Stocks Gain, but Clouds Are Forming for Rally's End

In another lackluster session, stocks gained widely on Thursday amid mixed economic news. Prior to the market opening, newly-released unemployment figures showed new claims at 623,000, slightly below last week's revised 636,000, though continuing claims reached another record - 6.788 million - for the 17th straight week.

Data on new home sales for April from the Commerce Department offered little in the way of excitement in either direction, rising 0.3%, an annual pace of 352,000, still well below historical norms.

What really captured investor attention was the $26 billion auction of 7-year Treasury notes, which was better-received than anticipated. After bond prices had fallen precipitously over the past few weeks due to concern of oversupply of government debt, the 10-year note actually rose, dropping yields to more palatable levels... for now. There is still worry that the enormous amount of borrowing the US government will be engaged in over the coming 12-16 months will cause yields to rise, crowding out private investment and making bonds an attractive alternative to stocks.

As explained in yesterday's post, the result of higher interest rates would not only stunt any recovery efforts, but would also be largely inflationary. It's nearly a foregone conclusion that interest rates will rise and inflation will follow, the only unanswered questions are how high and when these events will occur and how severely they will affect the economy. For today, at least, the answers remain mysteries, though the sentiment appears positive. Expect more of this kind of choppy day-to-day activity in the markets for the time being.

Eventually, however, stocks are doomed in the near term, as p/e ratios on the S&P 500 have reached extreme highs and dividends have reached extreme low rates of return. It will take some time for the Wall St. sharpies to unload their recent purchases onto the unsuspecting public, but another round of market shock is surely in store for the average 401k investor.

Dow 8,403.80, +103.78 (1.25%)
NASDAQ 1,751.79, +20.71 (1.20%)
S&P 500 906.83, +13.77 (1.54%)
NYSE Composite 5,917.06, +93.50 (1.61%)

Advancing issues decisively took back control from decliners, 3988-2463, though new lows continued their domination over new highs, 66-47. Volume was only slightly better than the first two sessions of this shortened trading week, an insignificant reading for now.

NYSE Volume 1,368,613,000
NASDAQ Volume 2,237,013,000

In the commodities markets, oil continued its seemingly unstoppable ascent, gaining another $1.63, to a multi-month high of $65.08. with the price of oil rising as dramatically as it has over the past four-five months (more than $25 per barrel) the question of just how much strain it puts on the general economy has to be asked. Every additional dollar spent on gas for regular transportation is another dollar taken out of circulation in the consumer-led economy. Eventually, high gas prices will do more damage to any recovery - if one ever does occur - than high interest rates or bad tax policy. It's absurd to think that Americans can survive 9%-and-growing unemployment and high gas prices. Oddly enough, gas (and in a more general sense, all energy) prices are the sacred cow neither the administration nor the congress will address properly. Tighter control on energy prices would be a major step toward getting the economy out of recession and the lack of oversight is proof that the federal government is not really serious about future growth, only about their future electability.

As the government diddles along without any general direction, the precious metals have been staging another powerful rally since late March. Gold gained again, up $8.00, to $963.20, as was silver, up 30 cents, to $15.16. The rally in metals and higher bond yields are screaming that the equities rally has stalled and is about to roll over. Stocks cannot remain at these unrealistic levels much longer, especially with slower summer months dead ahead.