U.S. stocks gained ground for a fourth session in five Friday, getting a boost from Oracle’s strong earnings results; the enterprise software giant also raised their guidance for the current quarter. 

Mideast tensions continued to rage and the #3 reactor at the Fukushima nuclear plant reportedly has a larger radiation leak than previously believed – and this weekend it was reported that the #2 reactor has new problems problem, they don’t know what they’ll do with all the contaminated sea water that’s been pumped in, and 6.5 magnitude quakes continued to hit the region as early as last night.  However, the market continued to overlook these issues.  This nonchalant behavior has me very concerned; although, I’ve been concerned since the S&P 500 blew past my fair value estimate of 900-950, yet the rally carries on as the broad market currently stands 38% above that level. 

The press reported that the latest revision to Q4 GDP was also helpful to trading activity.  I heard a couple economists suggest that the GDP reading of 3.1% was much stronger than the print suggests because it occurred even as the inventories component dragged heavily on the reading.  I’d like to believe this is something to get excited about, but it appears the consumer spending results that offset the drag from inventories stole some activity from future quarters.  Further, I heard no one mention that the after-tax profits measure within the GDP report (known as economic profits) declined for the first time since 2008 – this profit measure is typically a good indicator of the direction accounting profits take a couple of quarters out.

Energy, telecoms and basic material shares led the broad market higher.  Utilities, tech and consumer staples were the laggards, but all 10 major industry groups did close higher.

For the week, the Dow Industrials rallied 3.05%; the S&P 500 gained back 2.70%; the NASDAQ Composite recouped 3.76%; the Dow Transports recovered 3.00%.  Mid and small cap stocks were also up around 3%.  The broadest measure of international stocks gained back 3.41%.  Over the past seven sessions, the S&P 500 has recovered two-thirds of the month-long slide that began February 18.

Portugal’s Prime Minister stated Friday that the government will not need a bailout.  This pretty much seals the deal as leaders in Greece and Ireland made identical statements just before accepting checks from the EU bailout fund that kept those governments from defaulting on interest payments. 

Market Activity for March 25, 2011

Sector Activity for March 24, 2011

Final Revision to Q4 GDP

The final revision to last quarter’s economic growth came in a bit better than previously estimated, up 3.1% at a real annual rate vs. the 2.8% in the previous revision – although this is slightly lower than the initial estimate of 3.2% that came out at the end of January. 

Personal consumption (the largest component, accounting for 70% of GDP) came in a bit weaker than previously thought – yet still the strongest print we’ve seen during this recovery cycle – as did the government spending component, pushed lower by state & local spending reductions.  But these were offset by stronger business investment and residential construction. 

So 3.1% is a good number at a point in an expansion that’s substantially more mature than the current stage of this cycle, but really well too weak than we need at this point.  Historically, as I’ve stated many times now, coming out of the worst recessions of the postwar era we had enjoyed 6-7% prints at this point; so the 3.1% is half that rate. 

And it appears that we’ll get another sub-3.0% reading for the current quarter.  The Fed knows this, which is one reason they continue to attempt stimulating the economy like never before.  There are two or three other major reasons why they continue their unprecedentedly aggressive stance that clearly cross the bounds of what monetary policy is all about.  However, the time has already passed for Bernanke & Co. to at least take away the emergency level of monetary easing (end QE and thereafter bring fed funds back to 1.00%) - holding the current stance will only bring on more problems even if no one likes the direction stock prices take on such a move. 

The Obvious Link Between Gasoline Prices and Confidence

The University of Michigan/Reuters Consumer Sentiment measure for March was revised down to 67.5 from 68.2 – the reading is released twice a month, a preliminary number in mid month and the final by end of the month.  The reading for March is the lowest since November 2009.

It’s not really the revision that’s all that important (didn’t change drastically), but the difference relative to the previous month/months.    The headline figure fell 10 points (largest one-month decline since Katrina and Rita hit in the summer of 2005) from the February reading of 77.5 and takes out the low for 2010.

The slide in sentiment is the damage done by the recent surge in energy prices, or gasoline specifically – not to leave out rising food prices, but gasoline is surely the primary function behind this move.  You can see it in divergence between the current conditions part of the survey and the expectations segment.  

The current conditions segment of the survey covers questions involving respondents’ financial position relative to a year prior.  Since payrolls have increased and the stock market is 11% higher, it’s not a surprise this segment of the index held up relatively well – down 4.4 points.  

However, the expectations measure is the segment that did the damage to the headline reading – sliding 13.7 points, and to a level that is back to the lowest since March 2009.   The rise in gasoline, and to a lesser extent food prices, probably has consumer concerned over the future growth (or lack thereof) of real wages – a number we talked about a couple of days back that is quickly sliding back negative territory. 

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