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BOTTOM LINE: Overall, last week's market performance was very positive considering the mixed economic data, mostly hawkish statement’s from the Fed’s Bernanke and subdued investor sentiment. The advance/decline line was higher, most sectors gained and volume was about average on the week. Measures of investor anxiety were mostly higher. Moreover, the AAII % Bulls fell slightly to 40.18% and is still below average levels, which is a positive. The average 30-year mortgage rate rose to 6.28% which is still only 107 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield fell 5 basis points on the week as investors cheered Bernanke’s comments.
Unleaded Gasoline futures bounced slightly for the week, but have collapsed 48.2% 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/Nigerian production disruptions persist. Natural gas inventories fell less than expected this week. Moreover, supplies are now 44.0% 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 55% in 9 weeks. Gold was mostly unchanged on the week as a firm US dollar offset inflation data that exceeded estimates.
The mania for many commodities waned further this week. It still 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. 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.
The Telecom sector(ITH) outperformed substantially and is close to breaking out of the trading range that has contained it since 2002. An upside breakout in this sector would be a big positive for tech stocks and help further boost the broad market. S&P 500 earnings growth for the fourth quarter is now on pace to rise 15.0% 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. I continue to believe the S&P 500’s forward p/e multiple, which is currently 15.4, will expand back to around 19 by year-end, thus helping to push the index about 15% higher for the year. The ECRI Weekly Leading Index fell and is forecasting healthy, but decelerating, US economic activity.
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