Market Talk

Last month we got on James Bullard’s case for saying he saw no evidence that QE2 was a factor in driving up commodity prices, with the St Louis Fed president suggesting it was more likely related to normal supply and demand. We think a simple glance at the charts of a host of commodities would be enough to get Mr. Bullard to recant, as he observes the steeply slanting lines running from lower left to upper right, beginning roughly in late August.

In case he needs some more “evidence,” here’s a real-world observation from Mark Millett, on Steel Dynamics’ (STLD) fourth quarter conference call today (Millett is operating chief of STLD’s OmniSource unit — emphasis added is ours):

Nonferrous shipments quarter-over-quarter were down 10% to 230 million pounds largely due to depressed foreign demand, particularly in copper — depressed copper market, while that demand was certainly not reflected in market pricing as the Comex rose 22% through the quarter, clearly demonstrating the dislocation of supply and demand metrics from the market indices and also the growing impact of hedge trading and also exchange-traded funds that require physical backing.

Comex copper was up for a second-straight day today, but is off about 2.5% from its Comex record close on January 3. It’s up more than 28% vs a year ago.

Image courtesy of Wiki Commons.

Stocks sprint higher, helped by momentum investors piling into a handful of big industrial stocks. Moves said to be predicated on global recovery hopes, but if so, oil should’ve been running too, and it wasn’t. Nymex crude fell to its lowest level in more than a month.

For stocks, looks more like an oversold bounce from last week. IBM alone accounted for 30% of the DJIA’s gain; add in UTX and CAT and those three are more than half of today’s move up. Tech, industrials lead sector gainers; financials and health care the only decliners.

Dow Industrials bolt 108.68 higher to 11980.52, and Nasdaq Comp adds 28.01 to 2717.55. S&P 500 ends 7.49 higher at 1290.84.

Tomorrow gets a little more interesting, with Case-Shiller Nov home price index, Conference Board’s Jan consumer confidence index due, along with earnings reports from J&J, 3M, Verizon and DuPont, to name just a few.

Looks as if bulls are now fixated on DJIA 12000, for what it’s worth. Expect that to be vanquished, perhaps tomorrow, and they can gun for 1300 on the S&P 500.

GM grooved one today for the State of the Union speech tomorrow night.

You can almost hear it already. President Obama standing before Congress, citing examples of the strengthening economic recovery. “And just yesterday,” the president will say, “General Motors — back from bankruptcy, a thriving public company once again — showed us a heartening example of its increasingly brighter prospects.  It’ll add a third shift and 750 jobs at its assembly plant in Flint, Michigan.” (Pause for applause from both sides of the aisle.)

It’s a feel-good moment, no doubt, but one in which we remain just cynical enough to take some shots at.

Look at the details. Is GM planning to increase production of its best-selling fuel-efficient vehicles in an attempt to satisfy what it expects to be increased demand as oil prices climb near (or above) $100 a barrel again? Nah.

They’re expanding production of big pickup trucks, the Chevy Silverado and GMC Sierra. They get about 15 mpg city, 20 highway — not awful for a big truck, but not cheap to fill up, either.

Here’s the amusing part. According to WSJ’s Sharon Terlep, GM’s North American head, Mark Reuss, says the increased production is a response to an uptick in residential and commercial construction. Say what? Is that on planet Earth, Mr. Reuss? December housing starts fell more than 4% to a 529,000 seasonal rate, lowest level in more than a year. Sure, starts are up about 11% since hitting an all-time low in April 2009, but back during the halcyon days, starts were regularly clocking in at more than two million annually. Continue reading…

I’ll be blunt: I expect China to come unglued one day. I’ll be honest, too: I’ve been expecting this for at least four years.

I’m not a hedge-fund manager, I’m a reporter, so I don’t put my theories into investment vehicles. But some hedge-fund managers are thinking the same thing I am, and they are putting those ideas into investment vehicles. I missed this story in last week’s Telegraph about hedge funds setting up China-fail funds, (h/t, Big Picture) but it’s something to keep an eye on.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of ‘distress China’ funds is a sign to sit up.”

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Granted, if you know me, you know I can tend to be a bit, ah, emotional. So, here’s a less caffeinated take on the state of the U.S. consumer from Bank of America/Merrill Lynch’s Ethan Harris, part of the bank’s research report today. The take-away is, yes, things have improved, but haven’t improved that much, and two major overhangs, housing and the crumbling fiscal picture at the state level, will continue to be a drag.

Good, but not that good

After dipping during the summer, US growth data have improved noticeably. The better data, combined with easy fiscal policy, have caused some fairly big GDP forecast revisions. We have added 0.6 pp to our 2011 forecast, and some competitors have been even more aggressive. Table 2 compares the December and January Blue Chip surveys.

Despite the revisions, we remain slightly below other major banks. In our view, while easy monetary and fiscal policy has provided plenty of caffeine to the economy, it still suffers from a severe hangover:  Household and bank balance sheets are slowly recovering, but with bad loans well above historic averages and with the personal saving rate still low, a lot of work remains.

Both the housing market and state and local governments are still in the middle of their crises. We expect the housing market to languish until the foreclosure process begins to wind down. State and local governments will likely remain in recession for the next two years.

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I read another comment from a Wall Street type this morning crowing about the “sustainable” recovery in the U.S. The strategist is quite pleased with earnings, noting they’re exceeding “expectations,” but also pleased that sales are likewise exceeding “expectations.” This is a sign that the recovery is building some kind of momentum.

You don’t say?

Let’s see President Obama tell the nation tomorrow night that it can’t afford the tax giveaways the government, in fact, just gave away, and that he’s going to reverse them. Let’s see the FOMC on Wednesday come out and say it’s going to raise rates and scuttle QE2. Then we’ll see how “sustainable” the “recovery” is.

Any talk of the economy’s fundamental strength is useless when the federal government not only leaves the Bush tax cuts in place, afraid to upset the fragile state of the consumer, but also goes ahead and cuts payroll taxes. When the Federal Reserve has short-term interest rates pinned to the floor with the spilled beer and peanut shells, and is out there pumping $80 billion a month into the marketplace, which acts both as a continuing back-door bailout for the banks and a ready stream of liquidity to feed speculators with easy money.

Ask any state treasurer how sustainable the recovery is.

Ask anybody who saw their wages slashed if the “recovery” is “sustainable.” Ask anybody who’s lost their job if the recovery is sustainable. Ask any of the more than, well more than, one million people who have been out of work for more than two years if the “recovery” is “sustainable.”

Hell, ask them if there’s even been a recovery.

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Today’s Upshot column, about rising costs and margin pressures for corporate America, comes with some pretty good timing. Today’s Wall Street Journal has a page-one story about rising prices, right up at the top, four columns. Pricing pressure for a range of commodities is shaping up as one of the themes at Davos (not that anybody there’s going to do anything about it, they’re all too busy trying to get Bono’s autograph (think we’re bitter about not getting press credentials? Think we’re bitter about freezing in New York when we could be freezing in Switzerland with Bono? Of course not.))

The paper interviewed ECB chieftain Jean-Claude Trichet, who warned about rising inflation, and said, without saying it of course, that the central bank will move to contain it, which means raising interest rates. The euro has responded in kind.

Margins are already a big theme amid fourth-quarter earnings reports, and we think it will remain a big theme this year. Companies across a range of industries are talking about it. They always do, but what’s different about the talk this quarter is that companies are finally saying they’re going to be forced to raise prices, no matter the state of the consumer.

From our column:

There are signs that margins may be hitting a plateau. After bottoming out in 2008, operating margins for S&P 500-Stock Index companies have improved steadily, and are near pre-recession levels again. For the fourth quarter of 2010, operating margins for the S&P 500 companies are expected to be 8.8%, according to S&P, down slightly from the third quarter’s level of 8.95%.

Operating margins are expected to average about 9.08% in 2011, according to S&P. But if consumer demand doesn’t drive up sales enough to offset the rising costs, and at this point in the recovery that still appears likely, margins will be capped, and so will profit growth. So companies will be forced to raise prices, cut costs, or both.

Adding surcharges to product prices is one move industrial manufacturer Parker Hannifin Corp. is considering, Chief Executive Donald Washkewicz said. “Because we’re not going to absorb these increases,” he said last week, citing higher raw materials prices. “We can’t absorb them, and we’re just going to have to pass them on.”

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Early direction for US stocks looks like a toss-up, premarket futures generally flat ahead of week jammed with corporate earnings reports and a variety of closely watched economic gauges.

Roughly half of the Dow Industrials are scheduled to report quarterly results this week; McDonald’s reports before today’s open and AmEx after the close. Data this week (beginning tomorrow) include readings on home prices, pending home sales, consumer confidence, regional manufacturing, durable goods and first look at 4Q GDP.

FOMC convenes tomorrow for two-day meeting, and the annual Lollapalooza for business types called the World Economic Forum gets started this week in Davos, Switzerland.

Stocks in Europe mostly lower so far, markets mixed in Asia overnight. US dollar’s stronger, oil down, gold a shade higher. S&P 500 futures up 1.20, DJ futures up 14. Ten-year note lower, yield at 3.42%.