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. 

Market Activity for April 22, 2011

Sector Activity for April 21, 2011

This Week

Last week was kind of quiet with Friday’s holiday and the bulk of economic releases being housing-market related.  But this week will be a big one as we get the Conference Board’s consumer confidence reading (April), durable goods orders (March), the latest FOMC statement (and the beginning of Fed Chairman press conferences, an unprecedented event), and the first look at Q1 GDP. 

And on GDP, I see the mainstream economists have run into the wall of reality as the current estimate is for 1.8% growth last quarter.  They began the year estimating that Q1 GDP would grow 3.5%-4.0%.. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900