U.S. stocks extended the latest winning streak to five sessions on Wednesday after getting a boost from a strong retail sales report and positive comments from JP Morgan’s Chairman/CEO.  Oh, and a stocks received little more help from Dr. Zero as he told lawmakers that the recovery faces “significant restraints” – this pretty much assures no change in the next FOMC meeting’s language with regard to fed funds at virtual zero.

JP Morgan’s CEO Jamie Dimon stated the following: China is growing, India’s growing, Japan is growing, home prices have stopped going down, consumer income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.”  I guess he could but one’s got to question a few of those points. 

Asia is certainly growing, but we’ll see what happens when China reins in their massive government spending and loan activity (and even now it’s mixed as China just printed 12% GDP but Japan pretty much remains in recession); home price activity is precarious at best and existing home prices have engaged in second-round slide that has brought the median price back to the cycle low’ consumer incomes are flat, and that’s only because government transfer payments as a percentage of total income are at record highs, excluding these temporary payments incomes continue to fall. While he’s correct on spending and manufacturing activity, it seems his other assessments are a bit misplaced.  But he’s the Chairman/CEO of the second-largest bank by assets and I’m just this guy commenting on the data – I guess we’ll just have to wait and see how things play out. 

Financials led the rally, with tech and consumer discretionary rounding out the top spots.  Telecoms and health-care (again) were the only two industry groups to decline. 

Market Activity for April 14, 2010

Mortgage Applications

The Mortgage Bankers Association reported that their applications index slid 9.6% in the week ended April 9, following an 11% plunge in the prior week.  Both applications to purchase homes and refinance mortgages fell hard.

With the 30-year fixed-rate mortgage holding above 5% (man, how the housing market has become conditioned to low rates), it’s no wonder refi activity fell for a fifth-straight week.  The average 30-year mortgage rate did fall last week to 5.17% from 5.31% but anything above 5.00% has generally not inspired refis. 

The surprise was the 10.5% decline in purchases, which was not suppose to happen until after the tax credit expired (must have the contract signed by April 30). 

CPI

The Labor Department reported that the Consumer Price Index (CPI) rose 0.1% in March and was higher by 2.3% from the year-ago period – the month-over-month reading matched expectations, the year-over-year figure came in just below the estimate.

So the inflation gauges remain tame, but the transportation component (makes up 16.7% of the index) was held down by a drop in the way CPI measures gasoline prices.  (That’s going to change over the next couple of months as the retail price of gasoline must reflect the 15% jump in wholesale prices since mid-March.) 

Another thing to consider is the housing component, which accounts for 42% of the CPI.  This component has been flat for 14 months as rents are held to the mat.  Exclude the effect of the housing market on inflation and CPI is up 3.8% year-over-year.  I’m not saying inflation is going to rage any month now, but the longer the Fed hold their policy at zero, the greater the chance of this thing getting out of the bottle…and once it does, the tightening (higher rates) necessary to stuff it back in is economically pernicious. 

Retail Sales

The Commerce Department reported that retail activity was strong in March as the overall reading jumped 1.6% (1.2% was expected) and ex-autos was up 0.6% (edging the 0.5% estimate).  Retail sales got a boost from an early Easter (fell in the first week of April so the final week of March was helped), the return of warmer weather following a harsh February (most evident in the rise within the building materials and clothing segments) and first-time home borrowers spend some of those tax credits that either have arrived in the mail or will be coming soon (most evident via the furniture segment, which is up for two months now). 

I don’t think one can say this increase is a result of a healthy consumer, not with nearly 10% official unemployment and near-record debt levels.  Motor vehicle and parts sales jumped in 6.7% during March, and with loan-to-value ratios averaging 90% (as measured by the Federal Reserve) the necessary household debt pay down is occurring very slowly – Fed-induced low interest rates are delaying the inevitable need to reduce debt loads.  

Yes, the vast majority of the labor pool is working and there is some pent up demand among those with a job, but everything is on the margin and as a result 10% joblessness (which has only occurred on two occasions in the postwar era) does matter. 

The report though was a strong one, only the electronics and gasoline station segments registered declines for March.  Consumer activity is going to help boost the first-quarter GDP report, along with the inventory cycle.  This is why I believe we’ll see a 3.0%-plus reading, the consensus estimate currently stands at 2.9%.  But there will be payback to this spending; there will be a payback to the way the government has chosen to attack what was a nasty recession.  For now, enjoy it while it lasts.

Business Inventories

Business inventories rose 0.5% in February following an upwardly revised 0.2% increase in January -- initially reported last month as being unchanged.  So, the inventory dynamic will boost GDP again for the first-quarter, as discussed above, and this should remain the case for another couple of quarters.

The report showed sales rose 0.3% for February after the 0.7% increase in January.  This latest sales rise is the weakest we’ve seen since September, but it extends the streak of monthly gains to five.  Sales are obviously essential to a continued rebuilding of inventories – essential to production. 

This latest report marks the first time in this nascent recovery in which the sales data failed to outpace the rise in inventories.  This is nothing to worry about just yet, but if it becomes a trend then it will mean a curtailment in production – something that concerns me about 8-9 months down the road.

Beige Book

The Fed’s report on economic activity within each of its 12 districts explained that activity increased “somewhat” over the six weeks ended April 5 across all districts except good ol’ St. Louis, which reported “softened” economic conditions. 

Straight from the report, my comments in parenthesizes:

Districts generally reported increases in retail sales and vehicle sales; tourism was up in a number of districts; reports on the service sector in general were mixed; manufacturing was up in every district except St. Louis; many districts reported increased activity in housing from low levels (suggests we’ll get bounce in March, the data up to February showed a three-month slide in sales); commercial real estate activity remained very weak; activity within banking and finance was mixed as loan volumes and credit quality decreased (the banks better not get too excited about reducing provisions); while labor markets remain weak in general, some hiring activity was evident, particularly for temporary staff; retail prices generally remained level, but some input prices increases (no kidding, but Dr. Zero continues to scoff at the prospects of commodity-price inflation).

Don’t let the date get you down; have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com