U.S. economy better - Good for oil prices

[dan_s]

Comments from Philip Springer, Editor of the Leeb's Income Performance newsletter
December 16, 2010
Market Averages Cling to Their Highs
The big story in the U.S. financial markets of late has been rising stock prices, fueled by prospects for improving economic growth; and soaring bond yields, with lower prices, for the same reason.
Many economists have increased their estimates of 2011 growth in the U.S. economy to 3%-3.5%. The soon-to-pass tax bill, including a one-year cut in payroll taxes and an extension of unemployment benefits, should help the economy. Consumer spending clearly is picking up, with retail sales at their highest level since 2007. And the Labor Dept. said today that first-time unemployment claims fell last week. The four-week average slid for a sixth week, to its lowest level since July 2008, before the Lehman Brothers collapse and the height of the height of the financial crisis.
Even so, the Federal Reserve said this week that it's sticking to its plan to buy $600 billion of Treasury securities while keeping short-term interest rates near zero. The high unemployment rate, currently 9.8%, is the main reason. The unemployment rate is higher than it was when the recession is said to have officially ended, 18 months ago. Inflation also remains very subdued. The latest report this week puts the consumer price index at just 1.1% higher than a year ago.
A major question, of course, is whether we have the will to start reducing the deficit instead of letting it grow. Various polls suggest that most Americans want it both ways, agreeing that deficit reduction should be a top priority, but also wanting entitlements left alone.
The news from Europe also remains worrisome, with the focus now on Spain. Moody's said this week it might have to downgrade Spain's bonds again. And Standard and Poor's lowered its ratings outlook on Belgium to negative from stable. But there was good news today as auction of Spanish bonds went well. Even so, Europe's sovereign-debt story has a long way to go, in our view. Pressure may well resume in January, typically a heavy month for new-bond issuance.
Most of the major U.S. stock averages have hit their highest levels since September 2008 recently, including modest gains on four of the last five days. (Rate-sensitive utilities have been a notable exception.) But the equity advance has narrowed in scope. For example, the old-line, 30-stock Dow Jones industrial average has led the way of late. And smaller numbers of stocks in the broad market are rising in price or reaching new 52-highs than was the case at previous peaks in late April and early November.
Narrow market breadth often is a precursor to pullbacks, particularly when accompanied by a notable increase in bullish investor sentiment, which also has occurred lately. With the current bull market now 21 months old, periods of choppiness may well become more frequent. But don't confuse short-term concerns with the long-term trend, which is still up.
Meanwhile, benchmark 10-year Treasury issues now yield 3.5%, up sharply from near the admittedly price-overbought, yield-depressed low of 2.5%, right after the Fed's quantitative easing program was officially announced just six weeks ago. While higher yields reflect positives such as a better economy and investors' shift to stocks, they can also dampen growth. And rising rates could trigger another market correction, although we currently don't foresee a sharp sell-off.