U.S. stocks traded lower early in the session as EU debt woes and U.S. housing distress weighed on investor sentiment – we touch more on the EU situation below; on housing, U.S. home prices have sent the percentage of underwater mortgages to 28.5%, according to Zillow.  But then for reasons with which I’m unaware, the market rallied at 10.45CDT and pretty much held the level to the close. 

The only things I can come up with for why stocks shot up on a dime is that the move did coincide with  POMO time, and the Fed did inject $7.2 billion into the markets at 10.45CDT.  Also, there was word (as we see this morning is actual news) that the CME was going to hike margin requirements on crude futures by 25% -- a sort of alternative tightening, which may allow the Fed to keep ZIRP/QE in play and thus continue monetizing government debt and pumping liquidity. 

I’ve made an effort to stay away from this topic, but we’re to a point where it’s just too blatant.  Higher commodity prices are a thorn in the Fed’s side and it’s obvious what’s going on here. 

Energy and basic material shares were the big winners, leading the nine of the 10 major industry groups higher.  Financials being the lone group to close down for the session; consumer discretionary and tech were the next worst performers. 

Following last week’s beat down, the CRB Index bounced back (still 7% below the post-crisis high hit six sessions ago) as that which got crushed the most rebounded.  Thus, the prices of silver, gasoline and crude led the commodity index higher – gasoline up 19 cents to $3.28/gallon and crude up $6 to $103/bbl. 

Market Activity for May 9, 2011

Sector Activity for May 9, 2011

The ratings agencies are showing they’re all over it again as S&P downgraded Greek debt about a month after the market already signaled the problem is getting worse by sending yields soaring. S&P seems to acknowledge that a re-scheduling of debt (extending maturities, ie. two-year debt becomes five-year and five-year becomes 10-year) constitutes default.  This means Moody’s will be doing the same over the next couple of days.  I guess S&P only has to be better than its competition. 

The re-scheduling of Greek debt, and later Portuguese and possibly Irish and even Spanish and Italian (74% of Italy’s government debt is financed with short-term securities so their problems will rage over the next 18 months), is preferred by the EU as it would prevent huge write downs at European banks -- this is the stealth default.  The restructuring of debt (taking haircuts on principal) is what’s needed – that’s conspicuous default.  We’ll see how long they can delay the inevitable restructuring.

The Week

We were without an economic release yesterday, but today we get NFIB’s gauge of small business optimism (or lack thereof) and import prices (which should be interesting as the year-over-year reading is expected to hit double-digit territory). 

The NFIB’s survey of small business confidence has been stuck at low levels, even falling back again in March to a reading that darned near matched the low of the 1990-91 recession and well-below the nadir hit in the 2001 downturn – in fact, the highest reading on NFIB during this recovery has thus far failed to hit the low of that 2001 period. 

Higher commodity prices likely kept small business confidence at recessionary levels again in April. 

Import prices are expected to increase 1.8% for April and 10.5% year-over-year.  It’s even uglier from a three-month perspective as the measure has import prices up 27.4% at an annual rate.  Even if we smooth the number out a bit by taking a six-month annualized look (which isn’t quite so impacted by the February/March surge in oil prices), it doesn’t get all that better, up 23.5%. 

This is all of function of higher oil prices, which is largely a function of a declining dollar value, which is a function of Bernanke’s addiction to ZIRP/QE.  It was the increased MENA tensions that sparked the jump in oil over the preceding couple of months, but the 7% slide in the greenback over the same period didn’t help – and we wouldn’t have been close to $95/bbl to begin with (prior to MENA raging) without the Fed’s wild QE experiment. 

Later in the week we get the trade balance for March (we’ll watch this one for signs of a GDP revision), initial jobless claims (after last week’s jump to 474K we watch to see if it was a one-time blip or not), retail sales for April and CPI also for April (y/o/y inflation will post a number above the Fed’s stated “comfort zone” for a second straight month). 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900