Domestic stocks began the week lower after Standard & Poor’s became the first ratings agency to put the U.S. government’s credit rating on “negative” outlook.  So, while the broad market has vacillated over the past couple months, it’s failed to gain traction since hitting a 32-month peak on February 18. 

Stock-index futures were lower even before the ratings outlook news (S&P didn’t actually downgrade U.S. debt as it remains AAA) as EU debt woes were on everyone’s minds during early-morning activity – Greek and Portuguese debt spread continue to blow out to historic wides and Irish rates are very near the record high hit in November. 

Regarding our own public debt issues, the “negative” watch from S&P is unlikely (specifically) to have a recurring effect on markets as the U.S. government’s rating is not going to be cut – for a couple of reasons (the U.S. will not default in a nominal sense as the Fed would just keep printing money if borrowing costs were to surge, and the ratings agencies wouldn’t downgrade U.S. debt anyway for fear of a market collapse). 

What the markets will eventually have to price in are the necessary conditions to get things right again.  That is, the adjustment to promises the federal, state and local governments have made for several decades – and the financial difficulties along with some social unrest that may very well accompany the shift.  These adjustments will be made merely out of necessity (it’s only a matter of time) and the country will emerge stronger for it, but there will be a period of struggle to get there.

The safe havens were the outperformers again yesterday as consumer staples and utilities were the best relative performers – although even these groups closed lower.  Energy, telecoms, industrials and basic materials were the hardest hit areas. 

The CRB Index pulled back, largely due to price declines within the energy complex.   But outside of energy, most of the CRB’s components rose in price --metals, corn, soybeans, wheat, cattle and cotton prices all gained ground. 

Market Activity for April 18, 2011

Sector Activity for April 18, 2011

The Saudis reported they cut production by 720k barrels/day in March (to 8.30 million from 9.02), yet crude prices slipped back to $107.12/barrel from Friday’s close of $109.66.  One wouldn’t normally expect prices to decline on news of a production cut, particularly since we’ve heard for a couple of months now that the Saudis were going to produce more to offset the virtual elimination of Libyan production.  But the Saudis explained that the market remains fully supplied, a statement one might scoff at coming from an OPEC cartel member if not for U.S. weekly energy reports showing the same – supplies are abundant and demand weak. 

There is clearly a $20 Mideast risk premium (due to all of these uprisings) in the price of crude right now.  And I contend that there’s another $30 in the price of crude that’s driven by a wildly aggressive monetary policy – placing the price of crude at about $60 without these events.  My favored energy analyst (Peter Beutel) believes the fundamental price of oil should be even lower, something closer to $40.  But that’s all academic at this point because the reality is a Mideast that remains a hotbed for radicalism and a Fed unwilling to allow the cards to fall where they may by continuing down this road of ZIRP/QE – a path that is unpaved. 

NAHB Housing Market Index

The National Association of Homebuilders gauge of builders’ confidence slipped back to a reading of 16 for April (17 was expected) after inching to 17 in March – it has been at 16 for five of the past six months.  Nevertheless, 16,17, heck 25 for that matter – none of these readings are much different from one another as anything below 50 means respondents believe conditions are poor. 

The measure of sales expectations for the next six months fell to a six-month low. The glut of distressed properties (driving prices lower) and the huge inventory (both official and shadow) of existing homes will keep home-builders’ confidence very weak for…a considerable length of time. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900