of issues for sure, but the market is either rallying in anticipation of something better 9 or so months down the road, or it is just flat out overrun by world liquidity. Which is it? Yes. The market looks down the road to better times and the best long leading indicators such as ECRI still show a return to better growth later in the year. As for the liquidity, that is true as well. There is so much money running through the world's financial markets it only let the US stock market take a 4 week breather. The market always overshoots in the short term so there will be some deeper test ahead after this binge higher, but it can overshoot for quite some time before that happens.


First run at 2007 GDP is basically par for the course.

Of course the expected par was 1.8% not the 1.3% that showed up Friday. 1.8% was almost in spitting distance of Q4's 2.5%; 1.3% is not even worth puckering up to give it a try. Prices were outlandish, up 4.0% on food and energy (core was up 2.2%).

To look for the drags on the number, just round up the usual suspects: housing (-17%) and the trade deficit as exports fell. Housing carved 1% off GDP and the trade imbalance skimmed another 0.5%, right off the top. Add it back in and you have a 2.8% reading. Hey, break out the bubbly; after a few glasses we can add everything back in and have a 4% growth rate.

On the positive side business investment rose 2%, nice to see a gain after the declines. Equipment and software rose 1.9% after a pitiful 4.8% Q4 decline. The consumer was great as well with a 3.8% gain on top of Q4's 4.2% rise. Gasoline is high, but wage growth and jobs are offsetting that for now. It will be interesting to see how $4/gallon gasoline impacts that this summer. Recall how post-storm 2005 prices hit over $3 and stalled demand for gasoline and curtailed some travel. It happened briefly in 2006 as well. That will make things very interesting in the Chinese curse way.

Michigan sentiment higher than expected but still lower than before.

In January the Michigan poll takers braved the cold to take the pulse of the US consumer. They found enough positive attitudes to push the results to a 2 year high. Gasoline had been on a decline since August 2006 and when gas is cheaper after a spike, consumers feel great. As gasoline jumps back up since January, sentiment has flagged. When petrol approaches $3 consumers get edgy. They don't clam up, they just get edgy.

Thus the April read was 87.1, down from 88.4, 91.3, 96.9 and 91.7. Steady trend lower, indeed a 7 month low, but expectations are up 12% from the August low, and given the rise in gasoline prices that is somewhat impressive.

Despite the trend lower, levels are still well within the range that shows continued consumer spending. The trend can always continue lower and take us into jeopardy (in the low 60's to the 50's), but there still is an awful lot of good news on the horizon to offset the economic worries of the past couple of months spurred by the sub-prime woes.

ECRI looks down the road, and as with the stock market, sees things it likes.

So much air time is spent on the economic future. The bears smell blood with the housing issues and with the Fed still in the game (at least with respect to its public image). Thrice weekly they are on the financial stations predicting a major meltdown. It just has to be. The consumer is tapped out after a buying binge. The decline in housing only exacerbates feelings of wallet impotency or purse envy. Gasoline prices will drive more nails into consumers' coffins. Earnings are declining. The dollar will implode. Inflation will spike. Foreigners will stop funding the US trade gap. The Bible talks of pestilence overtaking the world in the latter days, of seven signs of the end of the world. There are seven there that the bears cite with the regularity of someone on a high fiber diet.

The problem with those prognostications? There are at least hundreds of variables dealing with the above mentioned issues, and you can name as many countervailing issues that undermine those. These fellows cherry pick the ones that make their point and they repeat them as often as possible. Problem is, when you cherry pick with a foregone conclusion you are doing nothing more than relying on supposition based on incomplete data similar to Al Gore concluding we are the cause of the earth warming. Don't bring the sun into it; it is only the source of the heat and changes in its energy output directly impact our temperatures. Heaven forbid you include those changes in your calculations, especially when temperatures have dropped 0.04 degrees since 1978, after rising only 0.5 degrees in the past 50 years versus the 1 degree in the 100 years before that. Thus the world's temperature is not rising at a faster pace, but no one seems to be paying much attention to that fact.

The point: look at what works; look at what accurately tells the truth. ECRI has the best track record for predicting economic cycles. What does ECRI say right now on the week that pitiful Q1 GDP report was issued? The weekly gauge of activity popped to 141.6 from 140.4. The annualized growth rate rose to 4% from 3.6%. None of the ECRI data suggest the economy is going off the edge. Indeed, it still indicates, as it did early in the year, that there is growth out in the late summer and early fall after this mid-cycle slowdown. Could it possibly be this is what the market is building in? Well, yes.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

Technorati tags:

No comments: