Good News?

In reflection of the past month I reviewed some of the month's economic headlines to see how much good news came out of March.  In order of oldest to newest they were:

1. Motor Vehicle Sales Surge Past 13 Million
2. Housing Starts Fall to Their Lowest Level Since April 2009
3. Producer Prices Spike on Strong Food and Energy Costs
4. New Home Sales Have Worst Month Since Data Started Being Collected
5. Durable Goods Orders Unexpectedly Decline in February
6. Q4 GDP Revised Higher, Reveals Above Potential Growth
7. Personal Spending Rises, But Stronger Inflation Mitigates the Growth
8. Initial Claims Show Modest Improvement
9. Factory Orders Unexpectedly Fall in February
10. Employment Sectors Shows All-Around Improvement

Looking at these you would expect a market that is struggling to maintain its upward momentum.  But for a brief mid-month pullback, it appears that the bulls are still in control and continue to drive the market higher.  Certainly inflation will have a positive effect on stocks initially, but to me the underlying problems that we faced two years ago are still lurking, ready to derail the "recovery" at any moment.

Unemployment, while recovering, is still at over 8%.  Inflation is really starting to cripple the consumer.  Gasoline prices in San Diego are north of $4 per gallon.  Today I filled my tank and it was $4.25 a gallon.  That hurts.  Food prices continue to climb as prices of all commodities soar.  The main source of American wealth is tied up in housing and the prices continue to slide.  To me if there is any good news it is from my short sales team who have mentioned that the time to complete a short sale has declined significantly.  This is really a step in the right direction as the sooner we can clear this massive overhang the sooner the economy can start to recover on a solid footing.  That said I believe we are still at least two years from cleaning out the inventory of underwater houses.

Business profits remain strong for the moment but it remains to be seen just how much inflation will erode these as there is little chance of passing any increased raw material costs on to an already strapped consumer.  Furthermore the sovereign debt issues remain with Ireland as the most recent country to announce banking stresses far in excess of what was expected.  The facts are that global risk is highly interconnected.  Just look at the turmoil caused to the markets by the earthquake in Japan.

It is my opinion that the market continues to rise mainly due to the fact that interest rates are low and there is nowhere else to go.  Furthermore people do not want to get left behind and the market has been on a tear recently.  Once again I would caution you from going all in.  Although on the surface it appears that a recovery is afoot, and I have been told by many that the market is fairly valued, it all comes down to your outlook and mine is based on the economic fundamentals and risk profile of the market.

Certainly with inflation rearing its head, interest rates are going to have to rise at some point.  It is my opinion that the short term interest rates will remain low for the next 12 months or until Bernanke stops pushing them down with his open market policies.  Any increase in rates will put a nail in the housing coffin and will drag the economy down once again.  By printing the $3 trillion he has created inflation.  To fight inflation requires him to stop printing and raise interest rates.  Raising interest rates at this stage in a very fragile economy would be political suicide.  So what can he do?  He will keep on printing for now and will drive inflation even higher.  This will ultimately create a lot of problems both locally and globally.  We are seeing some of these problems already in the social unrest around the globe, but at present it has not affect the United States much.  It soon will and when it does you will be glad that you have a lot of your powder dry!