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BOTTOM LINE: Overall, last week's market performance was mildly bearish. The advance/decline line fell, most sectors declined and volume was above average on the week. Measures of investor anxiety were mostly lower. The AAII % Bulls rose to 42.11%, but is still only around average levels, which is a positive considering the major averages are near 6-year highs. The average 30-year mortgage rate rose to 6.58% which is 137 basis points above all-time lows set in June 2003. Notwithstanding recent strong housing data, I continue to believe housing is in the process of slowing to more healthy sustainable levels. This will also likely result in the slowing of consumer spending back to around average rates over the coming months. The benchmark 10-year T-note yield rose 5 basis points on the week as economic data exceed expectations. I still expect inflation concerns to begin declining again later this quarter as economic growth slows, unit labor costs remain subdued and the mania for commodities reverses course.
Unleaded Gasoline futures fell this week and are 28.5% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, 22.3% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. The mandated switch from MTBE-based reformulated gasoline to ethanol-based fuel had been the main reason behind the recent spike in gas prices. President Bush’s decision to authorize the temporary waiver of this mandate should quell gasoline shortage fears.
Demand for gasoline is decelerating and the recent rise related to shortage speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels. Moreover, the API recently said US oil demand fell 2.6% in March, notwithstanding blistering economic growth of 4.8% during the first quarter. Natural gas inventories rose more than expectations, resulting in a 15.1% plunge in the price of the commodity this week to new cycle lows. Supplies are now 62.2% above the 5-year average, an all-time record high for this time of year, even as 13.3% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 58.3% since December 2005 highs. U.S. oil inventories are now at 8-year highs. 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 as economic growth slows, oil should head meaningfully lower over the intermediate-term.
Gold rose for the week as the US dollar declined and economic data exceeded estimates. The US dollar fell on dovish comments from Fed Chairman Bernanke and increased speculation that a Fed “pause” is imminent.
Financial stocks outperformed for the week as the yield curve steepened. S&P 500 earnings growth for the 1st quarter is up about 13.4% year-over-year so far, almost double the long-term average and substantially above expectations of 8-9% growth just a few weeks ago. As well, 70% of companies have exceeded estimates versus the long-term average of 57%. This is the 16th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. The forward p/e on the S&P 500 has contracted relentlessly during this time period and now stands at a very reasonable 15.4.
The average US stock, as measured by the Value Line Geometric Index(VGY), is up a very strong 9.1% so far this year. Moreover, the Russell 2000 Index is up 13.94% year-to-date. I still believe US economic growth peaked for the year during the first quarter and will decelerate back to around average levels through year-end. I expect stocks to continue trading mixed-to-lower over the next few weeks. Subsequently, a reversal lower in long-term rates and/or energy prices should provide the catalyst for another push higher by the major averages. The ECRI Weekly Leading Index was unchanged this week and is still forecasting healthy, but decelerating, US economic activity.
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