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BOTTOM LINE: Overall, last week's market performance was slightly negative considering the positive economic data, a strengthening tech sector, a stronger dollar and falling commodity prices. The advance/decline line was about even, sector performance was mixed and volume was above average on the week. Measures of investor anxiety were lower. However, the AAII % Bulls fell to 40.19% and is now at below average levels, which is a positive. The average 30-year mortgage rate rose to 6.24% which is still only 103 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield increased 6 basis points on the week on positive economic data and subsiding fears over the Iranian nuclear situation.
Unleaded Gasoline futures fell again and have collapsed 50% from September highs even as refinery utilization remains below normal as a result of the hurricanes last year, 24% of Gulf of Mexico oil production remains shut-in and fears over Iranian production disruptions persist. Natural gas inventories fell less than expected this week. Moreover, supplies are now 38.0% above the 5-year average, approaching an all-time record high for this time of year, even as 16% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 54% in 8 weeks. Gold fell on the week as the US dollar strengthened, Iranian nuclear fears subsided and energy prices declined.
The mania for many commodities waned this week. It appears to me that the CRB Index has made a significant intermediate-term top. I still believe prices for many commodities have been driven higher by fear and record capital inflows into commodity funds, rather than fundamentals. I continue to expect global energy demand destruction, decelerating economic growth, a firm dollar and a significant increase in supplies later in the year to push oil prices substantially lower from current levels. The EIA is currently projecting US oil demand growth of 1.6% for all of 2006, which is highly unlikely given last year’s decline. If in fact commodity prices have peaked, international emerging growth economies will slow, thus leading to a substantial slowdown in the demand for emerging market stocks. While this may cause some more turbulence in US markets in the short-run, it is a huge positive for US stocks longer-term.
Technology stocks outperformed this week, led by networking shares, after Cisco Systems’(CSCO) relatively upbeat report. Best Buy(BBY) boosted forward guidance which also buoyed tech. I expect the technology sector to outperform through year-end. S&P 500 earnings growth for the fourth quarter is now on pace to rise 14.6% year-over-year, more than double the long-term average. This would be the 15th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. Moreover, companies have sufficiently lowered the bar as to allow for better-than-expected 1Q results. As of now, analysts are projecting 9.8% earnings growth for the first quarter, still very good by historic standards. The ECRI Weekly Leading Index fell slightly, but is still forecasting continued healthy US economic activity.
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