Marketmail

Stat of the Week: April’s Producer Prices Fell 0.2%
Greece’s Election was More Revolutionary than France’s
If Investors “Sell in May and Go Away,” Where Will They Go?

Lower Oil Prices Lift Consumer Sentiment & Dampen Inflation
By Louis Navellier

The S&P 500 fell 1.1% last week. The initial drop was in response to election results in France and Greece, followed by the shocking news of a $2 billion trading loss at J.P. Morgan Chase*. The Dow (which includes JPM) suffered its worst week of the year, down 1.7%. However, the Russell 2000 only fell 0.2%. While the soap opera in Greece may continue to dominate the news, I still believe that rising earnings in an election year should lift most U.S. stocks higher during the rest of 2012.

Stat of the Week: April’s Producer Prices Fell 0.2%

Due mostly to falling crude oil prices, the Labor Department reported on Friday that the Producer Price Index (PPI) fell 0.2% in April, the biggest one-month decline since October 2009, due mostly to a 1.4% drop in energy prices. Excluding food and energy, however, the “core” PPI rose 0.2%. In the past 12 months, the core PPI is up 2.7%, but the headline number is up only 1.9%, its slowest rise in 30 months.

Whenever the price of gas at the pump declines, consumer sentiment invariably rises. We saw two more examples of this trend last week. First, on Tuesday, the National Federation of Independent Business announced that its small business optimism index rose to 94.5 in April, up from 92.5 in March, reaching its highest level in 14 months. Then, on Friday, the University of Michigan/Reuter’s preliminary survey of May consumer sentiment rose to 77.8, up from 76.4 in April, reaching its highest reading since January 2008. In addition, their current economic conditions index rose to 87.3 in May, up from 82.9 in April.

The one piece of “bad news” released last week was not really so bad, when you check the details. On Thursday, the Commerce Department announced that the U.S. trade deficit rose 14.1% to $51.8 billion in March, but that figure is misleading, since the price of crude oil imports rose to their highest level in 10 months, artificially bloating the import totals. With crude oil prices now back to their lowest level of the year, the upward pressure on the trade deficit should ebb in the upcoming months. In addition, America enjoyed record-high exports to Canada, the European Union, Mexico, and South Korea last month.

Greece’s Election was More Revolutionary than France’s

Every May, it seems, Greece threatens to disrupt the euro-zone. It happened in May 2010 and 2011, and now it’s happening again. Interestingly, last Sunday’s French Presidential election did not upset investors that much (French stocks rose the next day), but the election in Greece, along with rising bond yields in Spain, sent stocks down last week. Today, all eyes will be on bond auctions in Spain and Italy, and the meeting of euro-zone finance ministers in Brussels as they try to solve the latest Greek crisis.

The situation in Greece is more serious than ever, since Greece’s two leading political parties were essentially thrown out of office last week. Specifically, the two main parties of the previous governing coalition, the Socialist Pasok party and the conservative New Democracy party, lost their parliamentary majority. Greek voters blamed these two parties for pushing through the very unpopular austerity cuts in exchange for a second 130 billion euro ($169 billion) bailout. Greece desperately needs a 5.2 billion euro ($6.8 billion) installment to repay 3.3 billion euros ($4.3 billion) in Greek bonds that mature on May 18th.

What is essentially happening in Greece is the equivalent of voters throwing out most of the Democratic and Republican members of Congress in favor of a variety of third parties that want to throw out the bums who cut their pay. There seems to be a growing backlash against austerity cuts in Greece and throughout Europe. That makes politicians nervous, since those who backed the Greek bailout are getting thrown out of office, right and left. The radical new political parties will resist the mandated austerity cuts. In effect, they are telling euro-zone officials to take their money and “shove” it. As a result, the public outcry is so severe that many in Greece want to leave the euro-zone and don’t care if Greece defaults on its debt.

The other debtor nations are doing almost as badly as Greece. Spain’s bond yields exceeded 6% last week and Portugal canceled four annual holidays in conjunction with its austerity reforms. Clearly, austerity reforms and budget cuts will not pass voting muster in Europe, so the stage is set for Greece to be booted out the 27-nation European Union or the 17-nation euro-zone, possibly followed by Spain or Portugal.

That’s not a pleasant prospect. Since there is no formal procedure for leaving the European Union, Greece will set the pattern. The procedure will likely be very messy and could dominate the global news in 2012.

The 64-billion-euro question is: What do Europe’s woes have to do with the U.S. stock market? Answer: Not much. Retaining the European Union is not important to most of the rest of the world. Europe is clearly entering a recession, but continued growth in Asia and the U.S. tend to offset Europe’s slowdown.

If Investors “Sell in May and Go Away,” Where Will They Go?

I spent most of last week on the road talking with brokers and the investing public. I debated with several stockbrokers and financial advisors on the wisdom of “selling in May and going away,” based on the theory that most historical market gains come from November to April, not May through October.

It sounds logical, and it sometimes works, but I always ask: “Where do you want to park your money?” Money market funds and bank accounts yield next to nothing. Treasury bonds entail some risk, since rates are historically low: 0.26% for two-year notes and 1.84% for 10-year notes. Since the S&P 500 now yields over 2%, blue-chip stocks deliver more income than Treasury bonds. Furthermore, stocks tend to rise during the middle quarters of most election years. I also noticed last week that the stock market usually tried to pop up late in the day, almost like releasing an air balloon from under the water.

I believe many bargain hunters and “smart money” traders are nibbling on stocks in the last hour of the day, while long-term investors tend to buy stocks with high dividend yields. Furthermore, many companies regularly buy back their outstanding shares, thereby boosting their earnings-per-share.

In addition, first-quarter sales and earnings represent the trough – the slowest overall results that we are likely to witness this year. Earnings momentum is expected to perk up for the remainder of the year. The S&P 500’s earnings are expected to grow at a 17% annual pace by the fourth quarter. So I do not believe investors should sell stocks before these earnings are released – or right before a major national election!