The broad market, as measured by the S&P 500, closed essentially flat for a second-straight session on Tuesday.  Opposite Monday’s action, the Dow and S&P 500 closed slightly lower, while the NASDAQ Composite ended marginally higher – all three indices traded meaningfully higher for most of the day but lost ground late in the session. 

Basic material, consumer-related and energy shares closed higher.  Telecoms, health-care and industrials led the six industry groups that fell for the session.

The price of crude oil slipped 66 cents to $107.81/barrel, while wholesales gasoline increased another two cents to $3.18/gallon – the national average retail price is up to $3.70. 

China raised its benchmark one-year interest rate 25 basis points to 6.31% yesterday as they continue the effort to restrain inflation without crushing growth in the region – one of the many risks we’ve talked about for several months now as Asia has been a key region of growth.  While that benchmark rate has only been raised to the level hit in 2006 when Chinese growth was flyin’, is up from the 5.30% bottom that was in place from December 2008 through October 2010.  The Chinese are not done yet, not so long as Bernanke keeps ZIRP/QE in place. 

So long as Bernanke keeps policy floored, commodity prices will remain elevated, or may even go higher, and that means all of Asia will be forced to continue tightening to combat the inflation that the ZIRP is exporting.  Nevertheless, the Fed Chairman continues to downplay the rise in commodity prices -- calling it a temporary situation, as he did again in a speech Monday night and yet again within the latest FOMC minutes released yesterday.  

Market Activity for April 5, 2011

Sector Activity for April 5, 2011

Sorry Mr. Ryan, That’s Much Too Serious

Congressman Paul Ryan has offered a very serious budget proposal – to some this is a spectacular, to others it’s horrible, but in reality it’s necessary.  However, the plan is way too necessary for yet another shallow Congress.  

You may remember my criticism a couple of weeks back regarding  the meaningless $60 billion spending cut proposal for 2011 – a number that is a mere 4% of the fiscal year’s deficit and 1.6% of total annual spending. Well, this current budget proposal takes meaningful to a whole new level as it encompasses slashing spending by $6.2 trillion over 10 years (remember that spending surged by $1 trillion from $2.8T /yr to $3.8T/yr in just the past three fiscal years), restructures Medicare for those under 55 (essentially you would go get private insurance and Medicare would pay most of the cost depending in your income), eliminates 10% of the federal workforce through attrition, freezes federal worker pay for five years and consolidates, simplifies and reduces income tax rates.  

The most important thing to understand on the spending side is that the proposal expects to get the spending/GDP ratio back to 20%, which is a level that’s served us well in the past as it leaves more capital in the private sector – today that ratio is 25% and set to go to 30% by end of the decade. 

Now, this proposal has less than a zero chance of passage (they couldn’t even agree to the measly $60 billion in cuts to the 2011 budget, it got cut to a trifling $30 billion).  But in time, an aggressive plan will get done simply out of necessity.   The longer we wait though, the harsher it gets. 

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity slipped 2.4 points to a reading of 57.3 for March (expected to come at 59.5) – the February reading of 59.7 was the highest print since 2005 and a mark hit only four times since the measure began in 1997.   Thus, the current 57 handle is a robust level.  (A reading above 50 marks expansion.)

As a strong reading of 57 suggests, the internals of the report looked good.  New orders remain in the 60 handle, down just 0.3 point to 64.1; the backlog of orders gauge rose 4 points to 56.0; employment fell 2 points, but remained at a solid 53.7; exports rallied 2.5 points to 59.0, which isn’t at the hottest levels this measure has seen but is nicely above the average; price paid slipped for the first month in five months, down nearly a point to 72.1 – although this is an elevated level that’s roughly 13 points above average. 

The major concern within the report came from the inventory sentiment gauge, which jumped 9.5 points to 67.5 – a level hit only four times since 1997, outside of recession. 

(A higher number suggests that retailers are less comfortable with current stockpiles.) 

This is concerning because GDP still needs help from inventory rebuilding.  Further, it’s not normal for managers to worry about stockpile levels during an economic expansion, particularly when inventory levels are already at historic lows.  Combine this with the massive cash positions corporations are sitting on and something (several things most likely) has them very cautious.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900