U.S. stocks gave back nearly all of the prior two-session rebound on Friday as the broad market declined 2.51% for the week – the first meaningful pullback in 10 weeks.  The Dow held just about the 11K mark, but slipped 1.75% for the week.  The NASDAQ got thumped by 2.73% last week, but is still up 14% over the past three weeks.  The broad market made a key reversal as it hit a new 19-month high, failed to hold that level, and dipped below the prior week’s close. 

Financials led the declines, the group generally leads no matter the direction, falling more than double that of overall market.  Tech, industrials and consumer discretionary shares rounded out the worst-performers.  The S&P 500 index that tracks utilities shares was the sole gainer, up about 0.5%. 

Greece struck a EU/IMF deal but it effectively ensures the country will remain a zombie as a huge percentage of its revenue will be necessary to pay these loans back – revenues that will already be depressed as its economy has become ultra-dependent on government spending.  The Greek government also pushed out its schedule for getting the deficit within the 3%-of-GDP EU guideline – although “guideline” isn’t the correct word as budgetary rules are not enforced and can’t be based on the zone’s massive entitlement programs.  They now say that the threshold will be met by 2014, previously stated to be achieved by 2012, but that’s highly unrealistic as well.  The deal will involve direct loans to Greece, for now planned at $145 billion over three years with EU members on the hook for $80 billion of it. 

Market Activity for April 30, 2010

First Quarter GDP (Advance)

The  Commerce Department reported that the economy grew at a 3.2% real annual rate in the first quarter (just slightly softer than the 3.3% expected), which follows the 5.6% increase in the fourth quarter – positive GDP for three quarters now .  This is the advance look at GDP, meaning it is the initial estimate; there will be two revisions over the next two months – the average revision from the advance reading to the final intermediate revision is +/- 0.6 percentage point.  I say intermediate revision because the GDP figures are revised annually for several years.  

Growth was fueled by a large increase in personal expenditures and actual inventory rebuilding (so this is the first quarter since Q4 2007 in which actual inventory building has occurred instead of just falling at a slower rate, which is all it takes to contribute to GDP.   

Capital expenditures (capex) increased 13.4% vs. the 19.0% in the fourth quarter – those Q4 results followed the largest decline in capex since at least 1947.  This back-to-back increase shows the business spending in the previous quarter was more than just year-end budget spending.  Corporate America is the segment of this economy with the cash and they’ve got a lot of it to spend; if they’re to keep it going we’ll need continued increases in executive confidence. 

Residential investment (housing) fell 10.9% and makes up a record low of 2.7% of GDP, down from 7% at the housing-market peak.  Don’t expect housing to contribute again anytime soon.  The residential construction that took place in the fourth quarter did nothing but delay the point to recovery; the overhang from distressed sales and millions of foreclosures in the pipeline will keep home construction very weak. 

Investment in nonresidential structures (commercial real-estate) decreased 14% after an 18% slide in the fourth quarter.  

Real Final Sales, a measure of final demand in the economy, remained anemic as it advanced just 1.6% and this is also what it has averaged during this three-quarter expansion.   This is less than half what is normal. 

Side notes on consumer spending and overall growth: 

On the consumer, exclude transfer payments and income was up just 0.5% at an annual rate for the quarter (down 1.6% over the past year), yet spending rose at a higher-than-average 3.6% annual rate.  As a result, the cash savings rate fell from 3.9% to 3.1%.   To offer a little more perspective, social benefits rose $61 billion in the quarter as total spending was up $130 billion.  

Now, luxury-goods sales are really bouncing back, from a very low base but still bouncing big.  Of course, Wall Street is rolling again (you can track the slump in luxury goods purchases right along with stock prices and overall trading activity); this results in big bonuses.  So, the improvement on the luxury side says the spending is about more than just government spending, but the payments to those who are unemployed cannot extend with such force for long, and overall spending will feel it a couple of quarters out. 

Also, watch for personal expenditures to be strong again this quarter as the home-borrowers’ tax credits roll in – you may remember that late last year we talked about how the tax-credit effect would temporarily boost spending.   It will be the third and fourth quarters that disappoint on this front, unless something huge happens in the job market. 

On overall growth, think about this.  Even with massive transfers payments, a specific $787 billion in stimulus (the bulk of which was reportedly deployed in Q1), the Fed at zero, gargantuan Chinese stimulus (boost to our exports) and $8,000 refundable tax credits, the economy still cannot hit levels that are normal coming out big contractions.  GDP should average 8% for the year (one-quarter removed) following an outsized  recession.  It’s on pace to do half that this time.  My feel is we’ll do 4.5% for this quarter, 2.0% in the third and maybe another 2.0% in the fourth.  We test contraction after that.

Chicago Purchasing Managers Index

Chicago PMI for April corroborated what the other regional factory surveys have signaled: factory activity has been robust for two months.  The figure came in at 63.8 from 58.8 in March -- economists had expected a reading of 60.  This is seriously hot territory, but these factory reports are not measures of degree, just direction.   That is, it shows the increase of respondents stating they are in growth mode, not how fast things are. 

All sub-indices were stellar with new orders smokin’ at 65.2; order backlogs up seven points to 61.4; employment to 57.2 from 53.0.  Inventories fell to 50.1, but anything right around 50 is good for this segment.  Price paid continues to climb, up 4.8 points to 71.4 – the 30-year average is 62.4. 

Today we’ll round out the manufacturing story for April with the ISM.  It should post a big number and complete a two-month acceleration that has taken factory activity from solid to robust.  We’ll need the demand to be there six months out to keep this growth in factory activity going.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com