From Between the Hedges:
BOTTOM LINE: Overall, last week's market performance was bullish. The advance/decline line rose, most sectors rose and volume was above average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 33.73% and is now below average levels, which is a big positive considering the major averages are approaching 6-year highs.
The average 30-year mortgage rate rose to 6.53% which is 132 basis points above all-time lows set in June 2003. I continue to believe housing is slowing to more healthy sustainable levels. This will also likely result in the slowing of consumer spending back to around average rates.
The benchmark 10-year T-note yield fell 5 basis points on the week, even as commodity prices rose, as traders began to anticipate slower economic growth. I expect inflation concerns to begin declining again later this quarter as economic growth slows to average levels, unit labor costs remain subdued and the mania for commodities reverses course.
Unleaded Gasoline futures rose again this week, but are still 23.0% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, 22.3% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. The switch from MTBE-based gasoline to ethanol-based fuel is the main reason behind the recent spike in gas prices. Please click here to read a brief report from the Energy Information Administration on the subject.
Demand for gasoline is decelerating and the recent rise related to the switch should further dampen demand over the coming months, sending gas prices back to reasonable levels. Natural gas inventories rose around expectations this week. However, supplies are now 62.6% above the 5-year average, an all-time record high for this time of year, even as 13.3% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 49.0% since December 2005 highs. U.S. oil inventories are now at 8-year highs. I continue to believe oil is priced at extremely elevated levels on fear and record speculation, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise as economic growth slows, crude should head meaningfully lower over the intermediate-term.
Gold rose for the week as the US dollar declined and the mania for all commodities intensified. The US dollar fell as speculation increased that the US economy will slow, thus resulting in a Fed “pause.