Tuesday, April 3, 2007

April Fools? Stocks Gain as Oil Slips

There wasn't a great deal of news today but all of it was good and that helped restore some confidence to a shaky market. Since the fallout from mid-February to mid-March the markets have stabilized and rebounded quite well. The Dow has recovered 460 points off its March 5 low, the NASDAQ has added 110 points from the same date and the S&P 500 is up more than 60 points.

What fueled today's action were a series of unrelated reports and market action which together created one big buying spree on the street. A 0.7% rise in pending home sales got the market's attention and eased some of the fears of a spreading crisis. That minuscule rise would hardly be worth noting under usual circumstances, but the worries in housing are palpable, and this little bit of good news was welcome relief. What the market isn't seeing is another story. More on that later.

U.S. chain store sales rose 0.3 percent in the week ending Saturday, according to data released by the International Council of Shopping Centers and UBS Securities. This report came on the heels of a 4.6% gain in the previous week, so the fact that there was no pullback was a strong sign.

The price of oil also contributed to wealth creation in equities, with crude losing $1.30 to $64.64 a barrel on the NY Mercantile Exchange. As I've commented all too frequently, the price of oil (and by proxy, gasoline), is the key cog in the economic cycle.

If the oil barons (you don't really think there's actually a free, open un-rigged market in crude, do you?) can wrap their brains around the concept that lower gas prices actually means more money for them (supply-demand scenario) and let the price slide into the high-to-mid 50s over the next few months then the economy might actually flourish.

Despite auto sales of the big 3 US automakers slumping in March, the market shrugged off that bit of disappointment and surged ahead in a buying orgy that saw new highs for 469 issues with only 83 new lows. As I commented yesterday, that indicator is telling us that the market is poised for more upward movement, circumventing the big correction that many - including me - said was coming.

Indeed, the sewers of Wall Street are full of pundits and predictors who said a correction was imminent over the past four years. Incessant priming of the liquidity pump by the Fed has averted any notion of a downturn since the early months of 2003.

Dow 12,510.30 +128.00; Nasdaq 2,450.33 +28.07; S&P 500 1,437.77 +13.22; NYSE Composite 9,381.46 +75.91

Getting back to those tepid housing figures... there's still a problem in suburbia. Housing prices rose dramatically over the past 6 or 7 years and a pullback was overdue. There's going to be plenty of home buying in the next few years, but most of it is going to come at some expense to the sellers. Simply put, buyers in 2000-2006 paid too much and some are getting out at a loss today. Any abrupt economic disruption would likely cause a panic in oversold markets. In general, home sales are likely to be brisk, but at lower prices, producing a net loss in economic activity and the general market is too concerned with day-to-day observations to pay attention to that troubling longer-term trend.

Still, the credit and money spigot at the Fed is still wide open and there's no way to close it gently without spinning the economy into a recession. Despite what the Fed says about controlling inflation, it's mostly lip service. Prices and wages will continue higher.

Gold was up and silver down. Holding coins or raw metal is still bad practice in today's environment. Expect a pullback before another rally can occur in the precious metals.

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