Week Ahead: Investors to Focus On Dollar, Signs of Recovery

By: Patti Domm
Executive Editor

Stocks may pedal sideways as investors shift focus to the wilting dollar and any data that might provide clues about the economy's recovery.Despite ups and downs, stocks finished the past week basically flat, ahead of the long Memorial Day weekend. The Dow rose 0.1 percent to 8277, and the S&P 500 was up 0.5 percent to 887. The dollar, meanwhile, had its worst week since December and traded at its low for year.The next two weeks offer plenty of economic data, starting with Tuesday's consumer confidence, and leading up to the June 5 employment report. In the week ahead, the big items are several housing reports. Investors will also pay attention to headlines around GM, as it heads to almost certain bankruptcy June 1.There is another $101 billion in Treasury notes coming to auction in the coming week, and traders are watching tensions in the bond market, where long end rates rose sharply in the past week. The yield on the 10-year finished Friday at 3.446 percent, a sharp increase from 3.125 the week earlier.

The dollar will be a key factor, said Art Cashin, director of floor operations at UBS. The green back was under pressure in the past week as investors moved to riskier assets, but it also took a hit on concerns the credit rating of the United States was at risk. That fear circulated after S&P said the U.K.'s outlook is negative. Both the U.K. and U.S. are piling on debt to tackle the financial crisis. The dollar was trading at $1.40 per euro Friday. "I find it a little bit illogical," said Boris Schlossberg , director of currency research at GFT Forex. "The U.S. is going to have massive budget issues going forward, but the European economy is hardly a bastion of strength..The higher the euro goes, the more problematic it becomes. The recovery story was anchored by the euro weakening story, which allowed European exports to become more competitive in the international market."

Econorama
Real estate data will be the headline grabber in the coming week, as existing home sales are reported Wednesday. The S&P/Case-Shiller home price index is reported Tuesday and new home sales for April are expected Thursday. Citigroup economists said they see a slight increase in both existing and new home sales as price cuts inspired some buying. They expect a 2.5 percent increase in existing home sales to 4.68 million. Mark Zandi, chief economist at Moody's Economy.com expects the housing data to remain weak, but he is watching readings on the consumer for possible improvement.
Consumer confidence is reported Tuesday and consumer sentiment is reported Friday. On Thursday weekly jobless claims and durable good are reported. Friday's data includes the final look at first quarter GDP and Chicago purchasing managers data. Zandi is also focused on durable goods data. "Businesses actually are panicked, and they've slashed everything.. I don't expect a big turnaround but hopefully we get a more neutral kind of number and we would view that as a positive sign."

Zandi is also watching the stock market's behavior. "The economy has never recovered without the equity market leading the way," he said. "If we get another leg up in the stock market, that would be very definite that the recovery has taken hold.. It has impact on spending, confidence and the banking system. It's both a signal and it's a fundamentally important economic variable." The problem, however, is that the market may have moved too far ahead of the data showing improvement. "I think the equity market has kind of priced in the idea that the recession is moderating, winding down. It's not going to move higher until there's clear evidence that the recovery is taking hold, and I don't think we're there yet. I think we're a number of months away from that," he said.

Whither Stocks
Deutsche Bank's Chadha also says it's likely stocks will not move ahead just now, and that the market is in a consolidation phase. However, the market will continue to see a positive bid as underweighted investors move in during dips. That phenomena should keep the market's trend going sideways. "Basically, we were expecting some consolidation because the market had moved a little too far, too fast, which has become a cliché by now. I don't expect a big consolidation for the market as a whole," he said, in a phone interview. "I think we go sideways to consolidate until we have a clear picture that earnings are going to be better, and the earnings are going to be better," he said. Chadha said there has been an important change in earnings in the past quarter. For one, more than 65 percent of companies in the S&P 500 had positive surprises.Chadha said that S&P 500 EBITDA margins rose to 15.9 percent in the first quarter, up from 11.4 percent in the fourth quarter. He noted that much, but not all of the improvement came from financials. Margins for that group rose to 16.2 percent form 15.8 percent.Chadha also commented on the action in Treasurys and the dollar in the past week which bit into the stock market's gains in the past week."There is clearly some disconnect between equities, fixed income, and the dollar. We did expect the dollar to weaken as equity markets came back, as risk comes back. The moves we've seen in the last few days are a little bit over done," he said. "On Treasurys, I think they are pricing in too little of a recovery. Even if there was not supply issues, we should be a lot higher ( rates) given the kind of consensus recovery we are talking about."

Oil Drill
Oil, like other commodities, has benefited from the dollar's weakness. It finished the past week 8.2 percent higher at $61.67 per barrel. Traders are looking ahead to OPEC's meeting in Vienna Thursday. Mike Fitzpatrick of M.F. Global does not expect OPEC to take any action. "They certainly don't want to be accused of pricking the illusory recovery, and I think if they try to engineer any more cuts, it would be very difficult to hold together the cuts they have right now," said Fitzpatrick. Fitzpatrick said as commodities move up and the dollar weakens, concerns about inflation have picked up. Gold, viewed as an inflation hedge, finished the past week 3 percent higher at $958.50 an ounce, the highest level since Feb. 25.

Kalender Ekonomi & Event Global (25-29 Mei 2009)

Date
Currency Detail Forecast Previous
WIB + 11 Jam
Mon
May 25 7:50pm
JPY All Industries Activity m/m
-2.3% -2.0%
10:00pm JPY BOJ Gov Shirakawa Speaks

1:00am JPY BOJ Gov Shirakawa Speaks

1:00am JPY BOJ Monthly Report

All Day GBP Bank Holiday

4:00am EUR German Ifo Business Climate
85.1 83.7
6:00am EUR Buba President Weber Speaks

All Day USD Bank Holiday

6:45pm NZD Trade Balance
280M 324M
7:50pm JPY CSPI y/y
-2.3% -2.1%
11:00pm NZD Inflation Expectations q/q
2.3%
Tue
May 26 2:00am CHF UBS Consumption Indicator
0.99
2:00am EUR GfK German Consumer Climate
2.5 2.5
2:00am EUR German Final GDP q/q
-3.8% -3.8%
2:00am EUR German Import Prices m/m
0.0% -0.4%
26th-29th GBP Nationwide HPI m/m
-0.9% -0.4%
2:45am EUR French Consumer Spending m/m
-0.5% 1.1%
3:15am CHF Employment Level
3.92M 3.96M
4:00am EUR Current Account
-7.3B -8.1B
5:00am EUR Industrial New Orders m/m
1.0% -0.6%
9:00am EUR Belgium NBB Business Climate
-27.0 -29.4
9:00am USD S&P/CS Composite-20 HPI y/y
-18.4% -18.6%
10:00am USD CB Consumer Confidence
42.1 39.2
10:00am USD Richmond Manufacturing Index
-7 -9
7:50pm JPY Monetary Policy Meeting Minutes

7:50pm JPY Trade Balance
-0.02T -0.10T
8:30pm AUD MI Leading Index m/m
-0.3%
9:30pm AUD Construction Work Done q/q
-3.0% 1.7%
11:00pm NZD NBNZ Business Confidence
-14.5
Wed
May 27 Tentative JPY BOJ Gov Shirakawa Speaks

All Day EUR German Prelim CPI m/m
0.1% 0.0%
4:30am GBP BBA Mortgage Approvals
29.1K 26.1K
8:30am CAD Corporate Profits q/q
-16.3%
10:00am USD Existing Home Sales
4.65M 4.57M
10:00am USD HPI m/m
0.2% 0.7%
7:50pm JPY Retail Sales y/y
-3.2% -3.9%
8:00pm AUD CB Leading Index m/m
0.2%
9:10pm AUD RBA Deputy Gov Battellino Speaks

9:25pm GBP MPC Member Tucker Speaks

9:30pm AUD Private Capital Expenditure q/q
-5.0% 6.0%
Thu
May 28 2:15am CHF Trade Balance
0.11B 0.15B

All Day ALL OPEC Meetings

3:55am EUR German Unemployment Change
66K 58K
5:00am EUR Consumer Confidence
-30 -31
6:00am GBP CBI Realized Sales
-10 3
8:30am USD Core Durable Goods Orders m/m
-0.4% -0.6%
8:30am USD Unemployment Claims
635K 631K
8:30am USD Durable Goods Orders m/m
0.1% -0.8%
10:00am USD New Home Sales
363K 356K
10:15am EUR Buba President Weber Speaks

10:30am USD Natural Gas Storage
103B
11:00am USD Crude Oil Inventories
-2.1M
6:45pm NZD Building Consents m/m
-4.6%
7:01pm GBP GfK Consumer Confidence
-25 -27
7:15pm JPY Manufacturing PMI
41.4
7:30pm JPY Household Spending y/y
-0.7% -0.4%
7:30pm JPY Tokyo Core CPI y/y
-0.5% 0.0%
7:30pm JPY National Core CPI y/y
-0.1% -0.1%
7:30pm JPY Unemployment Rate
5.0% 4.8%
7:50pm JPY Prelim Industrial Production m/m
3.3% 1.6%
9:30pm AUD Private Sector Credit m/m
0.2% 0.1%
10:00pm NZD Annual Budget Release

Fri
May 29 1:00am JPY Housing Starts y/y
-21.9% -20.7%
2:00am EUR German Retail Sales m/m
0.5% -0.4%

4:00am EUR M3 Money Supply y/y
4.6% 5.1%
4:00am EUR Private Loans y/y
2.9% 3.2%
5:00am EUR CPI Flash Estimate y/y
0.2% 0.6%
5:00am EUR Italian Prelim CPI m/m
0.3% 0.2%

5:15am EUR ECB President Trichet Speaks

5:30am CHF KOF Economic Barometer
-1.86 -1.86
8:30am CAD Current Account
-10.5B -7.5B
8:30am USD Prelim GDP q/q
-5.5% -6.1%
8:30am USD Prelim GDP Price Index q/q
2.9% 2.9%
9:45am USD Chicago PMI
42.3 40.1
9:55am USD Revised UoM Consumer Sentiment
68.0 67.9
9:55am USD Revised UoM Inflation Expectations
2.6%

Stock Market is 50% Over Valued, Bear Market is Not Over!

Sharon A. Daniels writes: The stock market has managed to claw its way higher since early March, despite some of the worst headlines since this financial crisis began.
Suddenly, “green shoots” are springing up everywhere, but they can just as easily turn into wilting weeds again this summer, as I’ll show you in just a moment.
The market rally, over the past nine straight weeks, has left many investors frustrated and bewildered. Our message of caution: In the end, you may be pleased that you remained on the sidelines and didn’t jump into what we view as just another bear market bounce.

While this was unfolding, our investment professionals at Weiss Capital Management† were scratching our heads, wondering what on earth investors were thinking. While it’s true that SOME recent data on the economy has improved slightly (by PLUNGING less than expected) the reality is that it’s still a pretty bleak picture … at best! Let’s take a look at the cold, hard facts … and these are just a few of the sobering headlines that have come to light while stocks rallied:
Fact #1 10 Major U.S. Banks FLUNK Stress Test:
Fact #2 U.S. Economy Shrinks Most in FIVE Decades:
Fact #3 One-in-Five Homeowners UNDERWATER:

Long-Term Trend Says S&P STILL 50 Percent Overpriced
Let’s take a closer look at stock market valuation using the price-to-earnings ratio (P/E) …

Back in October and November, as the market plunge was unfolding, the S&P 500 Index looked relatively cheap based on projected earnings over the next 12 months. At that time, the market’s “forward” P/E ratio fell to just 11 — well below the average P/E of 15 over the past 25 years.11 What you must understand is that stock prices collapsed first, but earnings had not yet adjusted downward to reflect worsening economic conditions.So, when corporate profits then plunged, the “E” in the P/E ratio collapsed. Stocks, of course, tumbled further. But even now, after this latest rally, the market’s forward P/E has bounced back up to about 14.5. That’s just about average, but certainly not cheap.12

Another approach is to measure valuations over a longer period, this helps smooth out the ups and downs of the business cycle.Yale professor Robert Shiller looks at a 10-year trend in “normalized” earnings for the S&P 500 Index, after adjusting for inflation. In March, his normalized P/E ratio fell to 13, its lowest level since 1986!13 But wait, that still isn’t dirt-cheap.That’s because, at the end of previous secular bear markets in the 1940s, 1970s, and early 1980s (see graph below) the normalized P/E ratio frequently fell below 10 … sometimes even lower.

U.S. Dollar’s Impact on Commodity Price Trends

On any day that commodities prices move materially, the financial media is quick to ascribe their action to the US dollar. And this oft-discussed causal relationship is certainly logical. With commodities priced in dollars, a stronger dollar will buy more units of any given commodity while a weaker dollar buys less. But countless times as I’ve seen CNBC reporting on this important relationship, I’ve gotten the impression that the talking heads think the US dollar is the primary or only driver of commodities prices. Neither is true of course. Each commodity has its own unique global supply-and-demand profile, the true fundamentals that drive its price. Nevertheless, the fortunes of the US dollar are often a significant secondary driver.

The long-term data readily reveals the secondary nature of the dollar’s role in commodities prices. During its secular bear between July 2001 and April 2008, the key US Dollar Index (USDX) lost a staggering 41% of its value! And if the dollar was the main driver of commodities prices they shouldn’t have rallied significantly more than the 40% weaker currency demanded. Yet between October 2001 and July 2008, the Continuous Commodity Index (CCI) soared 235%. Supply and demand far outweighed the dollar! Still, the US dollar has a disproportionate impact on commodities-trader psychology. The all-important worldwide supply-and-demand data for most commodities is usually merely estimated, is released piecemeal in a haphazard fashion on differing schedules by many unrelated organizations, and is very difficult to synthesize into a tradable whole. Meanwhile, the dollar’s levels are always available in real-time. Thus it is far easier watching the dollar to game commodities rather than delving into their fundamentals.

And with the recent stock panic driving the most extreme market psychology we’ll see in our lifetimes, the dollar’s psychological impact on commodities has temporarily ballooned to monstrous proportions. A panic is a bubble in fear, and fear drives highly emotional trading that is totally divorced from underlying fundamental realities. The dollar’s extreme fear-driven panic behavior, despite being irrational, really drove an unprecedented commodities bloodbath. The carnage was truly epic in scope.

Gold Wildly Bullish as Paradigm Shift Underway of Banking Power to Creditor Nations

A BEAUTIFUL GOLD CHART

The gold chart is wildly bullish, with a 1300 target. The gold price follows the central banks monetization and diverse federal fiscal stimulus worldwide, and has ignored season. As the big banks struggle to survive, the central banks take extraordinary measures, and frontal assaults are waged against hedge funds, all patterns have been departed from. What replenishes big banks also leaks generally into the system in time. As the economic recessions show stubbornness, expect fiscal stimulus to be monstrous and almost endless. The reversal pattern is unmistakable, the classic Head & Shoulders pattern. The neckline is at 1000 and the top of the head is at 715. The nearly 300 point potential indicates a 1300 target, a number that has come up frequently in several different patterns identified. Notice the upward vector in both moving averages, as well as the cyclical index. The only resistance will be the illegal kind from naked shorting of futures contracts by the usual villains who operate at the behest of governments, protected from prosecution. They will not be able to stop what comes. A challenge of the 1000 level could come very soon. Once 1000 is penetrated in clear fashion, with excitement and attention, an overshoot of 1300 could even occur.