What did Last Week's Data Tell Us?

From Barron's

Friday, for instance, we learned that U.S. employment grew in April at its slowest pace in more than two years, as payrolls rose by just 88,000 while the unemployment rate inched up to 4.5% from 4.4%.

That marks a three-month average decline in job growth to 118,000 from a 12-month average of 157,000, "a significant drop-off," says Daniel Genter, chief investment officer of Los Angeles-based RNC Genter Capital. It's also "a trend that's likely to continue," he says.

Though the jobs report was weak, the Institute for Supply Management reported stronger-than-expected readings for both its manufacturing and non-manufacturing indexes. Yet the week before, the Commerce Department said gross domestic product grew at a seasonally adjusted annual rate of 1.3% in the first quarter, the slowest growth since the first quarter of 2003.

1.) The economic trend is definitely slowing. Overall GDP growth is clearly slowing. GDP has been dropping from the 2.5% range to 1.3 range.

2.) Employment is a lagging indicator. Employers will do everything they can with current employees before adding new ones.

The year-over-year percent change in employment is still positive. Here is a chart from the St. Louis Federal Reserve.



Notice that while the trend is still positive, it has been decreasing at a constant rate since about the first quarter of 2006.

3.) While the ISM data was positive, it was one month's worth of data. Here is a chart from Martin Capital that places the ISM information in a more detailed context.



Notice that

-- The Industrial ISM was hovering between 50 and 54 for the last few months, indicating just enough activity keep the economy out of recession. Last month was a postive spike out of this activity level, but it is only one month of activity.

-- the year-over-year chart of industrial production is still down.

-- capacity utilization is still heading lower.

In other words, the usage of industrial assets is still saying things are slowing down. We'll need a few more months of ISM manufacturing data to confirm the trend.

In addition, compare the national ISM with the following regional manufacturing information.

From the Richmond Fed:

Manufacturing activity in the central Atlantic region continued to contract in April, according to the Richmond Fed’s latest survey. Respondents reported somewhat sharper declines in factory shipments with the pace of decrease of new orders and backlogs on par with March. Employment and capacity utilization declined at slower rates, and delivery times edged lower. In addition, manufacturers reported that growth in inventories remained on pace with March.

From the Philly Fed:

Activity in the region’s manufacturing sector was basically unchanged again this month, according to firms polled for the Business Outlook Survey. The index for general activity was near zero, and indicators for new orders, shipments, and employment were only slightly positive, suggesting little change from March. Regarding future activity, the region’s manufacturing executives were somewhat more optimistic this month than they were in March.

From the New York Fed:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers were flat again in April. The general business conditions index edged up 2 points, to 3.8, rebounding only marginally from March.

From the Kansas City Fed:

Tenth District manufacturing activity rebounded strongly in April, and expectations for future factory activity remained high following a strong increase last month. The price indexes in the survey were largely unchanged, with raw materials price indexes easing somewhat and finished goods price indexes rising only slightly.

It looks like the Kansas City area may be responsible for the increase.

Let's sum up.

-- The employment picture is slowing.

-- GDP growth is slowing.

-- The positive news from manufacturing may be the result of one region having a good month.

Money Moving Into Health Care?

Earlier this year Barron's had an article discussing health care. The gist of the article was health care -- which has languished for the last few years -- may make a comeback this year. The article focused on earnings and new products. I would add the added dimension of safety. As the economy slows down, investors may start to switch assets into safer investments -- especially investments that are a bit more immune to economic fluctuations.

Two charts indicate this may be happening. Here is a chart of the health care ETF. The chart has enjoyed a slightly upward moving rally since late 2005. Recently the ETF has broken through resistance just below 35 on a good volume spike.



Here is a chart of the big-Pharma ETF, PPP. This chart has a classic triangle consolidation and has broken out of the pattern on good volume as well. This chart still has a major point of resistance just a bit below 54.

It's All About Liquidity

News of Microsoft looking to acquire Yahoo is keeping the markets afloat today. This at a time when the economy is growing at 1.3% annually and employment growth appears to be slowing.

However, looking at the Flow of Funds report, a different measure comes up. Retained corporate profits came in at $731 billion dollars in 4Q 2006. That number is $499 billion with capital consumption adjustments. That's one of the primary ways that companies are fueling all of the merger and acquisition in the market right now.

Take a look at this chart from the St. Louis Fed of corporate profits with inventory adjustments. In short, companies are doing very well.



Here's the year over year change in corporate profits.



There's a ton of liquidity in the market right now.

Employment +88,000

From the BLS:

Nonfarm payroll employment edged up (+88,000) in April, and the unemployment rate was essentially unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains continued in several service-providing industries, including health care and food services, while employment declined in retail trade and manufacturing.

An important note. The BLS has issued some very sweeping revisions to employment reports for the last 5 years. That means this number could be subject to an upward revision in the coming months.

Let's look a bit deeper into the numbers.

Goods producing dropped 28,000, with construction dropping 11,000. My guess is the increase in non-residential construction is absorbing some of the losses from residential construction.

Education and health was up 53,000. The education and health category has a steady increase for the last 5 years. So long as the US population continues to age, this trend will probably continue. So basically, the employment report can count on this category to continually add jobs to the figures.

Government increased 25,000. The fact that government employment is responsible for about 30% of total monthly employment growth should raise a few eyebrows. When the public sector is responsible for a pretty large chunk of job growth there might be a problem.

Retail lost 26,000 jobs. Remember these are April numbers, so we're beyond letting people go for the Christmas season. While productivity increases may be responsible for some of the losses, retail is still pretty dependent on the "human touch". That means that letting people go could mean retail sales are not where people want them to be.

Here's a graph of the y/t change in retail sales from Martin Capital. Note they are still strong, but have been declining for the last year or so.



This is not a good report. Expectations were for a low number anyway, and the initial report was below those expectations.

ISM Services Up

From the Institute for Supply Management:

ISM's Non-Manufacturing Business Activity Index in April registered 56 percent compared to the 52.4 percent registered in March, indicating a faster rate of growth in business activity in April. The implication is that non-manufacturing business activity is continuing to increase for the 49th consecutive month. Thirteen industries reported increased business activity, and two reported decreased activity for the month of April.

The industries reporting growth of business activity in April are: Arts, Entertainment & Recreation; Accommodation & Food Services; Transportation & Warehousing; Utilities; Information; Public Administration; Other Services*; Retail Trade; Real Estate, Rental & Leasing; Finance & Insurance; Construction; Educational Services; and Health Care & Social Assistance.

The industries reporting contraction of business activity in April are: Wholesale Trade; and Professional, Scientific & Technical Services.

Looking at an average of the last 4 months, the overall activity index is about 54, which puts the average in the expansion area.

Notice in the second paragraph above the large number of industries experiencing an expansion versus the number that are experiencing a contraction.

In addition, there were positive anecdotal comments about the overall economic situation:

* "Progressive improvement in the business cycle." (Transportation & Warehousing)
* "We are showing signs of recovery from bad news. Transactions are increasing faster than our normal seasonal increase." (Accommodation & Food Services)
* "Concerned about the rapid increase in energy cost." (Professional, Scientific & Technical Services)
* "The level of business is maintaining an even level at this time. Capital projects are ramping upwards." (Educational Services)
* "Sales in the first three months of the year are slower than expected while pressure to lower prices is increasing." (Wholesale Trade)

These quotes indicate business is getting better and at a faster than expected rate.

The only negative to this report was the prices component:

Prices paid by non-manufacturing organizations for purchased materials and services increased in April for the 47th consecutive month. ISM's Non-Manufacturing Prices Index for April is 63.5 percent, 0.2 percentage point higher than March's index of 63.3 percent. In April, the percentage of respondents reporting higher prices increased by 4 percentage points to 42 percent as compared to March. The percentage indicating no change decreased from 58 percent in March to 54 percent in April. The percentage of respondents noting prices decreased remained the same at 4 percent in April.

While the increase was small (.2), it was still an increase. In addition, notice this is the 47th month of prices paid increases. The increases in productivity for this expansion may be enough to absorb those increases, but the Federal Reserve will still be looking at the overall increase next week.

Buying Panic?

That's the title from an article in today's WSJ.

I've been having an extremely difficult time understanding this market. The market goes higher as the economy continues to slow down. There are a few explanations.

1.) Once the market establishes a trend, it tends to stay intact. The SPY and QQQQ have solid, uptrending rallies in place. For traders who simply look at screens, this says "buy". In other words, traders are ignoring economic fundamentals in favor of technical trading.

2.) The market is anticipating an economic turnaround later this year. There are some economists who are arguing the current slowdown is simply a pause in the economy and economic growth will return to 2%-3% later this year or earlier next year. Traders may be looking to the future in an attempt to get in the ground floor of another rally.

3.) While the market isn't cheap, it certainly isn't expensive. According to Barron's the Dow's P/E is 17.29 and the S&P's is 20.18. While this isn't cheap, we have sen far loftier valuations in the past.

4.) Corporate earnings have surprised this earnings season. However, let's add an important caveat to that statement. It's entirely likely that companies were aware of the earnings slowdown and therefore lowered their earnings guidance. At the same time, analysts may have grown more conservative in a slowing earnings environment, making their projections conservative. This means the earnings beating numbers were in fact fact beating a low-ball set of estimates.

5.) There are a ton of deals going on in the market right now. Traders may be buying shares in an attempt to anticipate the next big merger.

6.) Corporate stock buy-backs are providing upward buying pressure, or at least providing some type of buying floor to shares.

While I spend a fair amount of time on technical analysis, I am also a fan of having a solid fundamental backdrop to a chart. If the economic background isn't solid, then trading for an upward move is far riskier. And right now, the fundamentals just aren't as solid as I would personally like.

That's my take.

I'll add that I've been wrong before -- I thought Madonna would be a one hit wonder.

GMAC Swings to Loss As a Result of Sub-Prime Loans

From the WSJ:

GMAC's home-lending unit, also known as ResCap, posted a loss of $910 million compared with a year-earlier profit of $201 million, due to continued pressures of the U.S. mortgage market. The slower housing market has led to an increase in the number of defaults on high-risk, or subprime, loans -- an area where ResCap, traditionally thought of as the jewel of the GMAC portfolio, does business.

Amid the sharp downturn in the U.S. mortgage market, GMAC said many of ResCap's nonprime assets were liquidated at a loss or marked substantially lower to reflect the severe illiquidity and depressed valuations in the prevailing market environment. GMAC established substantial incremental reserves during the quarter against various nonprime loans on the balance sheet.

In Wednesday's release, the company said its ResCap unit should "be far less vulnerable to further adverse developments in the nonprime space." GMAC also said the setback ResCap incurred "is expected to be a temporary one."

A few points.

1.) This is the last thing GM needs right now. They're already under pressure from a declining market share in the US and are attempting to turn the company around.

2.) This may be a one time event. GMAC may have seen the writing on the wall and took a great deal of corrective action all at once rather than letting it bleed out over several quarters.

3.) Notice the severity of the profit to loss swing. GMAC went from $210 profit to $910 loss -- almost a billion dollars in value. That's more than just a few mark-downs; that's a fundamental shift in the value of certain assets.

Bonds Backed By Sub-Prime Loans Downgraded

From the WSJ:

More challenges are hitting bond investors who own securities backed by risky mortgages.

Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.

More than half the bonds that were downgraded were originally rated "investment grade" but were cut to "junk" status, because they now are viewed as much more likely to lose money. A few bonds with weak ratings already have been eroded by losses, which means investors in those bonds probably won't be repaid.

"It's unusual to see downgrades in subprime deals so soon after they were issued," said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. "This is not a normal phenomenon and is a cause of concern."

So long as there is liquidity, everything is fine. And that's where this news comes in. With rising defaults, sub-prime liquidity is starting to dry-up. That means fewer buyers of homes, which in turn means the high levels of homes on the market will remain on the market for a longer time.

If this type of news continues, it will eventually ripple through the economy in the form of lower GDP growth as builders continue to stop building homes because of high inventory levels caused by lower demand. What makes this most troubling is the time it takes for this to happen. The real estate market takes time to react to and influence the economy.

Gas Prices Up; Supplies Down

From This Week in Petroleum:

Gasoline stockpiles are still decreasing.



And prices are still increasing

Gasoline prices rose sharply for the week of April 30, 2007, increasing 10.2 cents to 297.1 cents per gallon. Prices are 5.2 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 8.2 cents to 291.7 cents per gallon. The largest increase was in the Midwest, where prices jumped 15.0 cents to 292.5 cents per gallon. Prices for the Gulf Coast rose 9.8 cents to 285.3 cents per gallon, while Rocky Mountain prices increased 11.3 cents to 295.7 cents per gallon. West Coast prices were up 5.9 cents to 327.7 cents per gallon. The average price for regular grade in California was up 4.3 cents to reach a record price of 335.9 cents per gallon, 15.7 cents per gallon above last year's price.

The short story is simple: as supply decreases, prices increase.

In addition, notice the rapid and steep drop in inventories. Oil refiners are going to have to make some serious production moves to add enough gas to the supply chain to satisfy summer demand.

Finally, these price increases are going to add inflationary pressure, which is further going to back the Federal Reserve into a painful policy corner.

New Manufacturing Orders Up

From the Census Bureau:

New orders for manufactured goods in March, up four of the last five months, increased $11.9 billion or 3.1 percent to $400.2 billion, the U.S. Census Bureau reported today. This followed a 1.4 percent February increase. Shipments, up following two consecutive monthly decreases, increased $5.9 billion or 1.5 percent to $392.9 billion. This followed a 0.6 percent February decrease. Unfilled orders, up twenty-two of the last twenty-three months, increased $12.9 billion or 1.8 percent to $717.3 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.1 percent February increase. The unfilled orders-to-shipments ratio was 4.92, up from 4.88 in February. Inventories, up twelve of the last thirteen months, increased $1.0 billion or 0.2 percent to $484.0 billion. This followed a slight February increase. The inventories-to-shipments ratio was 1.23, down from 1.25 in February.

Looking at the numbers, we have a 1.5% increase excluding transportation and a 4.5% increase excluding defense.

There was a 12.3% increase in communications equipment and a 4.2% increase in machinery.

However, the unadjusted orders are down .3% Y/Y, largely because of poor y/y comparisons in communications equipment and computers/electronics.

This is a solid report, and dovetails with yesterday's increase in the ISM. It confirms that manufacturing may be coming out of a slump. However, we need a few more months of data before we are completely out of the woods.

Business Investment For This Expansion

Here is a graph of the year-over-year percent change in business investment in chained 2000 dollars. Notice the following:

1.) The trend in equipment in software has been decreasing consistently for the last year.

2.) There was a big increase in structure investment starting in the second quarter of 2006, peaking the next quarter and then decreasing since.

Gas Prices Are Still Rising

From the WSJ:

The latest Energy Information Agency data show gasoline demand in the past few weeks rose 2.3% from the same period last year, outstripping growth in refinery capacity. That, in turn, is making the U.S. ever more dependent on gasoline imports.

Regular gasoline nationally averaged $2.97 a gallon, AAA reported yesterday. While that's still about nine cents shy of the highest price ever recorded, which was in September 2005, it is a record high this early in the season. Gas was selling for just $2.70 a gallon as recently as the beginning of April.

How high prices go this summer depends largely on what happens to the refineries that crank out the nation's fuel. Refinery outages in recent weeks, largely for maintenance, are part of the reason fuel prices have rocketed up. If refinery operations smooth out, gas prices could remain stable or even fall.

But the picture could be far bleaker if supply interruptions persist or intensify. In 2005, hurricanes Katrina and Rita smashed into the petrochemical-refining belt in the Gulf of Mexico, idling more than a quarter of the nation's refining capacity and sending gasoline prices climbing. Another hurricane striking Louisiana or Texas this year, even if less severe than the storms in 2005, could have a similar effect on pump prices.

"There's very little slack in the system, so it doesn't take a lot to go wrong to send prices higher," says Doug MacIntyre, senior oil-market analyst from the Energy Information Agency, a federal agency.

This highlights a few important points.

1.) Here is a graph from the same article that shows a few years of gas price history. Notice that prices typically spike in the mid to late summer. Notice this year prices are already spiking before the summer. That means we could have some really painful price action by July or August.



2.) This price action shows how silly the inflation ex-energy prices analysis is outside of Federal Reserve policy making. Consumers see total inflation -- inflation with food and energy prices -- every day. Therefore, keeping an eye on total inflation numbers is very important.

3.) The economy withstood higher energy prices last summer. However this year we have a completely different backdrop. We've had a year of sub-par economic growth. We've also had about a year of bad housing news. Those two factors could change the consumer's reaction to high gas prices.

Car Sales Slow

From the WSJ:

U.S. consumers, wary of rising gasoline prices and falling home values, pulled away from new-car showrooms in April, depressing new light-vehicle sales to the slowest annual pace since 1998.

The slowdown in demand for new cars and trucks marks the economic head winds Detroit's traditional Big Three auto makers face as they try to turn around their loss-plagued North American auto operations.

But the results also demonstrate the challenge the U.S. economy poses to more-successful Asia-based competitors like Toyota Motor Corp., which posted its first monthly U.S. sales decline in nearly two years. Toyota, which recently surpassed General Motors Corp. in global vehicle sales to become the world's No. 1 auto maker, had been increasing sales earlier this year even as Detroit struggled and has continued to invest in auto-making capacity in North America, the world's largest car market.

....

Total car and light-truck sales fell 7.6% to 1,338,603 vehicles in April, according to Autodata. That translated to a seasonally adjusted annual selling pace of 16.27 million vehicles, down from 16.69 million a year ago.

"The consumer seemed to be frozen," said Brad Bradshaw, Nissan Motor Co.'s U.S. vice president, who noted decreased traffic at his company's dealerships in April. The No. 6 U.S. auto maker's sales were off 18%.

There are a few points to make here.

1.) Let's assume that purchases of durable goods (like cars and trucks) represent a sign of confidence in the future. If this is true, then consumers may not be that confident in the next few years.

2.) I am looking at buying a car at the end of this year or the next. The first thing I do when looking at a big purchase is to read Consumer Reports. According to their reliability analysis, Japanese cars are still very dependable and US cars are still a bit spotty. This has been the trend since I was a kid and I'm 40 now.

3.) There is also the question of household debt. According to the Federal Reserve's Flow of Funds Report, total household debt outstanding totals about 130% of disposable income at the national level. There is no hard and fast rule for how much debt is too much. But I feel pretty confident in saying we're a whole lot closer to saturation than we were 5 years ago.

Turn Up the Volume

There are numerous technical indicators that I ignore because a simple reading of the price and volume will usually say the exact same thing without adding to the noise. However, indicators that combine price and volume action can be very helpful in seeing what is happening in a particular security or index.

Here are three charts of the SPY, QQQQ, and IWN respectively. Ignore the price lines of the charts and instead focus on the two technical indicators below the price lines.

The first is of the Chaikin Money Flow. It attempts to measure the amount of money flowing into and out of a stock. You can read more about it here. Whenever the indicator has a green mountain appearing formations like those below it indicates money is flowing into the stock.

The second is the On Balance Volume indicator. You can read more about it here. A rising line indicates money is flowing into a stock and a declining line indicates money is flowing out of a stock.

The point of these graphs is simple: two technical indicators are telling us that money is flowing into all three securities, and has been for about nine months.

How Confident Are Traders .... Really?

Here are two charts. One is for Federal Express (FDX) and the other is for UPS. Are traders really confident in the US economy?

ISM Increases

From the Institute for Supply Management:

Manufacturing growth accelerated in April as the PMI registered 54.7 percent, an increase of 3.8 percentage points when compared to March's reading of 50.9 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

.....

ISM's New Orders Index surged to 58.5 percent in April.

.....

ISM's Production Index registered 57.3 percent in April, 4.3 percentage points higher than the 53 percent reported in March.

.....

In April, the ISM Prices Index registered 73 percent, indicating manufacturers are paying higher prices on average when compared to March.

In short, this is a solid report. It indicates manufacturing may be poised for a rebound. If we have 2-3 more months of similar performance in the index then manufacturing could be said to be turning around.

The only drawback is the prices paid component of the index. Inflation has been incredibly sticky this expansion. Despite the clear economic slowdown for the last three quarters inflation has been very stubbornly clinging to the 2%-3% range. This report confirms that trend is likely to continue for the foreseeable future.

Oil Market Update

Here's a daily chart of the oil market from Stockcharts. Notice the following bullish chart patterns.

1.) The uptrend that started in mid-January is still firmly in place.

2.) There is a secondary uptrend in place that started in early April.

3.) There is an ascending triangle pattern that started in early April. These are considered bullish chart patterns because the market continually makes higher lows, indicating traders think the lowest price for the commodity is increasing.

4.) The 20-Day SMA is rising, which is puling the 50-day SMA higher.

5.) Prices are over the 20 and 50 day SMA, which will continue to pull these averages higher.

6.) Prices have been bouncing off the SMA, using the SMAs as support.

7.) Remember the fundamental picture is still bullish. OPEC has reduced production, the US entering the summer driving season and China and India are still growing at high rates.

Gasoline Prices Over $3.00/Gallon

From IBD:

The nationwide average price at the pump shot up 10 cents last week to $3.02 a gallon, the most since mid-Aug. Gasoline prices have soared as refinery woes limit already tight supply and demand ramps up for the summer driving season. Gas futures rose 3.4% — 18.6% in April — to $2.4405. June gas closed nearly flat Mon. at $2.2594. June crude fell 75 cents to $65.71 a barrel.

The primary reason for this is a continued dwindling of gas stockpiles. Here is a chart of national gasoline inventory from the Energy Department's "This Week in Petroleum". Notice the clear downward trajectory over the last few months.



Here's a chart of gas prices from the same report.



Note that prices were about this high at the same time last year. However, this year is different because the US economy has had about a year of sub-par growth and a big housing slowdown. These two factors may have changed consumer perception to make the $3.00 prices feel more expensive this year and forcing consumers to slowdown their spending a bit more.

Circuit City Issues Warning

From the WSJ:

Circuit City Stores Inc. warned that April sales were "substantially below plan" and pulled its financial guidance for the first-half of the year. Shares fell 8% in late trading.

The consumer electronics retailer, which is in the midst of restructuring and faces intense competition in the television market, cited weak sales of large flat-panel and projection-televisions. The company previously anticipated a pretax loss of $40 million to $50 million in the first half of the year.

Circuit City shares closed the regular trading session on the New York Stock Exchange down 2.7% at $17.45. In after-hours trading, the stock was recently at $16, down 8.3%.

I looked for similar announcements from Best Buy and couldn't find any. Therefore, this may be company specific information.

However, it may also be a sign of a broader consumer slowdown. Yesterday the BEA announced that consumer purchases dropped .2% in March after adjusting for inflation. This may be a single data point in time which will rebound in the future.

However, it may not. Therefore, it's important to watch retailers' announcements for clues about future consumer behavior.

About This "Core Inflation" Thing

From today's WSJ:

On the inflation front, yesterday's report was mostly positive. The price index for PCE increased 0.4% in March, due to higher food and energy prices, after a 0.4% gain in February. Excluding food and energy, which economists often ignore because they tend to be volatile, the PCE index was flat. Year over year, the core PCE index was running at a 2.1% annual rate, down from 2.4% in February.

Economist have been watching inflation indicators for signs that energy and food prices would lead to broader price increases, but that hasn't happened. "Although headline inflation continues to climb, there is scant evidence of any pass-through to consumers," wrote Joseph Brusuelas, chief U.S. economist at research firm IDEAglobal, in a note to investors.

The statement in bold is completely removed from reality and needs to stop. Consumers see the signs of higher prices whenever they fill up their cars or buy groceries. In other words, consumers see higher prices at least twice a week and probably more often.

While the core/ex-food and energy data is important at the national level, it is only relevant to members of the Federal Reserve Board when they are considering interest rate policy. For everybody else, the total inflation number is a very important number.

Please adjust your reality perception accordingly.

Thanks --

Bonddad

A Deeper Look At Consumer Spending

Here is a graph of the year-over-year percent change in consumer spending in chained 2000 dollars. DG = Durable Goods, NDG = Non-Durable Goods and Service = service (duh). Pay particular attention to the first two areas of change. They represent the first year over year levels of consumption expenditures coming out of a recession. Here is the point of this graph. Consumption expenditures are still strong on a year-over-year basis. Until we start seeing YOY comparisons like those in the first few quarters after the recession the economy should be doing OK.

Consumer Spending Year Over Year Change

Here is a chart of Personal Consumption Expenditures year-over-year change in chained 2000 dollars. The previous chart I used was derived from the wrong data set.

Construction Spending Up .2%

From CBS:

Spending on U.S. construction projects rose 0.2% in March, fueled mostly by outlays for private nonresidential projects and offsetting a drop in spending on federal and private residential construction.

Construction spending in February was also revised to rise significantly upward, by 1.5%, from a previously estimated gain of 0.3%, causing some economists to boost their projections for first-quarter economic growth.

Let's look at the numbers:

Total annualized construction spending was $1.187 trillion in March, with private construction spending totaling $900.281 billion.

Private residential construction totaled $569 billion or about 48% of total construction spending and 63% of total private spending. This number was down 1% from February and 14% from March 2006. At the same time, private nonresidential spending is up 2.4% from February and 16.5% from March 2006. However, public nonresidential spending was up .4% from February 2006 and 9.5% from March 2006.

Here's an interesting fact. The total value of private and public nonresidential spending is $609 billion, making it about $50 billion larger than nonresidential. That means these combined sectors could theoretically absorb construction workers displaced in the housing slowdown. That assumes that residential and nonresidential construction projects are occurring in the same location and involve the same skill sets etc...

Consumer Spending Decreases .2% In March

From the AP:

The Commerce Department reported that consumer spending on all items was up 0.3 percent last month, the slowest increase since a similar rise in October. Incomes rose by 0.7 percent, the fourth straight solid month of income growth.

The spending performance was even weaker when the effects of higher gasoline prices were removed. After adjusting for price increases, consumer spending actually fell by 0.2 percent in March, the poorest showing since the fall of 2005 when the economy was suffering the aftershocks of Hurricane Katrina.

From Bloomberg:

``I would expect, especially if gas prices continue to push higher, that consumers are not going to be contributing nearly as much'' to economic growth, Chris Low, chief economist at FTN Financial, said before the report.

.....

``The rise in gasoline prices ate up the gains in nominal spending,'' said James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``Everything points to a much weaker consumer in the second quarter.''

This is one of the main reasons I focus a great deal of attention on gasoline prices. It's a price consumers have to pay, usually at least once a week. It's also a vital expense. Consumers will buy gas pretty-much regardless of the economic circumstances. When gas prices increase, consumers may cut back on spending on other goods and services.

The drops in consumer spending occurred in non-durable goods and services. These sectors dropped by 2.8 billion and 13.2 billion in chained 2000 dollars.

The inflation numbers were mixed. CBS reported:

The core personal consumption expenditure price index was flat in March, bringing the year-over-year increase down to 2.1% from 2.4% in February. Economists had expected a 0.1% gain in the core PCE.

The downward direction on inflation is sure to please Fed officials, but the level remains above the central bank's inflation ceiling of 2%.

Total inflation rose 0.4% in March and is up 2.4% over the past year.

For those of you who don't consumer food or energy, you saw no price increases. For the rest of us, we saw an increase especially in oil. The price at the pump in Houston Texas (where I live) is just below $3.00/gallon for premium. And it's only the end of April.

It's important to add the Fed has been forecasting lower inflation from lower growth for nearly a year now. Inflation has remained above the Fed's comfort zone for most of this time. While it has dropped a bit it's still higher than the Fed would like. Conversely, it's also important to point out inflation has not gotten out-of-hand. It's just been very stubbornly hanging on to the 2% - 2.5% range for some time.

I still don't see the Fed lowering rates because of this. They have firmly come out on the side of fighting inflation at the expense of economic growth.

Technical Issues Hurting Refiners

I've been closely following the gas market for the last few months. The reason is simple: gas prices are higher than the same time last year partly because gas stockpiles are down in a big way (here's a link to the latest update.) It turns out refiners are having more problems than usual:

Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough U.S. refineries, they don't run right.

After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime that has raised concerns about the adequacy of oil-product supplies.

Just about every day in recent weeks, a period when refineries ramp up production, unit malfunctions, fires and other mishaps have had oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.

This is an issue the US will have to come to grips with over the next few years. So long as the US is dependent on gas for a variety of necessary economic functions all of the parties involved -- but primarily business and environmental concerns -- are going to have to figure out a way to deal with the situation.

Big Stocks Finally Beating Small Stocks

From the WSJ:

For months, Wall Street professionals have been recommending big-company stocks as a safe bet in a slow-growing economy, only to be proven wrong as small stocks surged ahead.

Now, after the Dow Jones Industrial Average's run this month to records and its first close above 13000, gains for blue-chip industrials this year are equal to those of the small-stock Russell 2000 index. Both are up 5.3%. But for just this month, the industrial average is up 6.2%, compared with 3.6% for the Russell.

The gains for big household names like those in the industrial average were fueled by quarterly earnings gains that beat expectations for the likes of 3M, Microsoft and Exxon Mobil. Microsoft, for instance, posted a 65% earnings surge and its stock jumped 3.5% in one day on the Nasdaq Stock Market.

......

The common wisdom has been that large companies, which often have more-extensive overseas operations than small companies, are better positioned to withstand a softer U.S. economy. They also benefit from a weaker dollar because profits in foreign currencies look more impressive when translated into dollars. The U.S. currency on Friday touched its lowest point against the euro since the launch of the common currency in 1999.

Strong international sales have been a common theme for the duration of this earnings season. Many large companies have literally the same reporting template: weak US economy, strong international demand.

However, how much of the gain in sales is actually due to stronger sales and how much is actually due to the dropping value of the US dollar relative to other currencies?

This has been a theme of the WSJ's blog for the past week or so.

Here's a chart of the Dow versus the Russell 2000 for the last 4 years and the last week.

Painting Weekend

I'm painting the house this weekend -- with much needed and appreciated help from Bonddad's wonderful girlfriend. I'll be back Sunday night.

Gasoline Supply May be Very Tight This Summer

From CNBC

Phil Flynn, a member of Alaron Trading, told CNBC’s “Squawk Box” that the U.S. may face tight gasoline supplies this summer.

“(Production numbers) better change soon,” Flynn said Friday. “Otherwise, we’re going to have big problems in this country. I don’t know how we’re going to get gasoline supplies where they need to be by Memorial Day. We need to be at 210 million barrels in just a few weeks. We’re at 194 million.”

Here's a chart of US gasoline supplies. The red line -- the line that is heading down in a big way -- is the current inventory level.



This means that gas prices could again be a problem this summer.

Last summer we had $3.00/gallon prices and above with little painful effect on the overall economy. However, we've now had 4 quarters of slow economic growth, and a year of bad housing news. This summer $3.00/gallon may be an inflection point hitting consumer spending negatively.

As with most things economic, we'll have to see how this one plays out.

Advance Estimate GDP = +1.3%; Price Deflator Increases 4%

From the BEA

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the first quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.

The Bureau emphasized that the first-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The first-quarter "preliminary" estimates, based on more comprehensive data, will be released on May 31, 2007.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the first quarter primarily reflected a downturn in exports, an upturn in imports, a deceleration in PCE for nondurable goods, and a downturn in federal government spending that were partly offset by a smaller decrease in private inventory investment, an upturn in equipment and software, a smaller decrease in residential fixed investment, and an acceleration in PCE for durable goods.

From Bloomberg:

The U.S. economy grew in the first quarter at the slowest pace in four years, hobbled by the slump in home construction and a bigger trade deficit.

The 1.3 percent annual growth rate was less than forecast and followed a 2.5 percent fourth-quarter pace, the Commerce Department reported today in Washington. A measure of inflation watched by the Federal Reserve rose at a faster pace.

.....

A jump in oil last quarter pushed up prices. The report's price index rose at an annual rate of 4 percent, the most since 1991, compared with 1.7 percent in the fourth quarter.

The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, up from a 1.8 percent fourth-quarter gain. Fed Chairman Ben S. Bernanke is among policy makers that have said a 1 percent to 2 percent increase is preferable.

From CNBC:

Weaker exports and a steady slide in spending on homebuilding helped slow U.S. economic growth to its softest pace in four years during the first quarter, the Commerce Department reported on Friday.

Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3% annual rate in the three months from January through March.

That was a little more than half the fourth quarter's 2.5% rate and well below the 1.8% rate that Wall Street analysts had forecast GDP would expand. The last quarter when growth was weaker was in the first three months of 2003, when GDP expanded at a 1.2% rate.

.....

A price gauge favored by the Federal Reserve - personal consumption expenditures excluding food and energy items - increased at a 2.2% rate in the first quarter, slightly ahead of forecasts for a 2.1% advance. That was up substantially from the fourth quarter's 1.8% rate and is likely to keep Fed policy-makers wary about the potential for a pickup in inflation.

From CBS:

Hit by rising energy prices and a weak housing market, the U.S. economy slowed to 1.3% real annualized growth in the first quarter, the weakest expansion in four years, the Commerce Department estimated Friday.

.....

Led by higher energy costs, the GDP price index increased 4%, the most in 16 years. Meanwhile, core consumer prices - which exclude food and energy costs - increased at a more moderate 2.2% annual pace. In the past year, core prices are up 2.2%, the same year-over-year pace as in the fourth quarter, but above the Fed's 2.0% ceiling.

Consumer prices including food and energy are also up 2.2% in the past year.

Here are the details from the report.

Personal Consumption Expenditures (PCEs): + 3.8%. The big surprise here is the 7.3% in durable goods expenditures. The big reason for the jump was a jump in car and furniture sales.

Gross Private Domestic Investment decreased 6.5%. Residential investment fell 17%, which is to be expected. Nonresidential investment increased 2%, with the subcategory structures increasing 2.2% and software/equipment increasing 1.9%.

Exports decreased 1.2% and imports increased 2.3%.

Government spending (government consumption expenditures) increased .9%. Federal spending decreased 3% and state spending increased 3.3%.

Here's the summary:

This report is terrible. Growth slowed more than forecast and inflation increased more than expected and well beyond the Fed's comfort zone.

The Fed is between a rock and a hard place. They've been there for awhile and they will remain there for the foreseeable future.

Treasury Market Update

Let's take a look at the weekly 10-year Treasury chart.



There are two trends on this chart.

1.) Since interest rates hit 5.25% in early July 2006, rates have headed lower. Remember that Treasury prices and yields move inversely, so this means traders have been buying treasury bonds. This means there is at least a diminished fear of continued inflationary pressure.

2.) At the same time, there is an upward move in yields that started in November of last year. That means that traders are selling at an interest rate of about 4.4%.

Putting these two trends together and we get a classic consolidation triangle. All this means is there is a tug-of-war going on in the market between bullish and bearish sentiment.

Earnings Are Good, But Beware Comparisons

From IBD:

With more than half of companies reporting so far, analysts are looking at high single-digit year-over-year gains. That would snap the streak of 14 straight quarters of double-digit earnings growth.

But that is a lot better than Wall Street was predicting at the start of earnings season.

With fear of a slowing economy, many firms issued conservative guidance or none at all. Analysts didn't want to go out on a limb.

"People had really ratcheted down their expectations, so it was going to be pretty easy to get over," said Dirk van Dijk of Zacks Investment Research.

Back on April 1, analysts expected S&P 500 companies to deliver first-quarter earnings growth of 3.4%, said Thomson Financial.

Let's talk about expectations management. CEOs -- and all public spokespeople of big companies -- are media savvy. They understand that beating lower expectations will be a positive boost for stock prices. Hence, they will try and lower expectations in the hopes that a positive earnings surprise will increase a stock's value.

Analysts have a different fear, but one that has a similar effect: they don't want to be wrong. Hence, they will tend to be more conservative especially at a time of slowing economic growth.

These two factors are coming together this earnings season.

After all of the smoke clears from this earnings season, we're probably going to wind up where we thought we were going to wind up: High-single digit growth. This is about what we expected.

But the combined effect of conservative or no company estimates and analysts making conservative projections for fear of being wrong has lead to a bit more overall excitement this earnings season than is warranted.

In short -- we're where we pretty much predicted we would be this earnings season -- high single digit earnings growth. We just took a more emotionally charged avenue to get here.

Weaker Dollar Boosting Earnings

From CNBC:

Of those 19 Dow components--about two-thirds of the Dow--one company, Alcoa, had a negative impact on revenue from currency changes.

Two companies--AT&T and Intel--told us that there was no effect. But 14 companies had a positive impact, ranging from a low of 7% to a high of 51%.

The average company had a 27% positive currency earnings impact.

Revenues from these 19 companies are up $21.5 billion for the quarter. Of that amount, $3.4 billion, or 16% has come from positive currency gains.

So far, revenues are running about $9 billion ahead of analyst estimates. So the currency factor explains about 40% of the surprise.

US companies are benefiting from the same situation that has benefited Asian companies for some time. If the value of a currency is lower, goods sold in that currency are cheaper. Hence, the boost in international earnings.

It's going to be interesting to see how this impacts the international trade deficit. This increase in domestic profits from international sales is what is supposed to happen in a free-trading currency trading situation. As the trade deficit increases, the home country's currency is supposed to drop in value which in turn makes its products more competitive internationally. The question now becomes, is the dollar at a point of inflection -- where it's decreased value now has a long-lasting positive impact on the trade balance?

Here's a chart of the deficit form Martin Capital.

Market's Overview

With the markets rallying right now, let's take a look at the overall technical picture of the markets to see exactly what they look like.

First, here is a chart of the SPYs and QQQQs. Both markets have a very nice uptrend in place. It's not too steep and not too shallow. W.D. Gann -- one of the greatest traders the market has ever seen, hypothesized a 45 degree angle is about right for the markets. These rallies are along that line.

In addition, the 10 and 20 day simple moving averages are trending up and each index is above the SMAs. So long as prices continue up, they will continue to pull the SMAs up. Also note the 10 and 20 day SMAs are above the 50-day SMA, which means the shorter-term averages will pull the longer averages up.

In short, these are bull charts from the daily perspective.





The IWNs are a little different. While they share many of the same bullish characteristics of the SPYs and QQQQs, they differ in one key area. Price wise, they are having a difficult time rising over resistance. Traders are hesitant to take this average higher.

The WSJs market beat blog has done a fair amount of writing on what it calls megacaps -- stocks with very large market capitalizations. These stocks have performed well from an earnings perspective and are considered safer as well. The IWNs difficulty getting over resistance may be a sign of a flight to quality -- traders looking for more secure names.

More Signs of International Strength Helping the US

From today's WSJ:

More than half of General Electric Co.'s revenue is expected to come from outside the U.S. for the first time this year, Chairman Jeffrey Immelt said in an interview before the conglomerate's annual meeting.

Ford's North American automotive operations continued to suffer losses, but other key units, including Ford Europe, posted profits. Notably, the company's Premier Automotive Group posted a record $402 million pretax profit in the quarter.

The North American Automotive unit posted a pretax loss of $614 million, versus a loss of $442 million a year ago. Sales in the division fell $1.6 billion to $18.2 billion. European pretax profit rose to $219 million from $65 million. Sales rose to $8.6 billion from $6.8 billion. First-quarter revenue in Ford's South American operations climbed to $1.3 billion from $1.2 billion, although pretax profit fell to $113 million from $137 million.

This these appears to be becoming far more important to US companies.

Freight Slowdown Hitting Transportation Companies

From the WSJ:

In addition to UPS's profit decline of 14%, railroad operator Norfolk Southern Corp. said its first-quarter profit fell 6.6%, hurt by continued weakness in the automotive and housing sectors. Trucking carrier Arkansas Best Corp., Fort Smith, Ark., saw its profit shrink by 22%, but said a cost-cutting program begun last fall helped it offset weakened freight demand.

The stubbornly persistent freight slowdown that began last year has been particularly tough on trucking companies, which are facing overcapacity and pressure to cut prices because they increased truck purchases before stricter engine-emission standards took effect. Railroad shipments fell nearly 5% in the first quarter, but tight capacity has helped railroad operators maintain their pricing power so far. Norfolk Southern, of Norfolk, Va., said pricing remained strong in the first quarter.

Here's a graph of total rail traffic's year-over-year percent change. It confirms the transportation slowdown:



When people aren't shipping goods, it indicates the economy is slowing. Additionally, businesses are in a difficult position. If they are anticipating a slowing economy they will order a smaller amount of goods. If they order too much, their inventory will rise which will hurt profits. If they order too little they may make the situation worse.

It's a Wash

From the Street.com.

"Are stocks going up or is the measuring stick going down?" asks Jeffrey Saut, chief investment strategist at Raymond James. The Dollar Index has lost over 33% since its peak in January 2002, he writes, while the Dow has rallied about 30% in the same period.

More Signs of International Strength Helping the US

From Bloomberg:

Sales in Latin America, where Colgate has almost three- quarters of the toothpaste market, rose 14 percent. Colgate- Palmolive, which also makes Science Diet pet foods and Irish Spring soap, boosted advertising spending 20 percent, helping revenue increase the most in at least nine years.

``The Latin American piece is the growth driver of the company,'' said Christopher Meeker, who helps manage $560 million at Farr Miller & Washington LLC, including Colgate shares.

This type of earnings announcement has been very common this season.

The Beige Book

The Fed released the Beige Book today.

Most parts of the country logged moderate economic growth in the early spring, despite sluggish manufacturing largely due to the housing slump.

The fresh snapshot of the national economy, released Wednesday by the Federal Reserve, found that "manufacturing activity was slow" in many areas and that "residential real estate activity continued to weaken, with sales declining in many districts and flat in a number of others."

Here's a link to the full report.

Here are some relevant bullet points from the report (in italics):

-- Reports on retail sales across the Districts were generally positive, although vehicle sales were mixed in several Districts.

-- Reports on retail sales in most Districts were generally positive.

-- Reports on vehicle sales were mixed among the Districts.

-- Residential real estate activity continued to weaken in many Districts.

These points lead to a question. Just how confident is the consumer? Assuming that buying durable goods indicates confidence, the consumer might not be as confident as it appears. Autos sales are mixes and housing numbers aren't that strong.

-- Manufacturing activity remained slow overall, although reports on conditions in the manufacturing sector varied across Districts.

-- Activity in the services sector increased in most areas throughout the Districts, particularly for firms serving business customer

Business seems to be doing alright, but not great.

-- Most Districts reported continuing tight labor market conditions, especially for skilled occupations, although several Districts reported expansions in employment levels.

-- Wage increases were reported in some industries of the New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. These were generally modest.

These figures are the key to keeping the economy in positive territory right now. So long as job growth is at least moderate and wage growth over the inflation rate continues, consumers will probably continue to spend.

-- Consumer prices remained generally stable or increased modestly, but most Districts reported a rise in input prices, particularly for metals and raw materials

This could really put the Fed in a bind of the economy continues to slow.

Gas Prices Decrease

From This Week in Petroleum

Gasoline saw a slight decrease for the week of April 23, 2007, falling 0.7 cent to 286.9 cents per gallon. Prices are 4.5 cents per gallon lower than at this time last year. East Coast prices were down 0.4 cent to 283.5 cents per gallon. The Midwest saw prices fall 3.2 cents to 277.5 cents per gallon. Prices for the Gulf Coast dropped 0.8 cent to 275.5 cents per gallon. Rocky Mountain prices increased 4.3 cents to 284.4 cents per gallon, while West Coast prices were up 2.3 cents to 321.8 cents per gallon. The average price for regular grade in California was up 1.1 cents to 331.6 cents per gallon, 24.8 cents per gallon above last year's price.

The good news in this report is the price difference between this year and last year has decreased to 4.5 cents. The bad news is gas inventories are still declining. Here's the chart from the same report:



Refiners aren't leaving any room for error in their production capabilities right now.

Will Construction Employment Lead to Recession?

For the last year or so, the blog Calculated risk has been discussing the effect of the housing slowdown on construction employment. His central argument is that as housing slows, construction employment will follow. Here is his explanation of the following graph linking housing and construction employment.

This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions follow starts, and employment usually tracks completions.

Here is the graph:



Let's coordinate that information with a chart of total employment and recessions. Notice that right before a recession employment rates are strong. However, also note the employment situation deteriorates rapidly as the recession begins and progresses.



Will construction losses be severe enough to send the economy into recession? I don't know. But these two sets of data indicate we may be finding out soon.

New Home Sales Increase 2.6%

From Marketwatch:

Boosted by warmer weather in the Northeast and Midwest, sales of new homes increased by 2.6% in March to a seasonally adjusted annual rate of 858,000, the Commerce Department reported Wednesday.

Sales of new homes were off 23.5% compared with March 2006.

The inventory of unsold homes rose by 1,000 to 545,000 in March, representing a 7.8-month supply. The inventory is down 1.4% compared with a year earlier, the biggest year-over-year decline ever recorded.

The median sales price rose 6.4% year-over-year to $254,000, as luxury homes continued to increase their market share.

Here's a link to the report from the Census Bureau.

Looking at the numbers, one fact stands out. Sales of homes in the Northeast increased 50% from 48,000 to 72,000. This is the primary reason for the increase. The Midwest also saw an increase from 122,000 to 134,000, or an increase of 9.8%.

It looks as though the increases in the NE and MW were essentially delayed deals that buyers put off until the weather settled down.

Also looking at the numbers we continue to have inventory issues. While the months available for sale number decreased from 8.1 to 7.8, the total number of homes on the market increased 1,000. The year-over-year inventory change was a decrease of 1.4%. This is both good and bad news. It's good because it may indicate the massive inventory build has stopped. It's bad because a years worth of sales have not taken a large number of homes off the market, indicating a glut of new homes for sale may still exist.

I should add that Calculated Risk has an excellent summary up.

Durable Goods Orders Rise

From the Census Bureau:

New orders for manufactured durable goods in March increased $7.1 billion or 3.4 percent to $214.9 billion, the U.S. Census Bureau announced today. This was the fourth increase in the last five months and followed a 2.4 percent February increase. Excluding transportation, new orders increased 1.5 percent. Excluding defense, new orders increased 4.5 percent.

From Bloomberg:

Orders for U.S. durable goods rose more than forecast in March, signaling business spending started to recover as the first quarter ended.

Orders for goods made to last several years increased 3.4 percent after a 2.4 percent gain in February that was larger than previously estimated, the Commerce Department said today in Washington. Orders excluding transportation equipment rose 1.5 percent after a 0.4 percent drop.

``We had been worried that businesses weren't confident enough to invest and this shows better confidence,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. ``It's still too early to say manufacturing is completely on the mend, but this is a positive.''

Let's coordinated this data with a few other points.

According to the Federal Reserve's most recent Industrial Production release:

Output in the manufacturing sector moved up 0.7 percent in March; the increase was led by advances in the production of durable goods.

According to the same report, final products of consumer durables orders

1.) The 4th quarter 2005 - 2006 year-over-year comparison was a decrease of 2.5%

2.) The annual rate in the first quarter of 2007 was a 0% increase, and

3.) The March 2006 - March 2007 comparison was down 1.3%.

We also have the following numbers in the business equipment sector:

1.) The 4th quarter 2005 - 2006 year-over-year comparison was an increase of 9.7%

2.) The annual rate in the first quarter of 2007 was a -.5% decrease, and

3.) The March 2006 - March 2007 comparison was an increase of 7.4%.


In addition, we have the following comparisons in the final products of materials durable goods orders:

1.) The 4th quarter 2005 - 2006 year-over-year comparison was an increase of 5.6%%

2.) The annual rate in the first quarter of 2007 was a 2% increase, and

3.) The March 2006 - March 2007 comparison was up 3.6%.

The materials orders are twice the size of the consumers durables -- 19.15% versus 7.16%. The materials orders are twice the size of the consumers durables -- 19.15% versus 9.95%.

At the same time, we have the following chart from Martin Capital:

More Signs of International Strength Helping the US

From the WSJ:

PepsiCo Chief Executive Indra Nooyi said the company's international business "performed well on virtually every dimension." "Volume gains in snacks and beverages were broad-based, operating margins expanded and growth was balanced across developed and emerging markets," said Ms. Nooyi. "Our business momentum is strong coming out of the first quarter, which increases our confidence in the full-year outlook."

Revenue at PepsiCo's international division rose to $2.25 billion from $1.89 billion. Its Quaker Foods North America unit saw revenue increase to $463 million from $443 million.

This has been a constant theme this earnings season -- strong international sales.

Pepsi's national sales were also strong, so the international division didn't bail out the domestic. But that's not the point. The point is international sales are strong across a spectrum of companies.

More Signs of International Strength Helping the US

Whirlpool's earnings announcement:

Whirlpool Corp. shares jumped as much as 17% to a record high on Tuesday after the appliance giant said last year's Maytag acquisition along with strong international demand boosted first-quarter revenue.

.....

"As expected, higher material costs and significantly lower demand in the U.S. negatively impacted our first-quarter results," said Chairman and CEO Jeff Fettig in a statement. "The global environment is progressing as planned and we continue to expect lower industry demand in the U.S. through the first half of 2007 with gradual improvement during the balance of the year."

From Kimberly Clark's earnings report:

Kimberly-Clark Corp. reported Monday a 64% increase in first-quarter profit, helped by cost cutting and strength in emerging markets, and affirmed its financial forecast for the year.

...

In Europe, personal-care sales rose more than 12%, with currency effects accounting for the entire increase. Sales volumes were up 1%, as strong gains for diapers were mostly offset by lower sales volumes in other areas. Net selling prices were down about 1%.

Huggies Newborn and Natural Fit diapers and Huggies Little Walkers diaper pants drove a 9% volume growth for Huggies diapers in core European markets of the U.K., France, Italy and Spain. In developing and emerging markets, personal-care sales climbed about 16%.

Sales growth was particularly strong across Latin America, as well as in China and Russia, the company said.

These results indicate that foreign sales may help to cushion corporate profits as the US economy slows.

Volume Issue?

There's been a fair amount of talk about "decreasing volume" in the market. I don't see that as the problem with the SPYs and IWNs. I do see it possibly with the QQQQs. Here are the charts of the SPY, QQQQ and IWN with an exaggerated volume display. The horizontal line is a simple eyeballing of the recent rally's volume level with other volume levels.

I think what some people are missing is the China sell-off distorted volume readings in the market. Take a look for yourself.







I should add that I see plenty of other problems in the market -- namely that the economic preconditions to a solid rally aren't there. But it doesn't look like volume is an issue at this point.

Violence In Another Country's Oil Fields

From Bloomberg:

The Ogaden National Liberation Front, a rebel group demanding an independent state within Ethiopia, claimed responsibility for an attack on a Chinese-run oil field that left 74 people dead, the African nation said.

``The attack has killed 74 people and seven more workers have been kidnapped'' from the field near the town of Abole, which lies in the east of Ethiopia near the border with Somalia, Bereket Simon, an aide to Ethiopian President Meles Zenawi, said in an interview from Addis Ababa today.

Nine Chinese workers were killed and seven kidnapped, he said. The field is run by Zhongyuan Petroleum Exploration Bureau, the Associated Press reported.

Just what the oil market needs -- another geographic area with violence and oil.

Flight to Quality Underway, pt. II

From the MarketBeat Blog of the WSJ:

But in all of 2007 so far, the biggest contributors to the S&P 500’s rally include just one company with a $150 billion market cap or more, AT&T. The megacap advances in April suggest a flight to safety — investors more willing to bet on global conglomerates — while the lack of broader market gains suggests investors are worried about economic growth. Breadth has been negative on four of the past five trading days; only Friday’s massive rally helped more stocks finish higher than lower on the day on the Big Board.

......


As noted in earlier posts, outperformance of late has been concentrated in megacap stocks. The exchange-traded fund tracking the S&P 100 has outdone those tracking the S&P Mid-Cap 400 and Small-Cap 600, as well as the Russell Microcap index. The largest-cap stocks trail small- and mid-cap names on the year, but have rocketed ahead in the last month, gaining 4.75% compared with the 3.7% in both the Midcap ETF and iShares SmallCap ETF. It may not persist, but it does point to both a flight to safety and indication that those companies have the ability to offset dollar weakness with overseas sales.

Take a look at this chart, which is a comparison of the utilities ETF versus the S&P 500 ETF.



Utilities are clearly moving up in relation to the broader indexes, indicating investors are looking for quality and safety right now.

Existing Home Sales Drop 8.4%

From CBSMarketwatch

Sales of existing homes plunged 8.4% in March to a seasonally adjusted annual rate of 6.12 million, the lowest in nearly four years, the National Association of Realtors reported Tuesday. It was the largest percentage decline in sales since January 1989. Economists were expecting sales to fall to 6.45 million. The median price of an existing home fell 0.3% year-over-year to $217,000. The inventory of unsold homes on the market fell 1.6% to 3.75 million, representing a 7.3-month supply. Sales of condos were unchanged, while sales of single-family homes dropped 9.5%. Sales fell in all four regions. "This number reflects subprime lending" as well as the cold weather in February, said David Lereah, chief economist for the real estate group. End of Story

From Bloomberg:

The decline in sales, while partly weather related, may renew concern that the housing recession will linger and put at risk the Federal Reserve's forecast for moderate economic growth. Subprime mortgage defaults are rising, and owners' reluctance to reduce prices may keep more unsold properties on the market.

``I have no reason to believe that this particularly is the low,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``A lot of forces that drove sales higher in recent years are still weakening.''

Concern about mortgage defaults helped depress consumer confidence in the U.S. to the lowest level in eight months during April, a separate private report showed.

From AFX News:

Existing home sales in the US recorded their steepest drop in 18 years in March, even as they shrank to a nearly four year low, the National Association of Realtors said.

Here's a link to the National Association of Realtors Website for the numbers

A few points.

1.) This number, well, sucks. Housing is not anywhere hear a bottom.

2.) All regions dropped. The smallest drop was 6.2% in the South. The Midwest had the largest drop of 10.9%.

3.) The total inventory available for sale increased 17.1% from year ago levels, increasing from 3,198,000 to 3,745,000. Current months available for sale inventory increased from 6.8% to 7.3%.

4.) There is further to do on the downside. While sales dropped, the median price increased from $213,600 in February to $217 in March. Seller's still haven't gotten the message that to move houses off the market they're going to have to lower prices.

5.) While weather was probably partially responsible, this drop is fundamental -- that is demand is weakening. Credit standards are tightening, consumers already have a ton of debt on their books and there are simply a ton of houses on the market to sell.

Business Economists More Pessimistic

From the WSJ:

The National Association for Business Economics industry demand index fell 20 points during the first quarter to 20, indicating much softer demand growth versus previous months.

The quarterly index, based on a survey of 107 NABE members about conditions at their firms or industries, is calculated by subtracting the percentage of respondents reporting declines from those reporting increases.

The industry demand index has posted a quarterly loss of 20 points or more only six times in the survey's 25-year history, NABE said, the last time being the first quarter of 2003.

"Nearly every indicator in the April NABE Industry Survey showed slower momentum in the first quarter than previously, with very cautious expectations for the near future," said Ken Simonson, chief economist of Associated General Contractors of America, who compiled the analysis of the latest survey for NABE.

Employment growth during the first quarter "sagged," according to NABE, with only 23% of firms adding to payrolls, a three-year low.

A few points, in no particular order of importance.

1.) This survey is only of 107 members. That's a small sample size. While my guess is these firms are larger and therefore have a disproportionate impact on the market, it's still a small size.

2.) That being said, the index has been around for a long time which gives us some benchmarking numbers to look at.

3.) Employment strength, low unemployment and increasing disposable incomes are a primary driving force of the US economy right now. However, this report says employment "sagged". That is not a good sign going forward. Remember the following chart, which shows employment conditions change rapidly right before and during a recession.

Toyota Now the Largest Auto Company

From the WSJ:

TOKYO -- Toyota Motor Corp. surpassed General Motors Corp. in quarterly sales for the first time, making it the world's biggest auto maker.

Toyota sold 2.348 million vehicles world-wide in the January to March period, topping the 2.26 million vehicles that GM sold in the same three-month period. GM has been the world's No. 1 auto maker for more than 70 years.

While the sales figures released Tuesday are only quarterly results, they represent the first time Toyota has surpassed GM in global sales. Analysts say it is just a matter of time before the Japanese auto maker surpasses GM in its annual figures.

Toyota has been steadily grabbing market share from its Detroit-based rival in the key U.S. market, as high gas-prices lure Americans to Toyota's smaller, more fuel-efficient vehicles such as the Camry, Corolla and Prius hybrid and away from GM's larger trucks and sport-utility vehicles. Sales of Toyota's high-end Lexus line grew 7% to 322,000 vehicles last year, making it the top-selling luxury brand in the U.S.

This really shouldn't surprise anyone. Japan has successfully implemented a great long-term strategy: build a quality product and people will buy it. For as long as I can remember, the general sentiment about Japanese cars is simple: they're well built.

In addition, Detroit as shot itself in the foot (again) with its strategy of selling large trucks in an era of rising oil prices. This entire situation is a complete replay of the 1970s when the oil shock first sent consumers to Japanese cars.

Finally, it shows the incredible effectiveness of a long-term strategy. Toyota has obviously been following a long-term plan which again revolves around a quality product. They have done this slowly and continually. And it has paid off handsomely.

Oil Prices Increase On Nigerian Situation

From Bloomberg

Crude oil surged, approaching $66 a barrel in New York, on concern shipments from Nigeria may be disrupted as complaints about the country's presidential election spawn more violence.

Nigeria is counting votes after the April 21 poll that observers said was marred by fraud. Militant attacks have already cut about a quarter of Nigeria's output. The country produces low-sulfur, or sweet, oil that is prized by U.S. refiners because of the high proportion of gasoline it yields. Refiners are boosting gasoline output before the summer months.

``Nigeria is the driving force in the market because there are a lot of questions about the fairness of the vote,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``The Nigerian crude is sweet with a high gasoline yield, so any disruption will be very bullish for gasoline.''

Let's look at a few charts. Here's a 15 minute chart from Future Source. Notice how oil ran upwards today in a strong rally.



Here's the weekly chart from Stockcharts. Notice how oil is above the head and shoulders formation and is now consolidating above the neckline.



I would guess that a peaceful resolution to the Nigerian situation would bring the price back down for now. This action would mirror the daily action after the Britain/Iran situation. However, oil is under upward pressure still from OPEC's production cuts, decreased US inventories, the approaching summer driving season and increasing oil demand. In other words, the fundamentals are still bullish.

More Signs of International Strength Helping the US

From IBD

This is an article talking about the airline industry. Although there is concern about weakening domestic demand, international demand is helping to soften the blow to earnings.

Analysts say weaker domestic demand would hurt Southwest more than other airlines since it has the most U.S. flights. Also, Southwest's large fuel hedges are wearing off.

Meantime, it's boom time on the international front, where demand, load factors and pricing remain strong. Most low-cost carriers don't fly these lucrative routes, but the legacy carriers are adding new flights, buoyed in part by an "open skies" deal that will free up European airports such as London's Heathrow to more U.S. carriers.

Even if domestic yields slow, many of those flights feed into higher-yielding international connections. "Those new international routes make domestic routes stronger," said Michael Boyd of the Boyd Group.

Big Drug Stocks Shine last Week

From IBD:

On Friday, the 79 stocks in IBD's ethical drugs group rose to their highest level since November 2000. The group has been on a general uptrend since July, though increases have become sharper the last month.

Last week's surge was largely the result of better-than-expected quarterly results, even as many top players continue to grapple with sluggish growth, weak pipelines and regulatory risks.

"In general it was a huge quarter for U.S. pharma companies both internationally and in the U.S., where sales were stronger than expected," said Jon LeCroy, analyst at Natexis Bleichroeder.

Last Thursday I wrote an article that had the charts of the health care, utilities and consumer staples ETFs. These charts have done well during the post-China sell-off, indicating investors may be reallocating to more conservative areas of the marker.

This may be part of a flight to quality that seems to be happening in the market right now. Large drug companies are considered more conservative investments because their profits are a more immune to economic weakness -- people need certain types of drugs and will buy them in any economic environment.

Last week's performance by the big drug companies may further confirm this flight to quality.

Here's a five year chart of PPH -- the ETF for large drug stocks. While the average is in a rally, also notice that the average has been in a trading range for the better part of 5 years as commodity stocks have taken the lead in the market.

Truck Tonnage 1.6% Higher in March

From the American Trucking Association

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 1.6 percent in February after falling a revised 3.1 percent in January.

On a seasonally adjusted basis, the tonnage index improved to 113.3 (2000 = 100) in February from 111.5 the previous month. The index decreased 1.7 percent compared with a year earlier, marking the eighth consecutive year-over-year decline. The not seasonally adjusted index fell 6.8 percent from January to 101.2.

This is the 8th straight year-over-year decline. This does give a strong indication that economic growth is slowing, although probably not to recessionary levels. As the article notes, trucking is responsible for 70% of all transport in the US.

Will The Rest of the World Bail the US Out?

There is growing talk about the possibility of international economies preventing a collapse of the US economy. On Friday I posted this article where I noted that large US companies are reporting weak US sales but strong international sales.

The Big Picture quoted this point from this weekend's Barron's (subscription required):

THE REST OF THE WORLD IS CARRYING THE U.S. STOCK MARKET. Fast-galloping overseas economies, flush world capital markets and a sagging dollar fatten multinationals' earnings and furnish the fuel for commodity-related stocks to surge.

That's the takeaway from the earnings beats by Caterpillar (CAT) and Honeywell (HON) last week, the 22% jump in the Philadelphia Steel Producers index since March 5, the continued outperformance of foreign stock indexes, the seven-month high in copper and the run toward $700 an ounce in gold.

As a result, materials stocks are the new momentum favorites, and more broadly, traditionally cyclical sectors are being treated and valued as perpetual-growth vehicles -- a process even extending to sectors like railroads and utilities, now considered implicit plays on the commodity-demand boom.

It's enough to make independent souls look for traditional growth stocks to (finally) to return to favor. Quantitative strategist Joe Mezrich of Nomura notes that among all the stock factors he tracks, "long-term expected earnings growth" -- a long-term dog of a performance driver -- recently perked up, and it tends to be a decent signal of a growth revival when it does so.

Let me add two additional points to the above.

1.) This report from the International Monetary Fund titled World Economic Outlook highlights that the rest of the world is doing pretty well. Growth is fair in most other regions. In general, the IMF is projecting growth to at least continue on its present trajectory. If that continues, publicly traded US companies with sufficient international exposure will continue to see either earnings increases or insufficient earnings decreases to prevent a large loss of stock market value. In other words, assuming earnings are a prime driver of stock prices, we won't see a major correction although we could see a difficult rally going forward because of domestic economic problems.

2.) About a week ago I posted an article based on Marc Faber's observations that while debt was the primary source of consumer funds in the 2000 - 2005 period equity appreciation was the primary source for consumer funds from roughly 2006 on. This information comes from the household net worth tables from the Federal Reserve's Flow of Funds Report.

For the sake of argument, let's assume this is true -- that increased equity valuations are boosting or supporting consumer spending. If point number 1 is true -- that US companies have sufficient international exposure to mitigate a shortfall in US earnings -- than the natural corollary is consumer spending will be supported by equity prices.

Let's simplify the above to a few bullet points.

1.) International economies are doing pretty well.

2.) US companies with sufficient international sales will continue to see increased sales from stronger international economies.

3.) Increased international sales will mitigate the effects of slowing US growth on corporate earnings.

4.) If corporate earnings growth slows but does not contract the market's overall level and value will be sustained.

5.) If increased equity prices are supporting US consumer spending, than slightly increasing or stable equity values will continue to support US consumer spending.

6.) Consumer spending is responsible for 70% of US economic growth. So long as consumer spending expands, it will mitigate the effect of the housing and capital expenditure slowdown.

That's about as simple as I can make this.