Bernanke’s press conference marked the high point for rates this week, as the “new era of Fed transparency” failed to end the era of “extend and pretend”.

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U.S. stocks bounced between gain and loss for most of day but hovered close to the flat line, until traders decided to push prices higher with about an hour left in the session.

I couldn’t determine what sparked the late-day rally, maybe it was confirmation by the Commerce and Labor Departments that economic growth has weakened and initial jobless claims continue to rise (biting sarcasm alert).   Sure, there were more good earnings reports yesterday, but when one adjusts for the industries that are benefiting from QE-induced commodity-price spikes (a situation that is in the process of creating economic harm) earnings growth is cut in half.  Besides, without meaningful economic growth the profit cycle hits a wall.  And again, I’m sorry for the tone – it’s getting old even to me – but this expansion is so artificially manufactured it’s silly; and even with the Fed more aggressive than at any time in its history and several iterations of fiscal stimulus, we can’t even manage an average rate of economic growth.

Financials, consumer staples and utilities led the broad market higher.  Energy and tech were the losers, the only two of the 10 major sectors that fell for the session.

The dollar lost more ground yesterday – blah, blah, blah stock traders don’t care.   However, commodity traders do care, which is evident by the continued rise in most commodity prices.  One supposes consumers also care, but they rarely make the connection between a currency that’s getting zombie stomped by the Fed and rising commodity prices. 

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Prices are rising all around us.  Even the Federal Reserve’s policy setting committee acknowledges that energy and other commodity prices have “pushed up inflation.” (See today’s Daily Insight from Brent Vondera).

Two weeks ago the Labor Department reported the Consumer Price Index (CPI) increased 2.7% from March 2010 to March 2011, led by increases in food and energy costs.  Yesterday, I stumbled across the graphic below from Flowing Data, which breaks out the prices changes over the past year.

It’s no real surprise that gas prices are up 27.5%, but I was a little surprised to see education costs rising more than food or medical care.  Many will note that the cost of apparel is lower in the last year.  Retailers have been enticing consumers with low prices, but prices will eventually begin to trend up as higher costs for commodities like cotton will eventually be passed on to the consumer.

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U.S. stocks rallied after the Fed released the minutes from the latest meeting (after spending the morning session flat-to-down) and rallied some more after the Bernanke press conference – apparently the market viewed his comments as dovish (meaning policy will remain very easy), which would make sense considering no matter how fast and hard commodity prices rise the Chairman continues to say it’s only temporary.   That said, there were some comments in the text that I believe point to some mild tightening (or at this point less easing) bias…more on that below. 

Responding to each question on inflation (which was the focus of nearly all of the questioning) he continued the refrain that higher commodity prices are “transitory,” along with the erroneous statement that inflation expectations are anchored. You see, to Bernanke the substantial rise in commodity prices since August is not a problem because it’s temporary.  That is, if the price of gasoline goes from $2.40 to $3.90 in a matter of six months but then falls back to $3.75, then inflation has decelerated.  Of course, you’re still stuck with a high price. 

Telecoms, health care, consumer discretionary and utilities outperformed.  Strangely, energy and basic materials were the biggest losers.

Bernanke’s comments stomped the dollar, as it slid nearly a full point to close at 73.13 on the Dollar Index (DXY) – that’s within two points of the all-time low of 71.35 (y/o/y import prices averaged 15% the last time the Dollar Index spent time below the 74 handle.   This morning the DXY slipped to the 72 handle. 

The price of crude rose even as the latest Energy Department report showed inventories jumped 6.16 million barrels last week (forecast to rise just 1.7 million) – this leaves supplies 15% above the five-year average.  The price of oil would never be this high (even with increased MENA tensions) without the Fed’s wildly aggressive monetary policy.   Wholesale gasoline rallied eight cents to $3.44, so don’t be surprised when you see $4.10 at the pump. 

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U.S. stocks were able to shun rising troubles in the EU and the wacky world of stocks and Treasurys trading in tandem yesterday as strong earnings results from 3M, UPS and Ford boosted investor confidence.   The S&P 500 has finally passed what had been a 32-month high hit on February 18, so we’ve got a new post-crisis elevation on our hands.  

A rising stock market, it’s a funny thing sometimes.  Funny in the way that it causes people to ignore issues that would normally raise alarm. 

One thing that’s getting overlooked is the severity of the EU debt contagion that lives on…but more on that below.  Another development is rising MENA tensions, a situation that is not likely to go the West’s way with regard to who fills the vacuum.  Another is the tightening campaign that’s occurring in Asia, a region that’s been a key area of global growth.  Yet another is the rising price of energy (specifically a pump price of $3.88).  And finally, the rally within the Treasury market over the past few sessions even as stocks push higher.  These two markets trading in tandem is strange (not for the weird trading environment that accompanies a QE world, but strange with regard to virtually any other timestep). 

You can’t have stocks going higher with the Treasury market pushing already historically-low yields even lower without something cracking (the Treasury market rallied again yesterday, pushing the 10-yr yield back to 3.30%).  While people can ignore this situation for now, in time we’ll find that one of these markets will be proven terribly wrong, and it’ll be ugly when that plays out. 

On the earnings front, S&P 500 profits are up 17.7% from the year-ago level (+21.4% excluding financials) as companies continue to dance around higher input costs, but it comes at the cost of employment (got to find the cost savings from somewhere).  As I’ve been harping on for a year now, it is the back-half of 2011 where the concern lies.  This is especially true as higher commodity prices begin to compress margins; you can also see early evidence of lower earnings results by way of NIPA profits, which is the economic profits number within the GDP reports, as the figure has dropped from double-digit increases to -3.3% as of the fourth quarter.   

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U.S. stocks ended lower on balance as the broad market (measured by the S&P 500) halted a three-session winning streak.  The Dow Industrials slipped too, but the NASDAQ Composite was able to extend its winning streak to four. 

European markets were closed yesterday, so no EU debt contagion to talk of per se – not that the market is currently concerned about the issue anyway. 

As one would expect via the positive close for the Naz, tech was the best-performing sector with health-care and utilities rounding out the three sectors that closed higher.  Basic material, energy and consumer staples led the losses.

Well, commodity prices couldn’t rise on Friday as domestic and dollar-based markets were closed, so I was expecting the commodity complex to make up for it yesterday.  It wasn’t the case though as the CRB Index held pretty much steady as price declines among copper, cattle and cotton offset increases in corn, wheat, silver and gasoline.  Yes, gasoline gained more ground, much to the dismay of everyone I’m sure.  I think it’s reasonable to expect commodity prices to trade pretty much flat over the next session-and-a-half as traders wait to see how Bernanke’s press conference goes tomorrow afternoon – a new policy decision by the Fed where the chairman will take questions following FOMC meetings. 

And the direction of the dollar certainly isn’t helping our commodity-price woes; the Dollar Index settled just barely in the $73 handle, closing the day at 73.99 – down 10% over the past year, 18% over the past five years and 35% over the past decade. 

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Well, the markets were closed for Good Friday so no news there to talk about.  Hey, at least commodity prices couldn’t rise!

But here we are in spring again, a year removed from the deep water explosion in the Gulf of Mexico (the well blew out on April 20 and by the 23^rd it became apparent the leak was going to be a problem) along with the initial stage of the EU debt contagion.  Also at the time, QE was in limbo as the Fed was between QE1 and 2 – the market was uncertain whether the Fed would come back with another round of money pumping activity. 

So a year later, here we are still.  We don’t have the BP disaster, thankfully, but we do have the EU debt situation raging and the Fed in another period of limbo – QE2 is scheduled to end on June 30, which Bernanke is likely to confirm on Wednesday.  EU peripheral credit spreads have pushed to record highs as Greece, Portugal, and Irish bond yields are between 6-11 percentage points above German yields (which is the benchmark) – and they should probably be wider.  This isn’t just a problem for these governments, but it’s a problem for the entire European banking system as it holds mass amounts of this debt.  Why do you think the EU/IMF have tried so desperately to avoid debt restructuring? 

Last spring we endured a 16% correction on the S&P 500 (SPX) that began on April 26 (the only real correction this now 34-month run has seen) and bottomed at 1022 by July 2 – showing virtually no ability to recover all the way out to late August; I thought for sure we’d see the SPX decline to the 900 handle where my fair value still resides.  But Bernanke rescued the market with his August 27 speech that signaled QE2 was coming. 

Now we watch to see how stocks react this go around.  The Bernanke Fed will certainly attempt to rescue the stock market if it slides again, but will they ultimately be able to do so with commodity prices this high?   (When they signaled QE2 was on its way in August the price of oil was $72/barrel, the price at the pump was $2.30 and the price of corn was 47% lower than it is today.  The point is, the Fed’s wildly aggressive policy has begun to hurt economic development so they may very well be forced to reverse policy sooner than most currently believe.

Whether it’s this go around or the next, the market will have to stand on its own at some point – or even have to contend with the unwind of the current policy.   Obviously I have no ability to time when the market will slide again, a prediction that went from nearly impossible to completely impossible due to the Fed’s manipulation of the markets.  But happen it will, just be prepared and don’t go stretching your risk profile by chasing current performance. 

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Bernanke will have his first news conference next Wednesday following the release of the FOMC statement. His first news conference is also a first for the Federal Reserve, who in the past has opted for prepared statements and mandatory questionings on Capitol Hill.

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U.S. stocks rallied again yesterday on another session of solid-to-strong earnings reports – the day’s economic releases weren’t quite so upbeat.  The gains sent the S&P 500 higher by 1.3% for the holiday-shortened week after beginning on a weak note as the broad market lost 1.1% on Monday.  The rally halted two-straight weeks of decline. 

The best earnings results continue to come from firms that receive most of their sales from overseas (specifically with meaningful exposure to Asia), from higher commodity prices, or both.  

Basic materials, tech, energy and consumer discretionary shares led the rally.  Consumer staples, utilities and industrials were the main laggards but did eke out gains. 

The Dollar Index recovered from Thursday’s intraday lows but still took another beating – down 10 of the past 15 sessions.  The only bounce the greenback sees is when fear arises – the twin peaks of fear in the chart below illustrate the run to the dollar (it’s a liquidity thing) when the financial crisis hit its crescendo and then again last spring when the EU debt contagion initially began to rage.  During normal circumstances, and periods of sane monetary policy, the greenback would tend to rise on strong domestic fundamentals – it’s hardly a perfect correlation, but vastly different than the trend we see today. 

The CRB Index has just about made it back to the post-crisis high hit on April 8 as the prices of industrial metals, silver, wheat, soybeans, sugar and the energy complex moved higher yet again.  Crude settled at $112.29/bbl and wholesale gasoline at a post-crisis high of $3.31, which is within 6% of the record high hit in 2008 when the price at the pump hit $4.31/gallon – national average is currently $3.85.  Don’t worry though, Mr. Bernanke says it’s not a big deal.

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For the first time since Standard & Poor’s (S&P) has added an outlook to its debt ratings, they revised the ratings outlook on U.S. debt to “negative” from “stable.”  

In my opinion, S&P’s action is a non-event partly because they didn’t say anything we didn’t already know and partly because credit rating agencies have lost a ton of credibility in the past decade.  Still, S&P’s concerns are reasonable and several readers have inquired about the situation, so it is probably worth discussing.

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