S&P Resistance

The S&P 500 is trying to push past a key resistance point at 1165. The Consumer Price Index was unchanged for February. The lack of pricing pressure supports the Fed’s monetary stance. As the Nomura Securities chief economist David Resler told Bloomberg, “Inflation is certainly no imminent threat to the U.S. economy…We see the Fed on hold through this year.”   

 

Resler’s expectation for interest rates is a bit of a departure. Most economists think rates will rise later in the year. But any interest rate hikes will be dependent on jobs growth. Unemployment claims fell by 5,000 last week. That’s an improvement, but we still need to see payrolls increases. We won’t get that number for a couple of weeks.   

 

The dollar is stronger against the euro today as the bailout plan for Greece takes another turn. An agreement seemed to have been made a couple days ago. Greece was even taken of credit watch by ratings agencies. 

Happy St. Patrick’s Day

Happy St. Patrick’s Day! In honor of the holiday, the stock market is in the green. The Fed reiterated its pledge to keep interest rates low for an extended time. The promise of cheap money is clearly helping to support stock valuations.

Also helping move prices higher, and supporting the Fed’s stance, is the 0.6% drop in the Producer Price Index. The drop was led by food and fuel prices. Excluding those, the so-called "core" rate climbed 0.1%.

You wouldn’t know fuel prices were lower looking at the price for a barrel of oil. Despite the relative strength of the U.S. dollar, oil has staged a month long rally that’s got it within spitting distance of its 52-week highs. And I expect we’ll be seeing those highs in the very near future.

What About Ethics?

Senate Banking Chairman Christopher Dodd is all set to put his latest banking regulation bill up for a vote. The bill would put an end to proprietary trading, lend transparency to hedge fund trading and derivatives, and give the Federal Reserve the power break up companies if they pose a “grave threat” to the economy.  

 

Dodd’s proposal would also create a nine-member “Financial Stability Oversight Council” of regulators, led by the Treasury Secretary. According to Bloomberg, “…the council can make recommendations to the Fed to impose “strict” rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that “the next AIG would be regulated” by the Fed…”   

 

It’s clear what Dodd is trying to accomplish here. He’s trying to make it so that financial firms can’t engage in trading activities that could ultimately destabilize the entire economy. I’m not sure these proposals, as I understand them, accomplish the objective. 

Sovereign Wealth Fund and Commercial Real Estate

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

 

In my opinion, this line of thinking is completely unrealistic.   

 

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  

 

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM)

Reader Mail

Stocks continue their upward climb. As TradeMaster’s Jason Cimpl  told us earlier in the week, the S&P 500 has kept its date with 1,150. And it looks poised to move higher.   

 

The retail sales data from February is positive. Despite two crippling blizzards on the East Coast, sales still rose 0.3%. And if you strip out autos, sales were up 0.8%.   

 

Normally, it makes no sense to ignore auto sales because they are obviously an important gauge of consumer spending, but in light of the recalls from Toyota (NYSE:TM), it’s reasonable to assume that some auto sales were simply postponed due to the uncertainty.    

 

Sales were especially strong for electronics and at restaurants and bars. Sounds like consumers are celebrating their new iPhone purchase over a beer. That’s probably led to a surge in drunk-texting.   

 

Retail sales from January have now been revised lower two times, from an initial reading of +0.5% to the current +0.1%. Funny thing about this rally – economic data is consistently revised lower, and no one cares. The only exception I can think of is 4Q 2009 GDP, which was actually revised slightly higher.  

 

Economic data has been improving. But it says more about the bullishness of investors that they are consistently overlooking negative data. That gives me more confidence that we will be seeing new highs for the major indices soon.   

 

Now, let’s wrap up our week with some Reader Mail… 

China to the Rescue

For the past year, the fate of commercial real estate in the U.S. has been a popular talking point for economic bears. Something like $1.4 trillion in commercial real estate loans comes due in the next 3 years.   

 

Given that a good portion of these properties are underwater, and the fact that banks are still reluctant to lend, the concern that many of these loans won’t get refinancing seems valid.   

 

Already, we have seen companies simply walk away from properties that are losing money, turning the keys over to the banks that hold the mortgages. Maguire Properties (NYSE:MPG) has done it. And we’ve seen BlackRock (NYSE:BLK) and Tishman Speyer Properties abandon Manhattan’s Stuyvesant Tower when the value fell from $5.4 billion to $2 billion.   

 

For shareholders, these moves make sense because it’s better than throwing good money after bad. For Maguire, it was a matter of life or death for the company.  

 

Still, it’s a concern because someone has to step up and buy the impaired real estate from the banks. Otherwise, bank balance sheets are saddled with even more toxic assets, capital bases fall, lending dries up and the whole financial crisis gets repeated again.  

 

Interestingly, it may be the Chinese who help the U.S. out of this commercial real estate problem. 

Maquire!

I got this letter in my inbox yesterday:   

 

Good morning Ian,   

 

I followed your instruction and bought MPG at 1.50 per share, today, it goes crazy. Thanks a lot.    

 

I really like to read your articles.   

 

Sue   

 

I first discovered Maguire back in September, 2009. As part of my daily routine, I check in on the stocks that are moving the most every day. You can find this information on Yahoo! Finance by clicking on this link:  http://finance.yahoo.com/gainers?e=us 

 

This list simply shows the stocks that are putting in the biggest moves of the day. It’s almost always dominated by small cap stocks. You’ll also usually see a few regional banks that are up 15% on 3,000 shares traded. I’m always curious why these big moves happen to small banks on ridiculously light volume, but I digress… 

Anniversary, Part II

I suppose it’s fitting that futures should be down on the morning of the one-year anniversary of the stock market bottom last year. Perhaps stocks will put in a similar reversal today, but even if they don’t, I think we can take a little selling in stride.   

 

Oil prices are down a bit today as the dollar strengthens. We should note that the dollar and oil have moved higher in tandem lately, proving that there is more to the strength in oil prices than its relationship to the U.S. dollar.   

 

Expectations for the global economic recovery and a subsequent rise in demand for oil are part of it. But I also think that investors are slowly realizing that there is very little upside for production levels in non-OPEC countries.   

 

A recent article about Mexico bears this out…

Anniversary

It’s hard to believe that just a year ago, the Dow Industrials were trading around 6,500. It’s easy to look back and see this as an obvious buying opportunity, but it sure didn’t feel that way at the time.  

 

Of course, I was recommending stocks in SmallCapInvestor PRO, because valuations were incredibly low. But I was mitigating the risk by taking profits quickly.  

 

For instance, we took profits on SXC Health Solutions (Nasdaq:SXCI) in April with a 19% gain. That stock has gone on to post some fantastic gains. Conversely, we made a quick 33% on Arena Pharmaceuticals (Nasdaq:ARNA) between March 3 and March 11, 2009. That stock is now much lower than our exit price.  

 

In light of the anniversary of the market lows, the AP ran a great article over the weekend that included a bunch of interesting stock market stats. I’d like to share a few…

Well Played

This morning’s payroll data came in better than expected. After economists warned that February snowstorms may have depressed payrolls by as much as 100,000, the 36,000 job losses reported for last month sounds like good news. Well played, sirs, well played.