U.S. stocks shook off early-session weakness to gain ground for a fourth-straight session on Tuesday.  The broad S&P 500 has jumped 15% over the past two months, bouncing off of the late-January pullback of 8%; the market has its eyes set on the pre-Lehman collapse level of 1250 – about 4% above yesterday’s closing price. 

This 57-week rally from the 13-year low hit on March 9, 2009 currently stands at 77%, as measured by the S&P 500. 

Consumer discretionary, technology and industrial shares led the gainers.  Consumer stocks got a lift from the latest trade balance report that showed strong import activity in February; without fear of sounding repetitive, I’m highly skeptical of the idea that consumer activity will improve in a consistent manner – appears to be a minority view, but I’m fine with that.

The four industry groups that closed lower yesterday were energy, utility, basic material and telecoms. 

On the EU sovereign-debt financing front, Greece sold $2.12 billion in 6-12 month Treasury bills on Tuesday and demand was super-strong with bid-to-covers at 7.67 for the six-month paper and 6.54 for 12 month – a figure approaching 3.00 is strong.  But Greece had to pay up as yields came in at 4.55% and 4.85%, respectively.  Dang, U.S. savers would love deposit rates even half these levels – sit tight, we’ll get them in time.

So the EU states that they’ll come to the rescue of Greece if they have trouble funding government debt, which means risk of default over the next 12 months is about zilch.  I wonder what Greece would have had to pay without that backstop, 7-8% on 12-month paper?  What will they have to pay when this debt needs to be rolled a year from now?  Which begs the question: where will EU budget-deficit funding costs rise to when Italy and Spain run into trouble?   Germany and France won’t be able to bail them out too, without driving their own borrowing costs higher.   This story has only just begun.

Market Activity for April 13, 2010

NFIB Small Business Survey

The National Federation of Independent Business (the largest small business organization) reported that their small business optimism gauge fell to 86.8 for March from 88.0 in February.  As we’ve touched on, I’ve watching for this reading to rise above the 90 mark; the index has been stuck below even this weak level for longer than any time in the survey’s history, which goes back to 1974.

Nine of the 11 major components of the survey either fell or came in unchanged from the previous month.  Plans to hire fell, expecting higher sales fell, easing credit conditions fell, good time to expand fell, positive earnings trends fell to return to its record low, increased capital spending fell to just above its record low reading.  The plan to increase inventories response was unchanged from the abnormally low level of February, inventory satisfaction was unchanged. 

Only higher selling prices and expect better economy responses rose, but these were slight improvements from very depressed levels. 

Something is scaring small business owners about the future.  We’ve talked about this for some time.  Business owners know what follows huge government spending cycles:  Government goes on the hunt for revenues and they’ll try to find it in every and any way possible.  Add on higher costs to insure employees -- or the additional tax rates that firms will be hit with if they say “screw it, I’m not dealing with this uncertainty” and push employees onto the government exchange -- and it’s no wonder why these owners remain negative.  Small business confidence about the future is very important with regard to hiring and equipment spending.    

This NFIB survey has been a leading or coincident indicator over the past 35 years of its existence.  That is, it improves prior to or along with higher GDP readings.  Now, it is very much lagging.  We’re going to get the third-straight quarter of positive GDP when the first quarter results are released at the end of April, yet NFIB remains stuck below 90.  True, GDP has been hugely helped by the inventory dynamic (and a weak dynamic at that as inventory building has not totally begun, stockpiles have just been reduced at a slower rate) and massive global government stimulus.  Still, it is unusual for NFIB to lag like this. 

Trade Figures

The trade deficit for February widened for the third month in four to -$39.7 billion (wider than the -$38.5B expected) from -$37.0 billion in January.  It wasn’t all petroleum either, as is often the case, as the ex-petro deficit in trade widened to -$16.8 from -$14.4 billion – although this does show just how much our restrictions on domestic energy production are responsible for our deficit in trade.  It’s funny how the same people who commiserate over this deficit are many of the same people who advocate restricting domestic energy production – I doubt they even get the connection.

Import activity easily outpaced that of exports as the former rose 1.7% to $182.9 billion for the month, while the latter increased just 0.2% to $143.2 billion. 

A large 25% decline in commercial aircraft (a likely payback after the 44% surge in December) held export activity down.  Export of capital goods, semiconductors and autos looked good. 

Imports were fueled by semiconductors, crude oil, pharmaceuticals and televisions.  The big increase in TV imports was probably due to some inventory replacement as new home borrowers spent those tax credits to come and bars and restaurants bought better screens in January ahead of the Super Bowl – French Quarter establishments alone could have driven most of the demand on “Who Dat?” hysteria.

The real goods trade gap, which adjusts for the influence of prices and is used to calculate the trade component of GDP, widened more than expected.  The real goods trade deficit hit $42.5 billion from $40.9B, and is about 5.5% wider than it was in the first quarter of 2009.  Unless the gap narrowed in March, we’ll get that data next month, it will shave 0.3-0.4 percentage point from the first-quarter GDP, which prior to this data was expected to show an increase of 2.9%.  (I still think we’ll hit 3.0% GDP for Q1 as prior to this data I think 3.5% was more likely than the consensus estimate of 2.9%.)

Intel Inside

Last night Intel reported stellar first-quarter results as revenue jumped 44% and operating profit more than tripled – it was the best fiscal second-quarter (calendar-year first quarter) results in the company’s history, which goes back to 1968. 

Now, before we get too excited I should point out that fiscal Q2 is normally the weakest period for the chip giant, which means the comparison was easy –  even easier than normal as business spending slid during the first three-months of 2009 at a record pace (at least going back to 1947) and that means the maintenance equipment spending by business was all the more spring loaded for this past quarter. (Last year’s first quarter profit -- the period this latest number is being compared to -- was the lowest since Q1 2001.)  Intel has 70% market share and that means their chips are inside a lot of electronics equipment, the corporate refresh (that maintenance level of business spending) helped a lot.  Of course, Intel has been enhancing production efficiencies for a few years now and the slashing of payrolls has also delivered powerful margins.

The challenge for the stock now, which will open this morning around $23.80, is to break past $30; this has been the level of resistance since 2002 – the stock’s dotbomb high was $64.40.

The market is getting a little juice from the Intel results as illustrated by higher pre-market futures trading.  Stocks will likely gain additional momentum when the March retail sales numbers are released later this morning.  Although, the weekly mortgage applications index just hit the screen and it was ugly with purchases down 10.5%.  This wasn’t supposed to happen just ahead of the April 30 tax credit deadline.  We’ll touch on the specifics of the report tomorrow, but for now one wonders if this takes a little wind out of the stock-market’s sails as the day progresses.  

Have a great day!

Brent Vondera, Senior Analyst

www.acrinv.com