Producer Prices Increase .7%

From the BLS:

The Producer Price Index for Finished Goods increased 0.7 percent in April, seasonally adjusted, the Bureau of Labor Statistics of the U.S.Department of Labor reported today. This advance followed a 1.0-percent rise in March and a 1.3-percent increase in February. In April, the index for finished goods excluding foods and energy remained unchanged for the second consecutive month. At the earlier stages of processing, prices received by producers of intermediate goods rose 0.9 percent following a 1.0-percent increase a month earlier, and the crude goods index fell 1.5 percent after increasing 3.2 percent in March.

Raise your hand if you don't consumer energy. Consider yourself fortunate. And a bald-faced liar.

Let's review one more time. The core rate is only important to the people who set interest rate policy. Statistically they are about .000000000001% (if that high) of the US population. For the rest of us, the total rate is what's important. And that number was fair but not great.

The best news from this report is food prices only increased .4%. These prices had been increasing at high rates for the preceding 4 months. However, the chart of agricultural futures indicates prices have at least stabilized over the last few months.



Energy prices increased 3.4%, which is about the amount they increased the previous two months. But oil prices have come down over the last week despite a strong technical set-up.



If this trend continues it will probably have a positive effect on next month's PPI.

The markets thought this number would give the Fed more room to possibly lower interest rates. I don't think that's in the cards. It's highly possible the Fed already had this number at the meeting earlier this week. If that's true, then they knew of the 0% core rate and still kept the following language in their statement:

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Even if the Fed didn't have this number, there have only been two months of 0% core growth. If that trend continues for a few more months, then speculation about a rate cut makes sense. But not until then.

Retail Sales Drop .2%

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $372.0 billion, a decrease of 0.2 percent (±0.7%)* from the previous month, but up 3.2 percent (±0.7%) from April 2006. Total sales for the February through April 2007 period were up 3.7 percent (±0.5%) from the same period a year ago. The February to March 2007 percent change was revised from 0.7 percent (± 0.7%)* to 1.0 percent (± 0.3%).

Retail trade sales were down 0.2 percent (±0.7%)* from March 2007, but were 3.0 percent (±0.8%) above last year. Nonstore retailers were up 9.3 percent (±4.5%) from April 2006 and sales of health and personal care stores were up 8.1 percent (±1.7%) from last year.

Bloomberg reported:

The report heightens concern that a pullback in consumer spending, which accounts for more than two-thirds of the economy, will jeopardize the expansion. Federal Reserve policy makers, who this week maintained the economy would grow at a ``moderate'' pace and said inflation was their ``predominant'' concern, may now have more to worry about.

``Consumer spending could very well be slowing more than we expected,'' Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, said before the report. ``Higher gasoline costs are reducing discretionary income for low and middle-income consumers.''

This confirms yesterday's news from various retailers.

Gas sales increased 1.74%. This increase was the report's highlight.

General Merchandise decreased 1.1%.

Auto sales decreased 1%.

Clothing sales decreased 2%.

Electronics increased .66%.

Simply put, this is a bad report.

However, the year over year comparison is still strong.

Retail sales are up 3.2% in the past 12 months. Excluding autos, sales are up 3.7%. The figures do not include price changes.

And previous numbers were revised higher.

In one bright spot, sales in March were revised higher. Retail sales increased a revised 1.0% in March, compared with the initial estimate of a 0.7% gain. Sales excluding autos were revised up 1.1%, compared with the previous estimate of a 0.8% increase.

This is only one month. While the losses retailers expressed yesterday were large and wide-spread, it was one month's worth of data. If and when we have several months of data that corroborate this information, then we'll have a trend.

Consumer Confidence is Iffy

From the AP

"Consumer confidence appears to be spinning its wheels," observed Richard Yamarone, economist at Argus Research.

"Although employment is mostly stable, there are many uncertainties on the horizon," Yamarone said. "Will energy prices go even higher? How is the housing slump going to play out? It is the fear of the unknowns that is coloring peoples' feelings."

Those fears were a factor in the big drop in peoples' feelings about how the economy and their own finances will fare over the next six months. This expectations measure fell to 24.3, a nine-month low. In April, this gauge stood at 41.7.

I'm usually not a big fan of sentiment readings because I'm pretty skeptical about survey research in general.

However, The two questions regarding energy prices and housing are very important right now.

1.) We've had about a year of bad housing news. While a person can dismiss a few months as a temporary blip, a year is a trend. In addition, most people are probably seeing this first hand. For example, I walk my dogs in my neighborhood every day. The same houses have been on the market for at least 4 months and in some cases longer. The number of vacant houses has increased from 1 at the end of last year to 4 now. There have been two foreclosure sales in the last two months. While this is anecdotal information about a small neighborhood in Houston, Texas, the macro-level numbers indicate it is happening all over the country. At some point the sheer weight of this news starts to sink in.

2.) I've written a great deal about gas prices this spring and will continue to do so. Gas prices are spiking before the summer. While we expect price hikes throughout the summer peaking in August/September, we're seeing these spikes in April and May. Again in casual conversation I have with friends, gas prices are coming up more and more. Bonddad's girlfriend fills up her car whenever she sees cheap gas (one of the many reasons I love her is she is an incredibly smart shopper). Consumers see gas prices everyday and have to pay them at least once a week if not twice. As a result of actual experience, consumers may be curbing purchases of non-essentials because the cost of essentials (energy) is rising and the source of a great deal of recent cash (home equity withdrawals) is disappearing.

The point of all this is simple: consumers have a legitimate concern about the future right now.

Wal-Marts Sales Drop Most in 28 Years

From the WSJ:

Wal-Mart Stores Inc. posted its worst monthly same-store sales results in at least 28 years, tallying a 3.5% decline in April due to this year's early Easter as well as generally challenging economic conditions for consumers.

Wal-Mart's 3.5% drop in the four-week period ending May 4 at U.S. stores fell below its earlier forecast of "flat" sales to a 2% decline. In a recorded phone message Thursday, Wal-Mart blamed bad weather last month in most U.S. regions and the early Easter on April 8, which pushed many Easter sales into March.

This should put the loss in perspective. Next months figures are going to have to rebound smartly to undue this damage.

Foot Locker Radically Lowers Sales

Foot Locker Inc: late Thursday cut it first-quarter earnings forecast to a range of 10 cents to 11 cents a share, down from its earlier forecast of 34 cents to 37 cents a share. "The shortfall in our expected earnings primarily reflects a first quarter comparable-store sales decline of 5.1% and additional markdowns taken in our U.S. stores," said Mathew Serra, chairman and chief executive, in a statement

Notice the size of the lowering. This isn't a few cents of a miss -- it's a really big change. Combine that with some of the misses today -- especially Wal-Mart's 3.5% decline -- and the news is not good right now.

From CBS Marketwatch

The Markets Today

Considering today's sell-off, let's take a look to see what happened from the bigger picture -- the daily charts.

Here's a chart of the SPY



1.) We had strong selling volume today -- almost 50% more than the previous day and more than 100% of Tuesday.

2.) The SPY is slightly below the trend line. However, the breach isn't enough to warrant a call of a change in direction. As a rule of thumb, a trend break requires at least a 2% break, and preferably 3%. The average will get support at the 20-day SMA within about half a point.

Here's the QQQQ chart:



Much of the analysis for the SPYs applies here. Notice we are above the trend line which happens to be obscuring the 20-day SMA right now.

Here's the IWN:



1.) The IWNs have struggled to get above their late February levels, while the SPYs and QQQQs have been making new ground. This means that investors are moving into larger, more established companies (represented by the SPY) and the larger, more established NASDAQ companies.

2.) The average broke through the 20-day SMA, but is still above the trend line. In addition, the 50-day SMA provides further support.

SOOO - the short version is today was not a rally killer. It was a much needed sell-off. However, traders have some good paper profits on their books right now and they may want to lock some of those profits in while the getting is good.

Trade Deficit Expands; May Drag 1Q Growth Down

From CBS MarketWatch:

The U.S. trade deficit widened sharply in March after having improved somewhat over the past six months, a government report showed Thursday.

The report shows that trade will be a bigger drag on first-quarter growth than previously estimated.

The nation's trade deficit widened by 10.4% in March to $63.9 billion, its highest level since last September, the Commerce Department said. It marked the largest increase in the deficit since September 2005.

.....

Economists said that after accounting for the March trade and inventory data, first-quarter growth would be cut to a slim 0.5%-to-0.8% range. This would be the weakest since the fourth quarter of 2002.

Just what the economy needs right now -- a reason to lower the 1.3% growth rate in the first quarter.

On the issue of oil imports, the San Francisco Federal Reserve did a study of the relationship between oil imports and the trade deficit. Here is their conclusion:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

I've highlighted this report several times because its conclusion is really important: so long as the US is an oil importer, the trade deficit probably won't go away.

April Retail Sales Slide

From CBS Marketwatch:

April was largely a sales disaster for most of the nation's largest retail chain stores.

But it wasn't unexpected. Retailers raised flags well ahead of Thursday's results and investors grounded themselves long before that for what undoubtedly would be the weakest month, so far, of the year.

According to the article, Wal-Mart sales dropped 3.5%, American Eagle Outfitters dropped 10%, Pacific Sunwear dropped 16.5%, Bebe dropped 6.5%, and Chico's dropped 7.3%.

Bloomberg reported the primary reasons retailers gave for the drop.

Easter fell eight days earlier than in 2006, shifting most holiday purchases into March, when more than two-thirds of retailers beat estimates. The coldest April in a decade and more than average amounts of rain and snow crimped sales of shorts, dresses and other spring clothing.

``Easter took some sales from April into March,'' Steven Baumgarten, an analyst at PNC Wealth Management in Philadelphia, said May 8. ``You aren't thinking about buying the new bathing suit when there's an ice storm outside.'' The firm manages $54 billion, including shares of Wal-Mart and J.C. Penney Co.

....

Last month was the coldest April since 1997 in the U.S., the wettest in four years and the snowiest in more than 14 years, according to Weather Trends International, a Bethlehem, Pennsylvania-based firm. The Northeast and North Central states were especially hit by snow, the firm said.

Retail spending may have also been hampered by higher gasoline prices. The average price of a gallon of unleaded gasoline rose to $3.05 for the week ended May 7, the highest since September 2005, the U.S. Energy Department said.

Here is a chart of the year-over-year change in personal consumption expenditures in 2000 chained dollars. This chart will provide some context. DG = durable goods, NDG = non-durable goods and services = services. Notice the continued strength of the year-over-year comparison.



So, the US consumer has continued to shop for a variety of reasons, regardless of a host of limiting factors.

Now, this month's drop is attributed to the following:

1.) Easter occurring 8 days earlier this year. If we were seeing smaller drops this explanation would make sense. However, when the world's largest retailer's sales drops 3.5% in a month, that signals something a bit deeper.

2.) The weather. Again, a small drop makes this story plausible. But Americans have demonstrated a desire to continually shop regardless of the weather, income or overall condition of the economy. The consumer's history indicates this explanation is lacking.

3.) Gas prices. I think this is a bigger reason than people think. People see gas prices every day and have to pay them at least once a week if not more. In other words, consumers experience this personally every week. Gas prices are at/near records right now and it's the beginning of the summer driving season.

One analyst above stated April was the "perfect storm". This explanation makes sense to a certain extent. All three above-listed factors happening at the same time provide a viable explanation.

The coming months numbers are now extremely important. Now that the US consumer has pulled back for a month, we'll see how he feels about not spending so much.

Gas Prices Are Still Rising

From This Week in Petroleum:

Gasoline prices rose sharply for the second consecutive week, increasing 8.3 cents to 305.4 cents per gallon for the week of May 7, 2007. Prices are 14.5 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 4.1 cents to 295.8 cents per gallon. The largest increase was in the Midwest, where prices jumped 14.9 cents to 307.4 cents per gallon. Prices for the Gulf Coast rose 1.7 cents to 287.0 cents per gallon, while Rocky Mountain prices increased 13.3 cents to 309.0 cents per gallon. West Coast prices were up 9.6 cents to 337.3 cents per gallon. The average price for regular grade in California was up 10.2 cents to reach a record price of 346.1 cents per gallon, 12.9 cents per gallon above last year's price.

At least inventory levels have stabilized.



This number could become the economic story as we move into summer. This is a price consumers see on a regular basis -- at least once a week and probably more. As it increases consumers may be more prone to cut-back on other purchases to pay for gasoline/transportation.

In addition, we're already at/near rice records at the beginning of the summer. Stockpiles are low and refiners are slow to come on line with gasoline production for a variety of reasons. If production ramps up quickly than the situation may be averted. But I have noticed that gas prices rise quickly, but have a difficult time falling.

There May Be Room For Continued US Consumption Increases

From the WSJ:

Personal debt has reached a record $2.6 trillion. According to the Organization for Economic Cooperation and Development, U.K. household debt as a percentage of annual disposable income hit 159% in 2005 -- the last year for which data is available -- compared with 135% in the U.S.

The article expresses concerns about England's consumers ability yo keep spending when their household debt levels are at 159% of disposable income.

I raise the point as one of comparison to the US. I have expressed concern about US household debt levels for some time. However, there is no magic economic line where where household debt prevents an increase in consumption expenditures. It's really just a best guess scenario.

That being said, if England's consumers can continue spending at a household debt/disposable income level of 159%, than US consumers obviously can continue to spend at 135% household debt/disposable income ratio.

The article also has this graph which shows the hh debt/disposable income ratio in other countries. The US is far from alone.



In other words -- the US may continue shopping.

Headlines Tell The Tale of the Tape

All three of the following headlines are from Bloomberg.

1.) U.S. Stocks Rise on Profits, Takeover Speculation; Alltel Jumps

2.) European Stocks Advance on Takeover Outlook, Led by Rio; Ericsson Declines

3.) Asian Stocks Rise to a Record on M&A Speculation; Rio, Sumitomo Metal Gain

All three regions of the world are in the middle of a merger boom. Investors are looking for the next big consolidation.

FOMC Statement: RATES AREN'T COMING DOWN

Here's a link to the statement:

Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

This is very clear. There is no question about it. Rates aren't coming down.

I should add: the Fed has been saying this for the last few months. It's the markets that weren't listening.

Great Discussion of Employment Numbers

Over at the Big Picture.

Housing News Continues To Be Weak

From the WSJ:

The number of homes listed for sale in 18 major metropolitan areas at the end of April was up 7% from March, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condos and town houses on local multiple-listing services.

The increase was above the seasonal norm. Over the past 22 years, home inventories nationwide have increased an average of 4.5% in April from March, according to Credit Suisse Group. Spring is the busiest time of year for home shopping, as families with children try to get settled ahead of the next school year.

.....

In a report issued yesterday, Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse, said her building-industry contacts have been surprised by the weakness of sales recently, "given the typical seasonal bounce that occurs at this time of year." She added, "Our contacts have officially declared the spring selling season a bust." Many people who had expected a recovery by year end "now believe the market rebound will be pushed out until 2008 at the earliest," Ms. Zelman wrote.

...

The National Association of Realtors yesterday again lowered its forecast, predicting that sales of previously occupied homes will total 6.29 million, down 2.9% from 2006. A month ago, the trade group projected that sales this year would slip 2.2%. Lawrence Yun, a senior economist for the Realtors, said many speculators have fled the market.

Increasing inventory + weaker sales = lower total sales and lower prices.

Consumers Are Getting Squeezed From Several Directions

From Bloomberg:

A pickup in U.S. economic growth is becoming more elusive as climbing gasoline prices, falling home values and fewer jobs restrain American consumers, according to economists surveyed by Bloomberg News this month.

And the WSJ is chiming in on this issue as well:

Amid concern about consumers' habits, big retailers issue April sales reports tomorrow, and the Commerce Department follows on Friday with its estimate of retail sales in April. Yesterday, Redbook research said its index of chain-store sales in April fell 4.1% from March. The International Council of Shopping Centers said its measure of chain-store sales last week was running only 1.7% higher than a year ago, the weakest ICSC reading since early March, when the index matched a nearly four-year low.

Bad weather and rising gasoline prices were early explanations, but now there is evidence of a lasting slowdown, said Michael Niemira, chief economist at ICSC. "Over the last two weeks there's been a little more unease that some of this weakness is broader based. The worry level is higher."

Right now consumer spending is the only economic sector keeping the economy from dipping into a recession. That means consumers have to keep spending. But they are coming under increasing pressure to slow down from several areas.

1.) Employment Growth is Slowing Down. Notice the chart of the year-over-year change in employment is trending lower.



Also note this is occurring against a backdrop of weaker employment growth compared to other expansions. Here is the same chart going back to 1980:



2.) Wage growth is fair, but not great. According to the Bureau of Labor Statistics the average hourly earnings of production workers were $16.55 in April 2006 and $17.21 in April 2007 for an increase of 3.98%. Over the same period the inflation level increased from 199.8 to 205.352 for an an increase of 2.77, making the yearly gain 1.21%. Going back over the same period but in an earlier year (2005 and 2004) we get a 2-year and 3-year gain of 1.46% and .96%. In other words, incomes are increasing, but they are doing so just a tad faster than inflation.

3.) Gas prices hit a record over the last few weeks. This is a price that consumers see on a regular basis, making it more prone to impact consumer spending patterns.

4.) Home prices are expected to decline this year.

U.S. home price declines this year are going to be steeper than earlier forecast because of the drop in subprime mortgage lending and the adoption of stricter loan standards, the National Association of Realtors said.

The 2007 median price for an existing home likely will drop 1 percent to $219,800 from 2006, compared with its earlier forecast of a 0.7 percent decline, the Chicago-based association said in a report today. It now projects the median price for new homes to fall $100 to $246,400, the first decline since 1991, from its previous estimate of a 0.4 percent increase.

That means the cash-out refi is going away -- or at least slowing down. As

-- wages aren't rising fast enough to keep up with big increases in consumer spending,

-- the "home as ATM" is going away, and

-- consumers are already dipping into savings to finance purchases,

you have to wonder where the money for continued increases in consumer spending is going to come from.

The Proper Way to Look at Business

From Bloomberg:

The slowdown in profit growth ``is temporary as we are planting seeds,'' said President Katsuaki Watanabe, speaking to journalists in Tokyo. ``Our earnings will improve.''

This is from a statement from Toyota's President. Because the company is increasing investment overall profits will slow a bit. But the long-term benefit to the company is really important.

In other words, it's called long-term thinking.

Which Market Is It?

There are several columns out right now comparing the current market to various other historical periods.

Dow Parallels 1927:

The surging Dow Jones industrial average has rallied for 24 of its past 27 sessions - raising some alarm bells because that hasn’t happened since 1927.

“You don’t find those sorts of streaks near what have historically been tremendous buying opportunities,” hedge-fund manager Bill Fleckenstein yesterday said after the Dow rose 48.35 points to close at a record 13,312.97.

The Dow has rallied in all but three sessions since March 29 - a run not seen since July 1 to Aug. 2, 1927, just 26 months before 1929’s stock-market crash.

Although experts don’t see a 1929-style collapse coming, some think the Dow is setting up for at least a short-term correction.

Then there's this column comparing the market to Japan in the 1980s:

Editor Dennis Gartman wrote in the past week: "We stand in awe of the sheer majesty of this rise." But Gartman's response is to review what he wrote about an earlier unstoppable bull: the Japanese stock market of the late 1980s.

As Gartman remembers: "Shares there were running skyward even as the economies of the rest of the world were tanking. The Bubble was going "parabolic," and every modest decline was met with huge new buying, that soon took shares to incredible new highs as the Nikkei soared toward 40,000."

Gartman explains: "Already trading at incredibly over-bought levels when it had risen from 4,000 in late '75 to 8,000 by the mid-'80s, in reality the rally had only just begun! From '83-'85, the Nikkei rose 8,000 to 18,000 ... and still the rally had only just begun! From '86-early '88, it rose from 18,000 to 28,000 ... and still the rally had only just begun, for in those last two years, the Nikkei moved from 28,000 to 40,000, with the last 7.000 points coming in the final weeks of '89!"

Personally, I think any comparison to a historical period can be a bit problematic. Each expansion is unique onto itself. They have their own set of variables. For example, the recent rise is very insulated -- meaning the market is reacting more and more to itself instead of the economy as a whole. There's a ton of liquidity from a variety of sources (corporate balance sheets, the yen carry-trade) that didn't exist in the same proportion in previous bull markets.

While we all try to make sense of things through comparison, it's also important to look at the unique factors of this market.

Inventories and Inventory Sales Increase

From CNBC:

Inventories at US wholesalers rose modestly for the third straight month in March, while sales rose at their fastest pace in a year and a half, the Commerce Department said today.

Inventories at US wholesalers rose 0.3% in March after rising 0.4% in February and 0.6% in January.

Sales surged 1.8% in March after rising 1.0% in the prior month. Sales had declined 0.9% in January. The March gain is the largest rise since September 2005.

...

Wholesalers are middlemen operating between retailers and producers, who serve as absorbers for supply and demand shocks.

Let's coordinated this data with two other recent economic releases.

1.) Consumer credit expanded last month:

Consumer credit increased at an annual rate of 4-1/2 percent in the first quarter of 2007. In March, consumer credit increased at an annual rate of 6-3/4 percent.

2.) Personal income increased last month:

Personal income increased $79.9 billion, or 0.7 percent, and disposable personal income (DPI)increased $65.5 billion, or 0.7 percent, in March, according to the Bureau of Economic

All three of these releases may point to a more robust retail sales figure than anticipated.

However, it's important to note the year-over-year retail sales figure is decreasing:

Consumer Credit Expands

From IBD:

March's rise was much better than expected and the best since Nov. Credit-card borrowing and auto loans both showed notable gains. The overall economy grew at a sluggish 1.3% annual rate in Q1 amid a housing slump and stagnant business investment. But consumer spending held up reasonably well. There are some signs that spending growth may cool in Q2.

Here's a link to the Federal Reserve Report.

Consumers continue to go into debt at the expense of savings.

Food Prices Increasing Due to Ethanol

From IBD:

Food prices rose at a 5.2% annual rate in the three months to March, the biggest gain in years. That's a big reason, along with resurgent energy costs, why the overall consumer price index climbed at 3.8% pace in March vs. a 2.1% decline back in December.

Core CPI, which excludes food and energy, rose at a more-modest 2.3% pace over the latest three months.

Congress has mandated that 4.7 billion gallons of renewable fuel be added to the gasoline supply this year, rising to 7.5 billion gallons in 2012.

....

Rising corn prices will "exert upward pressure on meat, dairy and poultry prices by raising animal- rearing costs, given the predominant use of corn and soy meal as feedstock," the International Monetary Fund said in an April report.

Soy meal is used to make biodiesel fuel.

Consumer food prices are expected to rise 2.5%-3.5% this year, up from 2.4% in 2006, according to the Department of Agriculture.

Let's place this problem in perspective.

The Federal Reserve is in a corner right now. On one had, the US economy is slowing down. GDP growth clocked in at 1.3% in the 1st quarter of 2007. To stimulate the economy, the Fed could lower interest rates.

But inflation pressures may prevent the Fed from lowering rates. Not only does the Fed have to contend with oil prices, but now the Fed must deal with rising agricultural prices. Here's a chart of the Goldman Sachs agricultural futures index.



Notice how the average has increased from the 175 area to the 260 area over the last 2 years. That's a compound annual growth rate of almost 22%.

Here's a simple example of how this is hitting the average consumer:

Most agriculture experts say milk prices will jump in coming months as producers pass along increased costs for livestock feed (read: higher corn prices because of ethanol) and a spike in overseas demand.

....

Ken Bailey, a dairy expert at Penn State University's College of Agricultural Sciences, predicts an overall 8 percent increase for whole milk, from an average of $3.07 a gallon to about $3.35 in October.

The news is worse, though, if you live in New York, where milk this week shot up 60 cents a gallon to $3.54, a 20 percent increase, according to the U.S. Department of Agriculture. In Chicago, milk prices in April jumped 12 percent from a year earlier and are expected to rise further. In Boston, prices are 8 percent higher over last year and are also seen moving higher.

So long as we have ethanol mandates, this situation will continue.

Gas Prices Hit Record

From CNN:

The price of gasoline has hit a new record high, averaging $3.07 for a gallon of self-serve regular in the United States, a survey reported Sunday.

When inflation is factored in, the new price trails the all-time high in March 1981. At the time, gasoline cost $1.35 a gallon -- in today's dollars, that's $3.13 a gallon, said Trilby Lundberg, publisher of the Lundberg Survey.

....

The survey, which took into account the prices at thousands of gas stations nationwide on May 4, found a 19-cent jump from the previous survey two weeks earlier.

Last month there was "substantial evidence" that gas prices would fall, but a series of "incidents" at a dozen refineries worldwide led the price to reverse course, Lundberg said.

In some cases, refineries began scheduled maintenance, but in other cases they experienced accidents that led some to shut down entirely and others to limit their capacity, she said.

Also, demand for gasoline grows at this time of year as Americans drive more in the warmer weather, she said.

This is important news for one reason: consumer spending is the backbone of this economy and the only thing holding the economy above recessionary levels.

It's the Psychology, Not the Fundamentals

From the CBS Marketwatch Blog:

"We do indeed seem to be entering, in global terms, a period that is strikingly akin to the week, months and years very like that in the late 80's in Japan when that market 'went parabolic' to the upside. Why markets 'go parabolic,' is not a subject given to business school doctoral dissertations, for there is usually no real fundamental reason for them doing so. Indeed, there is every reason for them not to do so for prices move to levels that are simply unjustifiable in any terms economic. That matters not, however, for the psychology of the market trumps all other concerns and the quicker one learns to accept that fact the easier it is for one to deal with, trade in, profit from and eventual remove oneself from the events that shall transpire. Markets are psychological animals rather than economic ones...a lesson hard for many to learn. This market, however, is now at that point where psychology does indeed fully trump economics.

This is something I have grappled with as well -- how the market can move higher in the face of a slowing economy. I dealt with it a bit in this post where I essentially argued the market is reacting to itself rather than the economy. By itself, I am referring to the prevailing trend combined with the massive liquidity of all the recent M&A deals going on.

However, I think the best explanation still comes down to the old trading rule, "the trend is your friend." Right now we have an upward trend that has been in place for a few weeks. The longer it stays in place, the more important it becomes in traders' minds.

Rally's Length Starting To Show

From IBD:

The major indexes have made moderate progress since the March 21 market follow-through, and the hunt for leading stocks near buy points isn't getting any easier.

Investors face a challenge common to other rallies: The best breakouts occur in the early days and weeks of a follow-through.

We're about six weeks past the rally confirmation, a stage where it gets harder to find top-notch stocks still in bases.

As rallies progress, it becomes harder to find stocks that have yet to participate. This makes it that much more difficult for the rally to continue.

Here's a chart of the NASDAQ cumulative advance/decline line. Notice that it is already trading at a lower point.



In contrast the NYSE advance/decline line looks like it is going to continue upward.



This divergence between the markets could indicate that traders are looking for less speculative issues (represented by the NASDAQ) and are instead moving money into larger more established companies (represented by the NYSE).

It also confirms what the article is talking about. It's getting harder to find stocks that haven't rallied.

Oil Market Update

Last week I pointed out that oil was in a very bullish technical position. It was trading above its 20, 50 and 200 say simple moving averages. It was also trading above two trend lines and had formed an ascending triangle.

As we start this trading week, the situation is entirely reversed. oil is trading below its moving averages and the marked trend lines.

So -- what happened? Traders reacted to the US oil inventory situation announced on Wednesday by selling oil contracts.

However, I would also mention that while the technicals have reversed, the fundamentals haven't. OPEC's production is still down and world demand is still up -- especially with India and China growing at high rates. Both of those point to higher prices in the future. As IBD noted this morning:

June crude lost $1.26 to 61.93 a barrel. That's $4.53, or 7%, ceded this week. But some traders call this a correction within a rising market. They point to Nigerian output problems and an imminent surge in gasoline demand in the U.S. as summer drivers hit the road, all bullish factors. June gasoline dropped 3.12 cents to $2.2164 a gallon. But prices at the pump are at $3.

Asian Countries Seeking Greater Currency Cooperation

From the WSJ:

Asian finance ministers' agreed-upon framework for pooling foreign-exchange reserves could allow governments to respond more quickly and with greater firepower to a brewing balance-of-payments problem.

Main aspects of the plan -- including the size of each nation's commitment and the circumstances under which a country can tap the pool -- haven't been set.

Implementation could take a couple of years.

Finance ministers from the 10-nation Association of Southeast Asian Nations, plus Japan, China, and South Korea agreed Saturday to set up a regional reserve pool that each country could access in a currency crisis.

This is a great idea. For those who remember the Asian currency crisis of the late 1990s, it is definitely a good idea.

However, it points to something deeper that is going on. The world is starting to fall into three different trading blocks -- the Americas, Europe and Asia. Each of these regions has its own strengths and weaknesses. However, the US in particular is way behind in its dealings with Asia and needs to develop a better policy toward the region.