DOW Near 17K On Upbeat Economic Data; ECB Rate Cut

DOW Near 17k On Upbeat Economic Data — So Says Barron’s

I tend to believe that the U.S. economy is still anemic and pretty stagnant, considering we’re six years post-recession and growth is still weak and tepid. The strongest, most robust sectors — oil/gas/fraking, is “exploding” in spite of the Federal Government.

Having said that, the DOW closed Friday near 17,000, the S and P continues into record territory; and, the NASDAQ is also melting up. The U.S. stock market moved higher Friday, after the U.S. Labor Department reported that the U.S. economy added 217K jobs in the month of May — “pushing the total job count above the peak set in late 2007/early 2008 as the economy entered recession,” according to this weekend’s Barron’s. But, Barron’s also notes, “since that time [2008], the [U.S.] population aged 16 and over (and not in institutions like the Armed Forces, prisons, or nursing homes) — rose by about 15M, many of whom would be working if given the opportunity. So, the U.S. unemployment rate, at 6.3 percent, versus 5 percent when the recession began, most likely understates the amount of slack in the economy,” wrote Justin Lahart in this weekend’s Wall Street Journal. In addition, the U.S. has 1.6M fewer manufacturing jobs than when the recession began; and, 941K more jobs in the accommodation and food-service sectors which generally pay substantially less than the manufacturing sector.

For the week, the DOW climbed 207pts., or +1.2% to 16,924; while the S and P climbed 26pts., or +1.3 percent; and, the NASDAQ ended the week +79pts., or +2 percent to 4321. For the year, the DOW is +2.1 percent, the S and P is +5.47 percent; and, the NASDAQ is +3.47 percent.

“In spite of spring rotation out of biotech and momentum shares, where some stocks lost 20 percent to 40 percent, the broad market’s been resilient,” said Marc Pado, CEO of DOW Bull Advisors. “Those shorts have expected the emergence of the traditionally weak summer season for the market. However, the rotation back into those beaten-up stocks; the data; and Thursday’s easing by the European Central Bank (ECB), made the shorts wonder, “Why be short?” and some threw in the towel,” added Mr. Pado. And, “there is a sense of gathering momentum,” wrote Vito Ricanelli in this weekend’s Barron’s. “For example,” he wrote, “the percentage of stocks above their 10-day moving average is back to 85 percent,” according to Wellington Schields. “That’s a strong technical-strength signal about the bulls’ basic health, even if the market usually stalls in the short-term at such levels.”

Michael Mullaney, Chief Investment Officer at Fiduciary Trust, said “U.S. and global leading indicators are up, and it looks like a “mini-industrial revolution.” He added, the single biggest factor the rest of 2014 is likely to be geopolitical risk.”

Ailing Europe Tries Below-Zero Interest Rates’ ‘Super Mario’ Boldly Goes Where No European Central Banker Has Ever Gone

Last Thursday, the ECB took “extraordinary steps to stave off the threat of dangerously low inflation in Europe, including cutting a key interest rate below zero for the first time in their history — in a bid to get banks to lend more to credit-starved customers,” wrote Brian Blackstone in Friday’s Wall Street Journal. But, Mr. Blackstone noted that “the ECB stopped short of more drastic measures it has considered, such as the kind of asset purchases employed in recent years by the U.S. and the U.K. — both of which are now doing better than the Euro Zone.” That led some investors to question whether the ECB had gone far enough; and, markets only briefly reacted.” When aren’t we doing better than the Euro Zone??? Having said that, ECB Chairman Mario Draghi hinted that the ECB may need to do more to protect the region’s fragile economy.

Meanwhile, in Germany the reaction to the ECB was more vocal. Anton Troianovski, writing in this weekend’s Wall Street Journal noted that “the [German] conservative daily Welt Kompakt, ran a photo from the Alfred Hitchcock film “Psycho” across its front page Friday, with the caption: “Europe’s Central Bankers Are Causing Nightmares Among Many Savers.” The Frankfurter Allgemeine Zeitung declared the ECB move a “historic watershed” that offered little hope for “German savers clinging to their savings plans and life insurance.”

“The problem for Europe,” said Peter Schaffrik, Chief of European Rates and Economic Research for RBC Capital Markets, “is that corporate interest rates are still [too] high. The ECB’s provision of up to 400B Euros ($546B) to banks for private lending could make a positive contribution, “but, can’t single-handedly turn the situation around.”

Bottom line: The ECB rate cut should be good for European equity investors; but, it is hard to see any meaningful move upward in the European economy — without substantially more economic reform — especially, less regulation and more incentives for new business and competition. V/R, RCP

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