Good News - Nothing Bad Happened
by Guy Baker
Over the last month, little has happened to make one optimistic, but the good news is there has not been any new or unexpected bad news. A missile test here and a bomb detonation there aside, the month was relatively calm. All that may have contributed to another impressive week for the stock market. But lest we be fooled, there are plenty of storms ahead.
Maybe you saw that the latest GDP report showed the nation's output fell -5.7%. On the surface, that is catastrophic. But it was better than the estimates which predicted -6.1%. Why?
- Exports and inventory figures were better than expected.
- Consumers spent more for the first time this year. Probably reflecting the end of tax time.
- Markets saw corporate profits rise for the first time in seven quarters.
According to Moody’s "The U. S. economy remains in the most serious downturn since the Great Depression, but growth should resume in the fall." Here is the evidence cited:
- Durable goods orders were up sharply in April, and included the first gain in motor vehicle sales in the last six months. (GM just went bankrupt on June 1, becoming Government Motors as the barbs like to call it.)
- Consumer confidence rose for the second month in row based on the Conference Board statistics. The CB is telling their audience "the worst is now behind us." Hope they are right.
- New home sales were up +2.9% in April, but the median sales price was down 14.9% from a year ago to $204,000. Even though new home sales were up, the annual rate is 352,000 compared with 1.3 million sales in 2005, the peak of the housing boom.
Bottom Line: Most of the economists I follow are not so confident things are that much better. They see inflation, higher interest rates, increased taxes, high government spending and the mortgage debt as looming problems that have yet to be solved. So figure this is going to last at least another 6 months or longer. Even so, the stock market reflects future optimism and expectations. So the market may continue to rise, looking ahead to 2010 or even 2011.
THE MARKET
With the improved GDP outcome, increased orders for durable goods and improved consumer confidence and spending, the markets went higher. The Dow [+2.69%; -3.14%], the S & P 500 [+3.62%; +1.79%], and the NASDAQ Composite [+4.87%; +12.51%] all had positive results for the month with the S & P 500 and NASDAQ reaching positive gains for 2009.
Since the market reflects future economic results, the improved corporate profits helped the markets move to positive territory. I still feel this is the march of the lemmings, so I am reluctant to suggest moving new money into the market. The rash of economic negatives are still too potent to be optimistic this is over. A strong showing from 2Q earnings would go a long way towards reinforcing the market's enthusiasm. But for now, I think it is best to sit on the sidelines and wait to see what happens.
Despite the warnings of higher inflation, treasury rates stayed relatively steady. Is inflation really a harbinger of future doom? Too early to say, but the warnings are certainly there. For now, high government spending is being coupled with high borrowing to pay for it. This money is being infused into the economy because consumer spending is down. The result is that there are few dollars chasing goods and services. Not exactly the formula for inflation. But it could be in days ahead.
Economists were puzzled last week when the 10 year treasury bonds jumped to a six month high of 3.75%. The spread between 2 year and 10 year treasury widened to 2.75% which is much steeper than in recent months. Watch the treasury rates and see if they are moving up compared to 20 and 30 year treasuries. If that happens, we may see more volatility in the capital markets. What we don’t want is an inverted yield curve which drains the market of long term, stable capital.
The U. S. dollar declined against the Euro (€) because of the inflation fears. Currently the rate is $1.4158. Is it possible it will drop more? Yes, but will it go to the $1.57 level of last summer, probably not, but it is hard to say at this point.
Oil continues to be a ping pong in economic posturing. It ended the week at $66 but some analysts are predicting $75-$80 per barrel. You may remember last year the price was as high as $140 per barrel while this winter, the price declined to $40 per barrel. What is the stabilization price? Most think it is somewhere around $85 per barrel.
The price of gasoline has risen 35% in recent weeks. Per gallon prices are almost a dollar higher than they were at the beginning of the year, and it is likely we could be looking at $3.00 per gallon as a national average by the end of the summer. Happy driving.
In case you missed this
S & P's National Home Price Index reported home sales are 19.1% lower after the drop in the first quarter of 2009. This is the biggest drop in the 21-year history of the index. Based on their data, home prices have fallen 32.2% since their peak in 2Q 2006 and are at about the end of 2002 values.
Unless you are selling your house, this may not matter. But to people who are trying to buy, this is great news. If you are selling, on the other hand . . . But that is what economists do – talk about the other hand.
See you next month.