Farrell: 'Stay on the Cautionary Side for the Intermediate Term'

The stock market decided it loved Intel's earnings report more than it loved my guess that we had to correct a bit more of the rally from the March lows. Intel's very solid earnings, and more important its outlook for the next quarter, caused the shorts to run for cover and the market averages rose about 3% across the board.


Financial stocks, basking in the glow of Goldman's earnings report, and technology led the way. But, and I am sorry to sound like a broken record, volume was light yet again although a bit better than in recent days. I saw in my very good friend Michael Farr's commentary that a market pundit - getting carried away- said the 16 companies in the S&P 500 that have reported thus far have beaten estimates by 20% and we are off to a fantastic earnings season. But, says the ever perceptive Farr, since Intel beat the estimate by 125% and Goldman by 39%, maybe we ought to curb our enthusiasm. I think if eps continue to surprise we will have a light volume rally, but I'll stay on the cautionary side for the intermediate term- and would love to stay wrong for a long time.

Consumer prices as measured by the CPI inched up .7% but ex food and energy- the core CPI- prices rose .2%. The rise in the headline was really accounted for by a jump in gasoline prices of 17%. The core reading shows there are few immediate signs of either deflation or inflation. Core inflation is up 1.7% year over year, well within the Fed's desired range. Also a rising unemployment rate will exert continued downward pressure on both wages and prices.

Industrial production declined .4%, the 17th decline in the past 18 months. While still negative, the number is far less bad than it has been. Total capacity utilization fell to a record low of 68% and records date back to 1968.

Manufacturing capacity utilization dipped to 64.6%, an all time record dating back to 1948. The .4% decline is the smallest we have seen for 8 months which suggests to me the recession is definitely easing and probably ending.

Another economic stat released Wednesday was the Empire Manufacturing Index which came in at a very modest -.6 against the prior months negative 9.4. The area covered is more devoted to tech manufacturing which is a better place to be, but the relative strength of the number suggests to me that factory output is close to bottoming out, if in fact it hasn't already bottomed out.

Mortgage applications rose a disappointing 4.3% driven by a 17.7% surge in refinancings. I find the number to be disappointing since the average 30 year mortgage rate fell to 5.05%, but this is just one weeks number so let's see how it plays out.

There was better news (relatively speaking) from the credit card industry. 30 day delinquency rates for US cards continued the modest fall that started in February and charge offs were no worse than feared. American Express had nice enough things to say about the second half of the year, but I fear that potential losses will track the rising unemployment rate so this is another curb your enthusiasm data point.

Paul Leming of Soleil/Princeton Tech Research is still negative on the solar space. Volumes are weak throughout the industry and he feels earnings estimates are too high. He feels stocks will trade down to their book values.

Among the most vulnerable are LDK (closed at $9.23) and he thinks book will be about $5 when Q2 is reported, and SunTech Power (STP, closed at $15.30) where book will likely settle at $5.50.

On a more positive note, Dan Cummins of Soleil/Limerock Research wonders out loud if Microsoft's intro of Windows 7 due in October won't be helped by the order strength Intel has seen.