Seeing the World Through Rose Colored Glasses

May 1, 2011

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Ben Bernanke’s firs press conference was quite a spectacle and one can only wonder who gave him and Wall Street their rose colored glasses.

The economy is growing modestly, inflation is not a problem, job growth is slow but will improve.

We’ll discuss all of this in greater detail in a moment but first take a look at some technical and seasonal indicators.

On My Radar

Chart courtesy of www.stockcharts.com

In the view of the S&P 500 above, we see the significant breakout last week above the 1340 resistance level which now becomes support and the upward vector of the MACD on a daily basis.

RSI is now at edge of the 70 level on a 14 day basis which typically precedes a correction and is also in a similar range on the weekly chart, while Stochastic is also overbought.

The View From 35,000 Feet

Dr. Bernanke’s historic press conference was the news of the week and it was interesting to watch, although no real surprises emerged from the session. His efforts to restore credibility to the Fed and provide more transparency seemed to work as markets rose for the week, but I would have to say that, in my view, he’s looking at the world through rose colored glasses.

Starting with GDP, by his own admission, the central bank has taken extraordinary steps to stimulate the economy and this week, 1Q GDP came in at a meager 1.8%, down from 3.1% and this is truly a miserable figure, since not even 3% growth will be enough to bring down unemployment in any meaningful way.

According to a recent Gallup poll, 55% of Americans think the economy is in a recession or depression.

The dollar continued its decline to multi-year lows while gold and silver continued their meteoric rise.

So we have a slowing economy and most of us don’t share his optimism for continued growth and better job conditions in the future. He tells us that inflation is transitory and moderate, however, if you’ve filled up your car with gas or been to the grocery store lately, you know that inflation isn’t as moderate as suggests.

Weekly Developments:

Positive:

New Home Sales (up but near historic lows)
Consumer Confidence
Durable Goods

Negative:

Case/Shiller Home Price Index declines
GDP declines to 1.8% from 3.1%
Initial jobless claims rise
Chicago PMI declines from previous report
Japan outlook changed to negative from stable

What It All Means

A slowing economy combined with seasonal weakness points to weaker times ahead. The positive continues to be corporate profits and that is largely because the American consumer/worker is becoming more and more irrelevant as companies continue to move jobs, operations and sales offshore.

Stagflation, really the worst of all worlds, appears to be a growing possibility. The Fed will continue their efforts to prop up markets, which by many measurements have been a dismal failure, and now they find themselves being boxed in by rising inflation and a growing movement towards reducing the deficit.

The Week Ahead

Major Issues/Themes: This week will bring a blizzard of economic data climaxing with the April Non farm Payrolls Report on Friday.

Monday: March Construction Spending, April ISM, March Car Sales

Tuesday: March Factory Orders

Wednesday: April Challenger Job Cuts, April ADP Employment Change, April ISM Services

Thursday: Initial Unemployment Claims, Continuing Claims,

Friday: April Non Farm Payrolls, April Unemployment Rate, March Consumer Credit

Sector Spotlight

Leaders: (NYSEArca: EWI) Italy (NYSEArca: EWP) Spain

Laggards: (NYSEArca: FXI) China (NYSEArca: EWZ) Brazil

I was in Germany again this week where it was unseasonably warm and pleasant and white asparagus is in season which is a local specialty that is much looked forward to and in high demand. I was lucky enough to enjoy that springtime delicacy on the veranda of a quiet restaurant in a small hillside town with the ruins of a castle framed in the sunset in front of me. It just doesn’t get much better than that.

Have a great week and we’ll talk soon,