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BOTTOM LINE: Overall, last week's market performance was modestly bullish. The advance/decline line rose, most sectors gained and volume was about average on the week. Measures of investor anxiety were mostly higher. Moreover, the AAII % Bulls fell to 30.77% and is still approaching depressed levels, which is a big positive. Most other measures of investor sentiment are also around levels associated with meaningful market bottoms.
The average 30-year mortgage rate rose to 6.67% which is 146 basis points above all-time lows set in June 2003. Pending Home Sales fell the most since August 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. This will likely result in the slowing of consumer spending, and thus US GDP growth, back to around average rates over the coming months. US economic growth soared 5.3% during the first quarter.
The benchmark 10-year T-note yield fell 6 basis points on the week as economic data were mostly weaker, unit labor costs(the largest component of inflation) decelerated substantially and Fed members made mostly hawkish comments. I still believe inflation concerns have peaked for the year as investors begin to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course.
The EIA reported this week that gasoline supplies rose again as refinery utilization increased. Unleaded Gasoline futures rose, but are still 24.1% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, a significant amount of Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. According to TradeSports.com, the percent chance of a US and/or Israeli strike on Iran this year has fallen to 16% from 36% late last year. I continue to believe the elevated level of gas prices related to shortage speculation and crude oil production disruption speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels.
Natural gas inventories rose less than expectations this week, however supplies are still 49.5% above the 5-year average, near an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 57.60% since December 2005 highs. Notwithstanding this collapse, industrial demand for natural gas has shown few signs of increasing. US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down .24%, while global supplies have increased 4.94%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.
Gold fell for the week as inflation fears subsided and speculators continued to take profits. The US dollar fell on further speculation of a Fed “pause.”
The Healthcare and Utility sectors outperformed for the week on increasing worries over slower US growth. I expect both sectors to continue to outperform over the intermediate-term. The forward p/e on the S&P 500 has contracted relentlessly over the last few years and now stands at a very reasonable 15.0. The average US stock, as measured by the Value Line Geometric Index(VGY), is still up 5.3% so far this year, notwithstanding the recent correction. Moreover, the Russell 2000 Index is up 10.0% year-to-date. In my opinion, the current pullback has provided longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. However, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside. A chain reaction of events has likely begun that will eventually result to increased demand for US stocks.
While the major averages have likely bottomed for the year, a test of recent lows could occur over the coming weeks as economic data continue to disappoint. An ensuing Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence and the realization that growth is only slowing should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I continue to believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index fell again this week and is forecasting healthy, but decelerating, US economic activity.
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