Three Strange Facts

Last week’s stock market gains are beginning to seem like a distant memory to many traders. The very sectors that led the market higher before Easter – mainly financials – are once again lagging. In the bigger picture we note three news items of interest today. First, mortgage rates in the U.S. are remaining stubbornly high despite the Fed’s aggressive action the last few months. Moreover, anecdotal evidence suggests banks are being increasingly selective about borrowers. It appears that bankers have turned cautious. Rather than use the newly available liquidity to expand their loan portfolios, they are instead rebuilding their balance sheets with cheap money kindly provided by the Fed. This may be a good move for the banks, but it is bad news for those who hope to borrow money.

The new parsimony among bankers is also bad news for the technology sector, which brings up our second story. Financial services companies are among the biggest purchasers of technology, so the slowdown in lending activity is bad news for companies like Google (GOOG), which sells online advertising to banks, and Oracle (ORCL), which builds the databases that keep track of everyone’s money as it flies through the economy.

The third story we note is that crude oil, having finally broken through the $100 level and climbed to around $110, pulled back to $100 and now regards that area as support rather than resistance. This suggests that inflation remains a threat. Combined with the preceding stories which suggest recession is also a threat, we apparently face the prospect of an inflationary recession. The fact that real estate has zoomed to the top of our momentum rankings suggests that the markets regard inflation as the more immediate threat. Paradoxically, consumer staples stocks have picked up relative strength at the same time.