Dow Up 8%, Nasdaq Up 6% Since January 1

Oil Prices, Housing Sector & Builder Confidence Are Sill Negative Factors

May 19, 2007
By: Jerry Cole - Retirement, Investment

Will the slowing economy eventually catch the stock market? That is a question many analysts are pondering as the market is poised to close at another new high this afternoon.The Dow has risen over 8% since the first of the year. The Nasdaq is up close to 6% for the year and the S&P 500 at 1521 is within a few points of its record close in March of 2000.

At the same time, oil prices are back up over $65/bbl and some economists now expect U.S. growth to be revised down to 0.7% for the first quarter from 1.3% previously. The housing sector remains bleak. Median home prices dropped for a third straight month.

The National Association of Home Builders said builder confidence has fallen way back to its lowest level since the beginning of the downturn. On a scale of 100, where a reading of 50 signals builder optimism, the NAHB survey showed a reading of 30, the lowest since September. Gas prices are at record highs and the summer driving season hasn't even started.

Yet there seems to be a fascination with the large capitalization stocks, especially the big multi-nationals. (The capitalization of a stock is the multiple of the number of shares outstanding and the price of the stock).


To be sure, some of the multi-nationals deserve a close look when you consider the weak dollar. Those sales overseas are worth more when those sales are converted into dollars.

But something took place today that may begin to dampen the currency translation and the very rapid growth of some foreign securities. China, whose stock market has returned 31% annually over the last 5 years, said it is widening the trading band for the yuan, hiking interest rates and increasing banks reserve requirements. This is being done to cool their red-hot stock market and to appease increasing complaints by the U.S. that China has an unfair advantage in trading.

This is a step toward greater flexibility and eventual float of their currency according to the U.S. Treasury Department. Most industrialized nations allow their currency to float.. A floating currency means a country's exchange rate is set by the foreign exchange market through supply and demand.

This is in contrast to a fixed exchange rate. China has, until now, kept the price of their currency "strong" or "high" relative to others through a fixed exchange rate. Some countries believe artificially so. Hopefully the net effect of this move will make the dollar stronger against the yuan and improve our trade position.

Meanwhile, the winners in the Chrysler deal are Ford and GM. Both have rallied this week. Both are higher because investors see the Chrysler deal forcing the United Auto Workers to give more concessions to auto makers.

Energy stocks have remained strong. The energy companies have benefited from tight gasoline inventories and high refining margins. And we aren't far away from the hurricane season. But betting on a strong or weak hurricane season is like shooting craps. It will take some investment in additional refining capacity to blunt the ever rising prices at the pump. It will also take more investment in alternative fuels. Who is going to do it?

The first quarter earnings season is about over. Earnings came in higher than expected. This has contributed to the recent market rise. It is important to note however, that the growth rate is off the double digit growth rates reported for the last 19 consecutive quarters.

Forecasts are for the growth rate to slow even further in the coming quarters of 2007. Investors are pumping up the blue-chip stocks in the hopes that faster growth in developing economies will make up for slower growth here. Leverage in buy-out deals in increasing because interest rates remain relatively low.

Let's hope the Fed can continue a very good job of walking the tight rope on interest rates and the economy.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)