TGIF!

Let's get out of this crazy week!

If we are LUCKY the Dow will finish the week where it started, above 12,500.  12,500 is a very big number – one year ago we thought 11,500 was a top when we took a power dive in may all the way to 10,700, where we hung out until July.  Here we are, 17% above that level, having pulled back 250 points (2%) from our high around 12,750.  The 250 points we've lost represents around a 10% retracement from the July run and a 500 point gain from our recent 33% pullback.

Let's keep in mind I've been looking for a REAL pullback, to around 11,500 and if 12,000 holds through June, we could be really off to the races.  Nonetheless, I have had little interest in buying things this week and that's usually a bearish sign.  I just have a very queasy feeling about the overall economy and the commodity rally that is propping up the markets is based on a declining dollar, not growing demand.  Brent crude is approaching $70 because it is made in Europe while the WTIC we track on the NYMEX is our local blend.  The more oil we import, the more it costs and we imported A LOT with petroleum import prices jumping 9% last month.

How long can we keep our heads in the sand about this?

The market hung its hat on the fact that import prices EX-ENERGY rose "just" .2% last month which is really a neat way to keep score as those energy number just go up and down so much that you should just throw them out.  We are in year 4 of throwing out "volatile" energy costs as oil has gone from $35 to $45 to $55 to $65 – when exactly does that down part come in?

While consumers may be willing to spend like drunken sailors on shore leave our corporate masters are not quite so free with their checkbooks and capital spending is dropping off considerably.  "If there's something that keeps me up at night, it's the potential of corporate America really pulling back," said Nariman Behravesh of forecasting firm Global Insight. "We had expected 5%-to-6% growth in capital spending in the first half of 2007, but now that's down to 1.5%."

Consumer spending, one of the pillars that has supported the economy along with business spending and exports, has weathered the housing slowdown to date but would be vulnerable if weakness emerges in employment. "Consumers hang in there because paychecks have been getting bigger," said RBS Greenwich Capital's Mr. Stanley. "If we get a weakening in the labor market on top of other things, it's hard to imagine what would prop up the consumer."

Asia was down other than India, which was very excited about INFY's 70% jump in profits with over $3Bn in annual revenues.  Since Indian workers paid are roughly 15% of what American workers get for the same job, that $18Bn sucked out of the US economy.  While some may argue that this helps keep the US corporations that outsource their labor more profitable, the question is – but who does that really help?  Hint:  It's not the bottom 99% of US wage earners… 

These same corporations are not putting the money they save on workers into capital spending or middle-class pay raises.  The money goes into share buybacks and increased profits and dividends and, since 1% of the people own 85% of the stock – who is really being helped by lowering capital gains, corporate taxes and taxes on the upper income levels?  We are trading the future of our economy for a quick profit folks, mark my words!

Asians are so worried about our economy that TM is down 3%, despite the fact that they are kicking butt here and in Europe, where they gained market share from 5.5% to 6.2% in one year.  MS is buying $2.4Bn worth of hotels in Japan from Nippon Airways in a game called "who makes the least sense as a hotel operator?" 

In another game called "say one thing and do another" China reports a $135Bn increase in foreign reserves, now up to $1.2T since we were alarmed about it hitting $1T just 2 months ago.  This includes another $73Bn they "found" this month, marking the 3rd consecutive month they have made large upward adjustments in their totals after six months of downward revisions (note to self, when in Shanghai, remember to check under the sofa cushions for Billions of dollars).  The fact of the matter is they were dogging their totals most of last year, fearful of the clamor when they hit $1T and, not that that's past, they have a lot of hidden money they need to work into the system.

The ECB did what they could to bail us out by holding rates steady at this meeting but a hike in June is almost a certainty as their economy is overheating despite the Euro hitting a 27-month high against the dollar.  There's a G7 meeting in Washington today and we're all counting on Paulson to give 'em the old "razzle dazzle" to find some way to stop the dollars descent into the 7th circle of financial hell.

Europe is about to have a serious wage issue as Germany's largest engineering union, IG Metall, said it will organize strikes if they don't get a 6.5% raise.  This is not like the weekly French strikes that we ignore, Germans are serious people and most of Europe keys off the payment of this powerful union!

Speaking of the French, Jaques Chirac is stepping down this month and France will be hard pressed to find another leader with such a comically French sounding name.  Some leading contenders are Georges LaForge and anyone named Francois (my top choice is Minister of Youth, Jean-Francois LaMour).

Well we got our PPI data and it was shockingly high (1% vs .8% expected) but if you take out that pesky 3.6% rise in energy for the month, you can call the core a nice .2%.  Wholesale prices were up 3.2% for the year so it's nice to know the middlemen have tacked on a 50% increase for themselves.  According to the WSJ: "Deeper in the production pipeline, price pressures remained elevated. Prices of raw materials, known as crude goods, rose by 3.2%, while excluding food and energy they soared 7.7%. Intermediate goods prices increased 1%, and were up 0.2% excluding food and energy."

There is a bright side – our trade deficit dropped .7%, which is very good considering the oil costs and interestingly we imported FAR LESS petroleum-related products, down to $12.82Bn from $16.72Bn in January.  At $65 a barrel that would be like importing 61M barrels less of oil, which would possibly account for some of the 40M barrel BUILD in oil over in Europe and might (if one were to think logically) contribute to somewhat of a draw-down in inventories in this country.  Oh well, what can you do???  Really, I'm asking…

We're getting a nice phony-baloney boost from that PPI but let's see if it sticks before we get too excited, like I said, I'll be glad to get out this week with our Monday levels intact:

Let's keep an eye on Europe's closing levels, if they can close green across the board, I can feel a lot more bullish about our prospects, especially export compannies like MSFT, CSCO, HPQ and PFE (too late for MRK) – all worth a serious look.

Oil is just killing us at these levels and over $64 we just have to throw in the towel until it gets back under control.  Watch out for gold up here but I don't see anything on the horizon that will really save the dollar outside of a stunning announcement from the G7 meeting (doubtful).  ZMan has an excellent report on oil today and if you are too busy to read it now, take a look on the weekend!

I'm taking any gains today with a huge grain of salt and there will be a lot of virtual portfolio clean up ahead of the weekend so let's be careful out there!