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Market Up Over 3%, Despite Global Tensions
By Louis Navellier
The market rose every day last week, with the S&P 500 gaining 3.13% in a holiday-shortened week. The Dow and S&P are now just a few points away from turning positive year-to-date. In brief, Wall Street is increasingly ignoring the "normal" world tensions by focusing on rising corporate profits and positive earnings surprises, which make stocks an oasis from events like the fiscal chaos in Greece, new threats from Iran or rising deficits in America and Europe. Also, most of last week's economic indicators reflected a slow but sure recovery, even though rising inflation concerns still cloud the near-term horizon.
Stat of the Week: Import Prices Up 11.5%
Inflation is definitely brewing. On Wednesday, the Labor Department announced that the prices of imports jumped 1.4% in January, the sixth straight monthly increase. In the past 12 months, import prices have risen by 11.5%, a dramatic turnaround from the 19.1% year-over-year decline as of last July. According to the Bureau of Labor Statistics, January's petroleum prices rose 4.8% and fuel prices rose 5.3%, led by a whopping 18.8% rise in natural gas. However, non-fuel imports rose by just 0.4%.
Last February, crude oil prices bottomed out at under $40 per barrel. As a result of oil's rapid rise since then, the cost of imported petroleum products is up 95.5% in the past 12 months. However, the good news is that non-fuel prices, by contrast, are up just 1.3% in the past year. The dollar is the main culprit in this trend. Even though it rallied in January, the dollar fell 8% in the past year, pushing up import prices.
On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose 1.4% (an 18% annual rate) in January, while the core PPI, excluding food and fuel costs, rose 0.3%. Economists were expecting the PPI to rise 0.9% and the core PPI to rise just 0.1%, so wholesale inflation is running much higher than anticipated. Over the past 12 months, the PPI is up 4.6%, the largest annual increase since October, 2008. The price of crude goods rose 9.6% in January, the largest gain since November, 2006.
On the consumer level, we saw lower inflation, since about 40% of the Consumer Price Index (CPI) is tied to housing, or "owner's equivalent rent," which is held down by lower hotel prices, record apartment vacancies and a high inventory of unsold homes. Specifically, in January, shelter costs fell 0.5%, which suppressed the overall CPI. On Friday, the Department of Labor said the CPI rose 0.2% in January and the core CPI, which excludes food and energy, fell 0.1%. In the past 12 months, the CPI is up by 2.6%.
Other Economic Indicators Look More Positive
Despite the threat of rising inflation, most other indicators look better: On Wednesday, the Commerce Department announced that new housing starts in January showed some welcome signs of life, rising 2.8% to a 591,000 annual rate, the highest level since July, 2009. There was even more good news in the report: December housing starts were revised up to an annual rate of 575,000, vs. their initial estimate of 557,000. Permits for single-family homes - a key number in the report - rose by 0.4% to a seasonally-adjusted rate of 507,000, while starts for single-family homes increased 1.5% to a 484,000 annual rate. Housing starts have now risen by 21.1% in the past year, while building permits are up 16.9%, the largest year-over-year increases in nearly six years - since April and May of 2004, respectively.
Also on Wednesday, the Fed reported that industrial production rose 0.9% in January. Even better, U.S. industrial production is now up for seven straight months, while capacity utilization rose to 72.6% in January, up from 71.9% in December. All of the leading indicators of industrial production also rose in January, with automotive products being the strongest, with a 5.1% rise. The Labor Department also reported an increase in factory workers in January, due to a pickup in exports and the need to replace depleted inventories. Looking forward, however, industrial production may turn down in February, due to the shutdown of several Toyota plants and severe winter weather in most of the United States.
On Thursday, we saw more good news, as the Conference Board announced that January's Leading Economic Indicators (LEI) rose by 0.3%, the tenth straight monthly increase. The rise, though small, was slightly higher than economists' expectations of 0.2%. Only five of the 10 LEI components rose, with new orders for consumer goods remaining unchanged. Overall, the U.S. economy is growing, but it would grow a lot faster if consumer spending (68% of the U.S. economy) added to this economic growth. In economics, there is something called the "velocity of money," which is a measure of how fast money changes hands. The faster the velocity of money, the more prosperous the U.S. economy becomes.
Can Greece Be Saved?
Sovereign debt fears continue to dominate the news, but by and large, stock markets around the world are downgrading the chances of a default and instead are focusing on companies that are prospering from the global economic recovery. On Friday, Greek Prime Minister, George Papandreou, said during a visit to London that "We are not looking for money from other countries ... What we are simply saying is: we'd like to borrow on the same terms as other European and euro-area countries." Greece will apparently try to raise 3-5 billion euros ($4 billion to $7 billion) this week or early March to meet their debt obligations.
On Friday, Standard & Poor's cut all its AAA ratings on Greek asset-backed and mortgage-backed securities to AA, while Moody's Investors Service said it will review 23 deals. S&P said that medium-term economic growth in Greece will be slower than previously expected and the recession will probably deepen next year. S&P concluded: "These country risk factors will likely result in … cash flow stress."
In the meantime, the EU stripped Greece of its vote at a crucial meeting in mid-March. This is being viewed in Greece as the worst humiliation ever suffered by an EU state, amounting to a loss of Greek sovereignty. But if Greece fails to meet its financial obligations by mid-March, the EU could impose cuts under a draconian Article (126.9) of the Lisbon Treaty, potentially causing economic chaos in Europe.
This week, a general strike is scheduled for Wednesday to protest spending cuts and austerity policies, so it is possible that officials from the European Commission, ECB and the IMF will get stuck at the airport!
Federal Spending Out of Control
Last week marked the anniversary of the $787 billion spending/stimulus program. On Wednesday, President Obama marked the anniversary by vigorously defending the stimulus program, saying that it will create 1.5 million jobs in 2010, after creating two million jobs last year. On that same day, however, Democratic Indiana Senator Evan Bayh said that he would resign his seat in the Senate to look for work in the private sectors, saying, "If I could create one job in the private sector by helping to grow a business, that would be one more job than Congress has created in the last six months." Massachusetts Senator Scott Brown echoed Bayh's views, saying that the stimulus plan "didn't create one new job."
The New York Times said that Senator Bayh's comments implied that Congress was so dysfunctional and polarized that it may be unable to deal with the escalating federal debt, implying that the U.S. may follow Greece with a budget deficit spinning out of control. As the federal debt rises, so will interest costs, which are projected to be well over $800 billion a year by 2015. As a result, on Thursday, President Obama established an 18-member National Commission on Fiscal Responsibility and Reform, co-led by former Republican Senator Alan Simpson of Wyoming, who said in a telephone interview that "There isn't a single sitting member of Congress, not one, that doesn't know exactly where we're headed."
Fed Policy "Unchanged"
The Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing some anxiety among FOMC members. Several members appeared impatient about the size of the Fed's $2 trillion balance sheet and wanted to start a program of gradual sales in the near future, but the Fed is far from unanimous about how and when, if ever, to raise short-term interest rates. (Fed Chairman Bernanke told Congress Wednesday that the small Discount Rate increase does not reflect a shift in Fed policy.)
On Tuesday, Kansas City Fed President Thomas Hoenig said federal spending is on an "unsustainable course." Specifically, Hoenig said "The U.S. government must make adjustments in its spending and tax programs… If pre-emptive corrective action is not taken regarding the fiscal outlook, the U.S. risks precipitating its own next crisis." He added that the worst option was a scenario in which the government "knocks on the central bank's door" and asks it to print more money, instead of making spending cuts.
Amidst this "crisis of confidence," the Treasury Department announced on Tuesday that foreign demand for U.S. Treasury securities declined by a record amount in December as China sold $34.2 billion in U.S. Treasury securities. Overall, foreign governments shed a record $53 billion in Treasury securities in December. The previous record was in April 2009, at $44.5 billion. China's shedding of U.S. Treasury debt marks a reversal that it signaled last year when it said it would begin to reduce its Treasury holdings.
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