U.S. stocks gained some ground for a second-straight session on Friday but backed off just enough from the day’s highs to make everyone wait yet another day for the 11K close.  The Dow Industrial Average was helped by the energy component as the rise in Chevron and Exxon shares accounted for one-third of the index’s gain. 

The broad market was fueled by energy, telecom, consumer discretionary and tech shares.  Basic material and health-care shares were the laggards, but all 10 major industry groups closed higher on the session.

The major indices gained ground for a sixth-straight week; the broad market is up 8% over this stretch.  For the week, the NASDAQ Composite led the way with a 2.14% gain; the S&P 500 rose 1.38%; and the Dow added 0.64%.  Mid cap stocks, as measured by the S&P 400, jumped 2.16% and small caps, as measured by the Russell 2000, rallied 2.77% -- mids are up 10% and smalls have gained 11.8% over the past six weeks. 

Market Activity for April 9, 2010

Latest Bailout Plan

Stocks should get a boost, at least at the open, from this weekend’s announcement that the EU will bail out Greece, if needed.  You could pretty much see this coming on Friday as Greece’s financing costs had jumped to the highest spreads over German rates since joining the Eurozone.  While it will take unanimous agreement to implement, this is the most specific intervention plan EU ministers have laid out.  

The terms of a deal involve loaning Greece up to $40 billion at 5% for three years.  People are talking about how this is a stringent intervention, but only compared to that of an IMF loan, which would carry an interest rate of less than 3%.  Greece’s cost of financing for three years currently sits above 6%, and was over 7% before this plan was announced; so it isn’t very strict now is it?  I can actually see Greece coming up with every reason under the sun to get their hands on this financing as it is certainly cheaper than the market will lend the country money -- and of course the Greeks know that EU demands to get a handle on their budget has zero bite to it, as we’ve seen over the past several years. 

This intervention is not official, as it would take unanimous consent among members to implement.  So for now, this is just another attempt at this “talk the market down” strategy.  Soon enough, talk will no longer suffice and the market will demand action or financing costs will shoot even higher. 

We’ll see if this opens up political divisions as German citizens are not at all interested in extending help.  But as we’ve said since this issue first hit the headlines back in December, the EU will ultimately rescue the Greek government.  From there who knows what Germany and France, the two strongest economies within the Eurozone, will be on the hook for with regard to bailout packages as Greece is just the tip of the iceberg. 

Wholesale Inventories

The Commerce Department reported that wholesale inventories rose 0.6% in February (+0.4% was expected) after a slight 0.1% rise in January and a 0.8% decline in December.  For the first time in three months the ex-petroleum figure rose, up 0.5%, which is a good sign as it shows merchants built stockpiles of other components.  The computer and grocery segments drove the overall reading – the optimism here is the build in computers as electronics firms sees some demand may be building.

The report showed sales rose 0.8%, and up 0.4% ex-petro, fueled by a large 2.4% rise in the auto segment.  Merchant sales have jumped 12% since hitting the cycle low a year ago, yet activity is still off 2008 levels by 13.5%.

I don’t like the fact that autos accounted for 44% of the rise in ex-petro sales – the increase in car sales we saw in January and February is probably not sustainable, even if the annualized figure shows auto sales remain 22% below the 25-year average.  That said, there was a good pick up in machinery equipment so hopefully we’ll see the business side of things drive things – hopes here are more reasonable as corporations are the ones with the cash and thus have the ability to keep the ball rolling. 

So we wait for Wednesday’s business inventories report, which includes retail stockpiles and sales.  Based on this rise within the wholesale figure, we’ll get an increase in overall business inventories for February. 

An increase will be needed since the January inventory figure was unchanged -- the inventory dynamic is still needed to boost the GDP readings.  Consumer activity will post a good number for the quarter (surely helped by first time home-buyer tax credit refunds) so the largest segment of GDP will help out, but growth is still very dependent on inventory rebuilding. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com