U.S. stocks marched higher on good earnings reports, moving above the 1200 mark on the S&P 500.  This puts the broad market within 4% of its pre-Lehman collapse level.  The tech-laden NASDAQ Composite has already fueled past its pre-Lehman number of 2300, crossing the 2500 mark for the third time in a week so we’ll see if we can hold it this time.

Profit reports are looking good again this quarter, the second quarter of improvement following nine periods of decline; although the theme among the multi-nationals has been Asian growth, with sales from the Americas weak-to-flat relative to the year-ago period -- IBM and Coca-Cola’s results were the latest examples.  Also, corporate cost-cutting via payroll slashing is the primary boost to profits.  This massive cost-cutting is both good and bad.  While it helps the profit story, it stings personal incomes – exclude the $365 billion in transfer payments over the past 18 months, which cannot be sustained anyway, and personal income is down 4% over the last year-and-a-half.

As we’ve discussed, this profit cycle should extend for a few quarters, but for it to prove the multi-year run that is usually the case we’ll have to see the final demand necessary to fuel top-line improvement; that means several quarters of above-average GDP that is required for strong job growth.  The requisite household de-leveraging process once job growth picks up will prove a headwind for consumer activity.  If stocks hold these gains, it will make the process easier; if not, then consumers won’t have that relative wealth effect that helps propel spending.  For now, the more cars bought (as 0% loans and $0 down is all the rage again) and the more iPhones purchased by generations X and Y that just can’t do without their gazillion apps, the necessary de-leveraging is only delayed. 

Market Activity for April 20, 2010

Greece Wants to Know: Is Eight Enough?

Yesterday’s 13-week bill auction by the Greek government went very well as demand was strong and the rate the government had to pay was lower than many had expected – 3.65% yield vs. the expectation of something over 4%.  But this auction didn’t help the long end of the curve as the 10-year government note has surged to an all time record high of 520 basis points over German bunds – which means a yield of 8.28%.  The lower borrowing cost on the 13-week bill is nice, but doesn’t exactly help Greece’s funding problem.  They’ll need to roll debt using long maturities and the continued jump on the long end makes the rescue just a matter of time.  So we’ll see if eight is enough (will Greece achieve strong demand for their long bonds at 8% or will it take something much higher?), but I’m guessing Greece is going to trigger that EU/IMF rescue ASAP.

Reversal of the Slump…and the Hope We’ll Escape 3 at the Pump

It may not sound like a low price, but oil/barrel hit the $80 handle Monday and provided the hope we may move into the $70 handle. Crude had rallied all the way to $87/barrel on April 6 as it looked ready to move past $90, but the April 7 energy report got in the way.  Within that weekly energy report, the Energy Department stated demand for all petroleum products will drop to 18.84 million barrels per day this year, which is about 10% below the average of the previous few years.  The volcanic ash from Mt Whatchamacallit and the near term hit to global petro demand also played a role in crude’s slump.  Even when the air clears, the International Energy Agency believes energy consumption within the 30 major industrialized countries will remain about 8% lower than the average of the previous few years.

But the crude trade is back on its horse this morning, partially because we roll to the June contract this morning, which was trading a bit higher than the May contract that expired yesterday, but also because the market is getting juiced again following Friday’s brief financial-sector scare.  So we’ll see if energy demand improves over the next several months, but for now crude is back on the rise.  If oil can just hold here in the low or even mid-80s, we may just escape a $3-plus pump price.  That would be welcome news for the consumer, but of course the relatively low demand numbers show something still isn’t right – not a surprise with 10% unemployment.  But if traders push oil above $90/barrel, a reflex to the Fed’s continuation of ZIRP, then $3-plus gasoline is inevitable.  Thank Dr. Zero when it occurs.

ABC Confidence

The index of consumer confidence from ABC News fell for a second-straight week to return to the -50 mark – a reading below zero means the number of negative responses was greater than those that were positive.  The figure has dropped seven points since some believe it had stabilized in the -40s a couple of weeks back.  I don’t usually comment on this survey, but we were without a major economic release yesterday. 

The state of the economy survey has been below -75 for the longest stretch since the survey’s inception, although it only goes back to 1985.  The personal finances survey got hammered, falling to -14 from -6, even with a magnificent 78% run in stock prices from the March 2009 low. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com