Marketmail

The Escalating Greek Tragedy May Soon Split the Euro-Zone
Meanwhile, China, Japan, Germany, and the U.S. are Growing
Stat of the Week: Retail Sales are up 6.4% (Year over Year)

Stocks Fell 4.3% on “Fatigue and Uncertainty” Last Week
By Louis Navellier

The “sell in May and go away” crowd is standing tall today. The S&P is down 7.3% in May, including a 4.3% drop last week. Some stocks exhibited relative strength, but even the most resilient stocks were hit hard on Thursday, as fund managers were forced to “throw out the baby with the bathwater” to meet fund redemptions or to make room for “Facebook mania” on Friday. Despite Facebook holding its IPO price of $38, we ended the week with a sixth straight down day, and we believe this market is grossly oversold.

The Escalating Greek Tragedy May Soon Split up the Euro-Zone

One great outcome of the Facebook IPO was that it stopped the news media from talking about Greece, if only for a day. But on Saturday, Greek President Karolos Papoulias dissolved the country’s two-day-old parliament in favor of new elections, set for June 17. The next Greek crisis centers on whether or not the nation can meet the principal payments on its currently-maturing debt. Meanwhile, Greek citizens are withdrawing hundreds of millions of euros from their bank accounts before Greek abandons the euro.

Due to this run on Greek banks and Greek debt instruments, the European Central Bank (ECB) will have its hands full stopping the inevitable demise of the euro zone. Greece will probably eventually leave the European Union (EU), even though there is no exit plan. Most Greeks want out, and most of their fellow EU members want to get rid of Greece. Everyone is tired of Greece’s inability to service its debts.

On the flip side, a weaker euro could help the EU boost its exports and avoid a continent-wide recession, even though 11 European nations are already in a recession. Eurostat announced last Tuesday that industrial production fell 0.3% in March and 2.2% on a trailing 12-month basis. The primary reason that the EU avoided entering a recession is that Germany reported Tuesday that its first quarter GDP expanded at a 2% annual rate, while France’s Insee reported that France’s GDP was flat (unchanged) last quarter.

Meanwhile, China, Japan, Germany, and the U.S. are Still Growing

On Saturday, the leaders of the Group of Eight (G8) met at Camp David and vowed to “strengthen and reinvigorate” their respective economies, while also recognizing that each country may pursue a different policy path. Off the record, however, several countries reportedly disagreed on whether austerity or stimulus was the better course of action for Europe’s sick economies or for their respective countries.

Currently, most of the G8 nations are growing. On Thursday, Japan announced that its first quarter GDP grew at a 4.1% annual pace, while China announced that its first quarter GDP grew at an 8.1% annual rate. In addition, we know that Germany is growing by 2%, while the U.S. is growing by at least 2%.

With all the focus on Greece, it’s easy to ignore the strength in Asia, the relative strength of the U.S. economy, and the potential for Germany and other healthy northern European economies to keep Europe on a slow growth path. Overall, world economic growth is not as bad as many pundits proclaim.

Here in the U.S., we have our own troubled states. California is collecting 20.2% less tax revenues than the state forecast, due mostly to an exodus of successful businesses and rich taxpayers. Governor Jerry Brown’s reaction to a $16 billion budget shortfall is to chase away more millionaires! A November ballot initiative would raise California’s top income tax rate from 10.3% to 13.3%.

California’s loss can be America’s gain as California’s millionaires and businesses can move to Texas or Nevada or Tennessee or some other tax-friendly state. The U.S. remains the largest, richest, most mobile economy and most secure nation in the world. That’s why America continues to lead the world in foreign direct investment (FDI). Even the weakening dollar of the last decade has a bright side, as U.S. real estate becomes attractive to foreigners. A weak dollar also boosts our exports, while luring a record number of tourists to our shores. Never underestimate America or the potential for well-run companies to prosper.

Stat of the Week: Retail Sales are up 6.4% (Year over Year)

The stock market was down last week, due in part to a series of seemingly-disappointing U.S. indicators. In the end, however, there was some good news buried in these bad headlines, so let’s review the details.

On Tuesday, the Commerce Department announced that retail sales increased only 0.1% in April, but the details are encouraging. Year over year, April retail sales were up 6.4%, a fairly robust increase. March took away some of April’s sales due to an early Easter. In addition, lower gasoline prices contributed to slowing retail sales, even though lower gas prices benefit the economy. Most importantly, consumers were spending in other ways. Internet and catalog retailers posted a 1.1% gain and vehicle sales rose 0.5%.

On Wednesday, the Labor Department announced that the Consumer Price Index (CPI) was unchanged in April thanks largely to a 2.6% decline in gasoline prices. The core CPI, excluding food and energy, rose a bit due to higher rental prices (housing), apparel, hospital, used car, and airline prices. However, if the U.S. dollar rallies, crude oil prices decline (since oil is priced in U.S. dollars). So overall, the CPI report was very positive and gives the Fed extra room to maintain its 0% interest rate policy as inflation cools.

Also on Wednesday, the Fed reported that industrial production rose 1.1% in April, the strongest monthly increase since December 2010. This was a much bigger gain than the 0.7% rise that economists expected.

On Thursday, we saw the biggest disappointment of the week when the Conference Board announced that the Leading Economic Indicators (LEI) fell 0.1% in April. Four of the 10 LEI components worsened, namely building permits, jobless claims, consumer expectations, and stock prices. But the LEI index is still up a healthy 1.8% in the past six months, and most (six) of the 10 LEI components rose during April.

This week’s leading indicators will be April new home sales (Tuesday), April durable goods orders (Wednesday), and May sentiment indicators (Thursday). I’ll report on these and other trends next week.