Friday, April 27, 2007

Storm Clouds Gather: Dollar Down, GDP 1.3%

There's a palpable disconnect between what's hot on Wall Street and the realities of the US economy. While the Dow makes new highs day after day, extending one of the longest bull markets (55 months and counting) without a 10% correction.

Corporate profits are the drivers of the current rally which has taken the Dow on a 1000-point ride upwards over the past two months and the reports have been solid, if not spectacular. The other side of the equation is comprised of economic indicators, the value of the currency, credit markets and mood, may be more forward-looking than a string of corporate pluses and rising indices. Those indicators are forecasting more pain than pleasure, but the market has yet to buy into the argument.

So, is this the last hurrah? Are investors wringing every last cent out of stocks in anticipation of a dramatic reversal, or are investors just confident that US businesses are sufficiently globalized that they will not be largely affected by suffering in the US market alone. At the end of the day, the major indices registered a ho-hum split decision.

Dow 13,120.94 +15.44; NASDAQ 2,557.21 +2.75; S&P 500 1,494.07 -0.18; NYSE Composite 9,705.36 -10.13

While these investors should be applauded for their optimism, the decline of the US economy should have some ripple effect across the spectrum, though the extent of the decline (we may already be in recession) and the impact on various industry sectors is difficult to calculate, much the less correlate.

First quarter 2007 GDP showed a feeble 1.3% growth rate according to the Commerce Department, the lowest quarterly rate since the first quarter of 2003, which closely coincides with the beginning of both the current bull market and the start of the war in Iraq.

It should come as no surprise to anyone that this bull may be on its last legs, especially with the public discontent and debate to end the war sooner rather than later. Bull markets don't last forever, just as recessions aren't the end of the world. As a matter of fact, recessions are necessary and vital parts of a properly-functioning market economy. Expansions build excess and excesses must be wrung out to put the system back on a functional footing.

And who can say that the economy wasn't full of excess? Witness the housing and credit boom of the past five years. That rocket fuel has been spent and house prices are plummeting back to earth while credit qualifications by banks and finance companies ratchet up the pressure. The stock market - especially the Dow - looks like the last refuge for safe money.

Make note of this number: 13,197.50. That's the all-time intraday high (April 26, 2007). We may go past it, but if the market doesn't continue climbing past it over the next week, the summer and fall could be very trying seasons for US equity investors.

Another of the reasons the markets may soon struggle is the high price of oil and gasoline. Crude was up again on Friday, with a barrel for June delivery set at $66.46 after traders tacked another $1.40 to the price. Keeping with the tone, Chevron posted 1st quarter profits of $2.18 per share (net $4.7 billion), compared with $1.80 per share ($4 billion), during the same period last year, an 18% gain, or roughly the same percentage deeper US motorists dug into their pockets to fuel their transports. Lovely.

In currency trading, the Euro reached an all-time high against the greenback of $1.3682, before closing slightly lower, at $1.3650. Barely noticed by the general public, the dollar buys less overseas, driving up import prices on just about everything. The dollar weakness has been evident for years. Easy credit, loose fiscal policy by the government and a huge - and growing - federal debt have made the US dollar lose respect in world markets. The dollar's decline is gradual, but surely it is killing us.

Gold closed at $682.50, up 3.80, while silver ended the day at $13.58, a gain of 12 cents.

Earnings will continue to make headlines next week, but so could some serious profit-taking. Expect a roller coaster.

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