(Nevertheless, here we are with another weekend behind us and still nothing from Greece.  And when they do get a deal done, which I’m still holding out will happen, we’ve got Portugal right behind them – you know the Portuguese are saying to themselves:  “Hey, a 70% cut to principal redemptions sounds pretty good.”

Financials, tech and basic materials were the S&P 500’s best-performing sectors.  Utilities were shunned again; consumer staples and telecoms also closed lower.

The commodity complex extended its winning streak to five sessions as OJ futures are back on the rise and gasoline continues its latest climb.  OJ bounced after imports from Brazil and Canada (Canada? That’s a circuitous route for oranges to travel) tested positive again for that banned fungicide.   And gasoline is on its way to completely erasing any benefits consumers enjoyed from the slide during the back-half of last year.  The current price of $2.90/gal on wholesale (if it holds) will push the pump price to $3.50.

Key bond yields within the euro zone continued to improve on Friday, and significantly, as the Italian 10-year yield is down to 6.15% from the 7.50% hit in November.  Same is the case for Spain, which sees its 10-year at 5.05% after hitting 6.70% -- those yields were actually lower as of Friday, but they’ve backed up a bit this morning.   France’s 10-year has rallied to 3.03% from 3.50%.  Portugal has been left to wither on the vine, however, as it now trades at junk status – its 10-year has widened to 16.45% and as stated will soon go the way of Greece.

Of course, pumping nearly a trillion euros into the banking system (half a trillion in just the past two months via that LTRO, and more to come in February) will have that effect.  Since the improvement has come via massive central-bank help, we’re likely to see these yields blow out again and the whole fear of a euro zone collapse return.  These countries must revamp their budgets and implement aggressive growth strategies that will allow the private sector to provide greater and more organic growth potential.  This shift will be painful in the short term, but it’s Europe’s only way out.

Market Activity for January 27, 2012

Sector Activity for January 27, 2012

Q4 GDP

The Commerce Department reported that fourth-quarter GDP growth came in at a real annual rate of 2.8%, which was a bit shy of the 3.0% that was expected by the consensus but a bit better than the 2.5-2.7% range I had expected.  Of course, either could still be right as we’ll get two revisions over the following months.

The main cause of the lighter result was weaker-than-expected personal consumption (the largest component of GDP, which I explain below) as it came in at a 2.0% real annual rate rather than the 2.4% expected.  But on the other hand, inventories added 1.94 percentage points to the overall figure, which more than offset drags from trade (net exports) and government spending (which declined for the fifth quarter in a row).

I have no idea how inventories added so much to GDP as the monthly data certainly didn’t seem to suggest such.  In any event, without it GDP would have come in at sub-1.00% for the second quarter in four.

Spending on structures was mixed as nonresidential activity fell after two quarters of increase, while residential building rose 10.9% and caps off a three-quarter increase.  However, with both of these components severely beaten down, either direction they go it doesn’t contribute much to GDP anyway.

Business spending on equipment and software was somewhat weak, growing 5.2% at a real annual rate. This is down from the 16.2% in the previous quarter.

Overall though, the GDP print for the final quarter of the year was the best reading we’ve seen since the second quarter of 2010.  It brings the economic growth rate for 2011 to 1.6% -- half the long-term average.

I wish I could say all is clear, and we’re on to something with this latest print.  However, that inventory boost doesn’t bode well for growth in the first half of this year.

Further, as I explained in early 2009, consumer spending as a percentage of GDP must revert back to its long-term average of 66%.  Currently, as has been the case for over a decade now, consumer spending has accounted for over 70% of GDP.  This reversion would have taken place by now, but Mr. Bernanke and the rest of Washington has worked furiously to stop this from happening.   Government can’t ultimately stop it from occurring, so all they’ve done is delay the event.

Just as the unemployment rate (which has improved of late) must contend with at least four-million people re-entering the workforce, GDP must contend with its largest component falling back to levels that are realistic.

U of M Confidence

The final reading on the University of Michigan’s consumer sentiment survey for January showed the measure continued to improve from the 2008-2009 matching low hit in August.  The figure came in at 75.0, up from the 69.9 print for December – five months of increase from the historically depressed 55.7 reading back in August.

The current conditions measure gained 1.5 points to 84.2…

…while the expectations reading (respondents’ view of their financial position a year out) rose half a point to 69.1.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900