April 14, 2011

Wholesale Prices Up, Consumers Next?

What we know…

The headline producer price index reflects a sharp increase month-over-month, and nearly a 6% jump year-over-year.  The spike in wholesale prices has largely been driven by a surge in petroleum. Energy costs rose 2.6% in March, and they’ve shot up 17.6% over the past 12 months.  Last month wholesale food prices saws the biggest gain since 1974, and are up 4.4% over the past year.  The sharp and steady increase in food and energy costs could pose a threat to the U.S. recovery, as demand for many other consumer goods and services usually fall when people have to spend more money on basic necessities.  For now, though, most of the increases in wholesale costs have not been passed on to consumers in the form of higher prices. Consumer prices have risen a slower 2.1% in the 12 months ended in February.  Instead, many companies have found ways to cut their costs, or they are taking lower profits to prevent the loss of market share.

What we think…

What we think is quite possibly the obvious:  If wholesale prices keep rising companies eventually will have to pass along more of their costs to their customers. We have noted recently, though, that some manufacturers have been able to pass on the price increases to their customers (consumers).  Overall, we think with unemployment still high, businesses may be less likely (or able) to raise prices if they sense people can’t afford to pay the added costs. Further, we would expect the consumer price index to trail the producer (wholesale) price index because it includes more services, where price increases aren’t as widespread.  Retailers, for example, haven’t had the success manufacturers have passing on higher prices to consumers.  While the costs of nearly every commodity are going up, from corn to cotton, and milk to materials (like steel), companies will be being forced to do something.  They either have to eat the costs, cutting into their profit margins, or pass them on to retailers and consumers.  We think it is a matter of when, not if, the latter occurs.

Global Observations:

China sovereign wealth fund and other investors may pour $13 billion into Spain’s ailing banks, a government source told Reuters.

Brazil’s central bank’s economic activity index rose 0.32% in Feb., down from Jan.’s 0.71%, as the government curbed spending to cool inflation. The index rose 3.77% vs. a year earlier. Latin America’s top economy is seen growing 4%-4.5% this year, after 2010’s 7.5%, amid budget cuts and rate hikes

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Fed’s Beige Book points to continued economic improvement:  Overall, the Beige Book found that activity generally continued to improve since early March although some districts reported only moderate gains while others were more upbeat. However, a majority of the Fed’s 12 regional districts reported “actual or expected disruptions to sales and production” as a result of the Japan earthquake. Additionally, the report found more businesses were trying to pass along higher costs to consumers but were having mixed success.

Retail sales up:  Total retail & food service sales rose by 0.4% last month following a 1.1% February increase, revised up from 1.0%. Sales have risen for nine consecutive months and the latest increase left the y/y gain firm at 7.1%. The March rise roughly matched Consensus expectations for a 0.5% gain, according to the Action Economics survey. Lately, forward momentum in sales has picked up. During the last three months, sales rose at a 9.4% annual rate versus a 6.5% increase during all of last year. Excluding autos, sales rose 0.8% last month after an upwardly revised 1.1% February gain. The increase roughly matched expectations for a 0.7% rise. During the last three months, non-auto sales rose at a 12.0% annual rate after a 5.7% increase last year.

JOLTS up:  The Bureau of Labor Statistics reported in its Job Openings & Labor Turnover Survey (JOLTS) that the February job openings rate improved to 2.3% from an unrevised 2.1% during January. The latest reading was the highest since April 2010 and was improved versus the recession low of 1.6%. The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings. The private-sector job openings rate jumped to 2.5%, the highest level since August 2008. After a January drop, professional & business services job openings rebounded smartly to 3.8%, also the highest since 2008.

CRB Index down (week-over-week):   The Reuters-Jefferies Commodity Research Bureau is up 8.1% year-to-date.  This is down from 9.3% last week.

Oil down (slightly):  Crude for May delivery added 86 cents, or 0.8%, to settle at $107.11 a barrel yesterday. This was slightly below the $108.23 level last week.  Oil futures snapped a two-day losing streak that had shaved nearly 6% from Friday prices.

The Energy Information Administration reported crude oil inventories rose 1.6 million barrels in the week ended April 8, as expected by analysts polled by Platts.

Benchmark interest rate down tick: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.46%, about the same as 3.56% last week.   

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   April 7 – April 14.

WEAK INDICATORS:

Jobless claims up:  New applications by jobless workers seeking unemployment benefits jumped above 400,000 last week for the first time in a month, putting claims at their highest level since mid-February, the Labor Department said today. Initial claims for state benefits climbed by 27,000 to a seasonally adjusted 412,000 in the week ended April 9, while claims for the prior week were revised up by 3,000 to 385,000.  Economists had expected new applications for jobless benefits to drop to 380,000.  Further, the average of new claims over the past four weeks, meanwhile, rose by 5,500 to 395,750.

PPI up:  The producer-price index climbed a seasonally adjusted 0.7% in March, following a 1.6% gain in February and a 0.8% increase in January, according to the Labor Department.  The core rate, which excludes the volatile food and energy categories, rose 0.3% in March.  Economists surveyed by MarketWatch had predicted a 0.8% increase in overall producer prices and a 0.2% increase in the core rate.

Small business optimism index drops:  The National Federation of Independent Business indicated that its index of small business optimism fell to 91.9 in March from an unrevised 94.5 in February. The latest was the lowest level since October. Deterioration amongst the sub-series was widespread. The percentage of firms expecting the economy to improve turned negative, falling to its lowest since September. Firms expecting higher real sales in six months also fell sharply.  However, on a positive note, firms indicating that credit was harder to get fell to its lowest since June 2008. The percentage of firms planning as well as currently raising prices increased further to the highest since late-2008.

US budget deficit expanding:  The U.S. Government’s budget deficit during the second quarter of 2011(fiscal year) totaled $460.4 billion, according to figures released by the U.S. Treasury and the Office of Management and Budget. That was greatly expanded from last year’s $328.9 billion and its percentage of GDP jumped to 12.4%. For March alone, the deficit nearly tripled y/y to $188.2 billion, about as expected. Year-to-date the deficit totaled $829.4 billion.

US import prices up:  U.S. import prices last month. Prices jumped 2.7% after an unrevised 1.4% February increase. The gain was stronger than Consensus expectations for a 2.1% rise. It was paced by a 10.5% surge in petroleum costs while nonpetroleum prices rose by only 0.3%.  Strength in imported food & beverage prices intensified with a 4.2% March increase, up 18.9% year-over-year.

Consumer credit up:  During February, consumer credit expanded by $6.7 billion after a revised $4.5 billion increase during January, initially reported as $4.0 billion. Credit has risen strongly during the last five months following declines from 2008 through 2010.

Home foreclosures up:  Foreclosure filings rose 7% in March, compared with February, according to RealtyTrac.  RealtyTrac reported that 239,795 properties received a foreclosure filing of some sort in March.  However, filings were down 35% in March compared with March 2010, when RealtyTrac recorded the highest number of monthly filings since it started the report in January 2005.

Sources: Economy.com, Bloomberg, MarketWatch, Haver Analytics, IBD week of:  April 7 – April 14.

The Market:  

While still in a confirmed uptrend, the major indexes have come under pressure.  After hitting levels of resistance unable to climb above, the indices are now testing key support levels at their 50-day moving averages.   Volume has been on the lights side, coming in daily below average.  One bullish sign remains:  there is still strength among the leaders.  Yesterday for example, the top rated stocks saw 9 advancers to 1 decline.  As a group, the top 50 gained 1.5% on higher than average volume (vs. an almost flat session for the major indexes).   Since the market bottom on March 6,’09  the S&P 500 is up nearly  98%.     Year-to-date major index performance:   S & P 500 4.5%,  DJIA 6%,   NASDAQ   4.1%,  and the     S & P 600 4.8%.     Here are the past week’s results:  April 7:  225 new highs & 64 new lows,   April 8: 227  new highs & 30 new lows,  April 11: 161  new highs & 44  new lows, April 12: 49 new highs & 49 new lows, and April 13: 78 new highs & 46 new lows.  Industry Group analysis:  year-to-date, 156 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   April 7 – April 14.

**The Standard & Poor’s 500 (S&P500) is unmanaged group of securities considered to be representative of the stock market in general.

**The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

 **NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

 **The Standard & Poor’s 600 (S&P600) is an unmanaged group of securities, relating to the small cap segment of the U.S. equities market, covering approximately 3% of the U.S. equities market.

 ***Indexes are unmanaged and cannot be invested into directly. Investing in limited sectors may increase the overall volatility of a portfolio.

Bull/Bear Barometer: 

Market swings back into confirmed uptrend:   BULLISH.  Demonstrating once again its’ resiliency, the market has returned to a bullish uptrend. 

Industry group strength broad :  BULLISH.  156 of the 197 industry groups we monitor are up year-to-date, down from 178 last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.47%, this is the same as last week.  The Dow’s yield peaked at 4.45% March 9, ‘09, which was a 5-year high, which coincided with the last stock market bottom.

Volatility index down: BULLISH.  Also known as the ‘Fear index’, the VIX (volatility index)             is 17.5, up from 15.9 last week, and still down significantly from the last bear market highs. The VIX has dropped from over 50 near the market bottom in March ’09.   According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October ‘08, and then peaked at 103.4, as panic gripped markets worldwide.  Since its introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility.

Investors Intelligence survey shows increasing optimism: BEARISH.  The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, now shows the bulls taking the lead.  “Bullish” professional sentiment is 55.4%, down from 57.3 last week.    The “Bearish” sentiment is 16.3%, up from 15.7 last week.    The index is considered normal at a measure of 45% bulls, 35% bears and 20% neutral.

Bear Perspective:  Bull market or Bear market rally?? We continue to offer this question and the ensuing perspective.  As we last wrote, the S & P 500 has risen over 100% since March 6, 2009.  Both Bull markets & Bear market rallies provide impressive gains, especially over the short-term.  During the October of 1929 to July 1932 bear market the Dow lost 89% of its value.  During that time there were 7 large rallies exceeding 27%.  For example, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. The Dow gained 15% in one day!  Additionally, a more powerful bear market rally ensued in 1932 when an early August to late September advance exceeded 100% before another leg down, losing over 30%.  Japan’s Nikkei showed 4 huge up moves of 50% or more during its prolonged bear market, losing 74% of its value. Japan’s stock market is still a fraction of its September 1989 peak near 40,000, as it is now about 10,000.

Sources: Wall St. Journal, IBD, Thompson First Call, Zacks, Stock Traders Almanac, AlphaTrends. April 7 – April 14.

●          Earnings & Company Developments:             

The Q1’2011 earnings season was “officially” kicked off this week with the announcement from Alcoa.   Already, 30 companies of the S & P 500 have reported.   So far, we are off to a good start on the first quarter, with reported net income growth of 22.7%, down just slightly from the 25.7% growth those same 30 firms reported in the fourth quarter.   Of the 30 (6%) S&P 500 companies who have reported Q1 earnings, 73% beat estimates, 20% were in-line, and 7% were below estimates. The estimated earnings growth rate for the S&P 500 for Q2 2011 is currently at 14.2%, according to Thomson Reuters.  In 2011, the total net income for the S&P 500 should be $905.0 billion, or increases of 44.2% and 15.0%, respectively, according to Zacks Investment Research.  The early expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.0133 Trillion.  Indeed, analysts have raised their earnings expectations.  More than three 2011 estimates being raised for every two being cut (revisions ratio of 1.51), one has to feel confident that the current expectations for 2011 will be hit, and more likely exceeded. Analysts are raising their 2012 projections at an even higher rate, with a revisions ratio of 1.62.   Companies of interest:   JPMorgan Chase (JPM) reported a 67 percent jump in first-quarter earnings.  The company earned $5.6 billion, or $1.28 per share, compared with $3.3 billion, or 74 cents a share in the same period last year. The profits at JPMorgan were way ahead of the $1.15 per share analysts surveyed by FactSet were expecting. However, revenue fell to $25.2 billion from $27.7 billion in the same period last year.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  April 7 – April 14.

On This Day:

April 14, 1910 – William Howard Taft became the first U.S. president to throw the ceremonial first pitch at a baseball game at the Washington Senators’ home opener.

Source: history; about.com

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