Marketmail
By Louis Navellier
The U.S dollar rallied to a five-month high after seeing better-than-expected GDP growth and a rising consumer confidence index, but that wasn't enough to lift the stock market, as the S&P 500 closed January down 3.7%. The dollar is particularly strong against the euro, due to the financial crisis in Greece.
The good news is that we remain in an explosive earnings environment. The bad news is that the stock market seems easily spooked. That means 2010 is shaping up to be a pure stock-picking market, with stocks that release strong sales and earnings growth rising, despite all of the other stock market gyrations.
Stat of the Week: 5.7% GDP Growth
On Friday, the Commerce Department announced that its flash estimate for fourth-quarter GDP growth came in at 5.7%, substantially better than the economists' consensus expectations of around 4.7%. This marked the fastest GDP growth in six years - and later revisions may even push the final figure over 6%.
Looking into the details, last quarter's 2% consumer spending growth was weaker than the 2.9% annual rate from the third quarter, but that was based on artificial vehicle demand in the "cash for clunkers" program. The biggest sequential gain in fourth-quarter (vs. third-quarter) GDP was a significant rise in non-residential fixed investment, which grew 2.9% after having fallen by 5.9% in the third quarter.
The biggest net growth came from restocking inventories, which added 3.4% to the overall growth figure. The biggest percent gain came from trade, as exports rose 28.1%, the fastest rise in 30 years! Now, if consumer spending can pick up, we may be on the verge of an impressive economic recovery in 2010.
Most Other Economic Indicators are also Healthy
Some of the best news last week happened on Tuesday, when the Conference Board announced that consumer confidence rose to 55.9 in January, up from a revised 53.6 in December. Economists expected consumer confidence to stay flat, at around 53.5, so this was a pleasant surprise. Consumer confidence is now at the highest level since September 2008, right before the financial crisis struck. Six months later, consumer confidence hit a record low of 25.3 in February 2009, so the index is up 30.6 points since then.
In the housing arena, median home prices rose 1.5% in December to $178,300. Existing home sales are now up about 21% from their bottom a year ago, but they remain 25% lower than their peak in late 2005. The National Association of Realtors said that first-time buyers were the main driver in 2009, but their influence declined recently. First-time homebuyers accounted for just 43% of purchases in December.
The most positive housing news is that the inventory of unsold homes declined about 7% to 3.3 million, which represents a 7.2-month supply at the current sales pace. That number is creeping closer to the six-month supply level, which most experts believe is the optimum level for stable housing prices. I should also add that the S&P/Case-Shiller home-price index of 20 major cites was also announced on Tuesday, showing that home prices fell 5.3% in the year through November, and 32.6% below their peak prices.
On Thursday, the Commerce Department announced that durable goods orders rose 0.3% in December - a disappointing number, due mostly to a 38% decline in aircraft orders. Excluding orders for aircraft and non-defense capital goods, durable goods orders rose 1.3% in December. Shipments to manufacturers rose 2.9% in December - a sign that inventories are being replenished. Core capital equipment orders - the best monthly gauge of business capital spending - also rose 1.3% in December, a very hopeful sign.
Why the U.S. Dollar is Rising
In the global currency market, the three dominant brands are U.S. dollars, euros and Japanese yen. So, if you look at the economies in Europe and Japan, you can get a good idea about why the dollar is rising.
At the annual World Economic Forum in Davos, Switzerland, Greece became the major concern among attendees, since its bond yields continued to rise. A European Union (EU) bailout was the hottest debate subject in Davos. Greece is apparently wooing China to buy up to 25 billion euros ($35 billion) in bonds, but so far there is no sale. Currently, China owns a "significant amount" of Greece's debt and is wary of buying any more right now. That may explain why yields on Greek bonds rose to over 7% last week.
Worries are now spreading to other euro-zone nations, including Portugal, Ireland, Italy and Spain - the other "PIIGS" of Europe. Investors are fleeing bond markets in those euro-nations out of concern that the troubles in Greece might spread. This caused euro-bond yields to rise substantially last week. Further complicating matters, Eurostat announced on Friday that the annual inflation rate in the 16-country euro zone rose to an 11-month high of 1% in January, while unemployment also hit an 11-year high of 10%.
Turning to Japan, Standard & Poor's cut its rating on Japan's sovereign debt to "Negative" on Tuesday, after the Bank of Japan kept its key interest rate at 0.1% for the 13th consecutive month. S&P said "the outlook change reflects our view that the Japanese government's diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures."
On Friday, Japan said that its consumer price index (CPI) fell by a whopping 2% in 2009. During the full year, Japan's core CPI, excluding fresh food prices, declined by 1.3%, so deflation is persistent in Japan. (This tends to discourage consumer spending, as buyers wait for prices to fall further.) The median forecast by the Bank of Japan's policy board is now for price drops of -0.5% in 2010 and -0.2% in 2011.
Japan's central bank can't raise key interest rates due to the fact that its cumulative budget deficit is so massive that higher rates could destroy its economy. One reason that Japan is a favorite country for carry trades (i.e., borrowing in Japan at low rates to invest elsewhere in the world at higher rates) is that economists know that Japan cannot raise key interest rates without sending the cost of financing its cumulative budget deficit soaring. That would effectively force devaluation of the yen. So… now you know why the dollar is so relatively strong: The dollar is the "least weak" of the three major currencies.
The Latest Fed & Treasury News
The U.S. can't be too complacent in the face of similar problems in Europe and Japan. Our own Federal Reserve faces the same dilemmas as the central banks in Europe and Japan. But last week, there was a shred of hope when the Fed's latest FOMC minutes included a slight language change. In the December FOMC meeting, the Fed said that the U.S. economy was "likely to remain weak," but the January FOMC notes said that "the pace of economic recovery is likely to be moderate." Clearly, "moderate" sounds better than "weak," so there is growing optimism at the Fed. That optimism helped lift the U.S. dollar.
This positive outlook largely explains why the Senate finally confirmed Fed Chairman Ben Bernanke for a second term, by a 70 to 30 vote on Thursday, despite much grumbling by many Senators. Perhaps some Senators decided that Bernanke was not so bad after all, considering the alternatives, so they decided that they need someone in charge that basically knows what he is doing. By contrast, Treasury Secretary Geithner has clearly emerged as one of the scapegoats that Congress is willing to throw under the bus.
Turning to fiscal policy, the Congressional Budget Office (CBO) confirmed last Tuesday that the U.S. budget deficit will likely shrink modestly in fiscal 2010, even though it will be the second largest budget deficit since World War II (the largest was fiscal 2009). This year, the deficit will hit about $1.35 trillion, down slightly from last year's $1.4 trillion. The CBO also estimated that the total cost of rescuing Fannie Mae and Freddie Mac will be $291 billion, with the federal takeover adding another $99 billion by 2020.
Next: Watch the Coming Jobs Report
This week the big news will likely be Wednesday's ADP jobs report and Friday's payroll report. For the past two weeks in a row, new jobless claims have come in higher than expected. Last Thursday, initial jobless claims declined 8,000 to 470,000 for the week ending on January 23, but economists were expecting jobless claims to decline by 32,000, so jobless claims remain stubbornly higher than expected.
Last Wednesday night, President Obama made it clear during his first State of the Union speech that creating jobs is his top priority. The bad news is that the President did not clarify how government can create jobs. Instead, he demanded that Congress get him a job creation bill to sign as soon as possible. But the need for such a bill would fade if we see employment growth in Friday's payroll report. Either way, Friday's report will indicate how strong the U.S. economic recovery will be in the first quarter.
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