U.S. stocks advanced Monday as there were no signs of panic over the Middle East situation.   Another hot manufacturing report (be nice to see the same vigor in the labor market but fat chance of that with input costs rising) and strong earnings from Exxon Mobil helped propel equities. 

The S&P 500 gained 2.26%, the first January gain since 2007 and the best monthly start to the year since 2006.  The Dow’s 2.72% rally marked its best January since 1997.

Stocks even shrugged off the vocal re-emergence of the Egyptian Muslim Brotherhood (I advise taking some time to research this clan).  The group has been hiding behind the Noble Peace Price (Mohamed ElBaradei) -- lay low and allow their “centrist” fountainhead to lay the groundwork. But now that it’s clear neither Muburak nor one of his confidants will survive this, the group has gone public in organizing protests.   This is really what the concern is all about.  Does what has been a stable regime (from the West’s perspective) fall and tilt the region increasingly toward the Islamists?   

Energy and basic material shares rallied 2.56% and 1.59%, respectively, to lead the market.  Consumer staples and utilities were the laggards.

The Dollar Index resumed its latest slide, one of the best indicators that traders remain complacent – as we’ve talked about for a while now, until QE is halted the dollar is unlikely to gain traction unless the safety trade returns. 

And with the greenback down, the CRB Index pushed to a fresh post-crisis high.  Hogs, crude oil (closed back over $92), cotton (new record high) and wheat (closing in on its record) led the commodity index higher.  Rising food prices are at least one of the sparks behind these protests within emerging-market economies where food outlays account for a high percentage of income.  In Egypt it’s about to become even more acute as the economic shutdown that’s occurred will lead to serious shortages. 

Market Activity for January 31, 2011

Sector Activity for January 31, 2011

Personal Income & Spending

The Commerce Department reported that spending outpaced incomes for the fourth month in five during December. 

Personal income rose 0.4%, while spending jumped 0.7% to round out three months of consumer revelry.  As a result, the cash savings rate slipped to 5.3% from 5.5% in November and down from the 18-year high of 8.2% hit in May 2009.  Of course, the consumer doesn’t have quite the needy feeling for cash these days as the stock market continues higher – the Fed knows spending is very much a function of stock prices, which is why they’ve abandoned conventional monetary policy to prop stocks.  

The income numbers look pretty good.  Rental income led the way for 2010, up 10.4%.  Proprietors income advanced 6.4% (boosted by a 60% surge in farm income). Government transfer payments were up 5.8% (but down from 8.0% y/o/y as of August; gov’t help cannot last forever).  Dividend income was up 4.5% for the year.  The key private-sector measure (wages & salaries) advanced 3.5% for 2010.  Interest income declined 1.4%.

Disposable income (after-tax) was up 3.4% for the year. Although take out the record-level of government transfer payments and the y/o/y results are somewhat weaker, up just 2.2%.

Income growth will begin to outpace spending again whenever the stock markets reverses course.  At which point, the consumer will cherish cash savings again. 

Chicago PMI

Manufacturing activity within the Chicago region remained hot in January, and getting hotter.  The Chicago Purchasing Managers Index (PMI) rose another two points to a reading of 68.8 – a level hit just 3% of the time over the past 30 years. 

All sub-indices gained ground, except for supplier deliveries and inventories (although both remained at high levels).  New orders rose 3.5 points to 75.7 (remember it only takes a reading over 50 to mark expansion), orders backlog held steady at 60 and employment rose nearly six points to 64.1 – a reading that’s been topped only one time before, in December 1983 when nonfarm payroll growth averaged 503K/month in the six months that surrounded that reading; today that average is 126K/month.  

Then we have the prices paid, reading, which hit historically peak levels – up 25 points since September.  The only time this reading has sustained these level is when CPI averaged 8.5%/year (circled below), so we’ll see what happens this time.  But with very little pricing power, firms can’t simply pass these costs on right now.  That means these input costs will continue to eat into profit margins.  If they can’t pass them along in a timely manner, then the profit cycle will die and so will this expansion.  

Have a great day!

Brent Vondera, Senior Analyst

www.acrinv.com