The Power of One

Today's price action is a testament to the market's resilience, and to the case that the market may have bottomed. The ECB kept rates steady, while Hank Paulson uttered the words "sharp decline," and the market defied them both and rose!

Don't get me wrong, the market started the day lower on the very points we showcased above. Still, by mid-morning, that market, she said enough's enough. Media outlets are praising a chip sector upgrade as the catalyst, but if one analysts opinion can bring an about face to a market burdened by the onset of recession and all its dire news flow, then this market, she may have bottomed. Heck, let's just say it, she's bottomed! (for now anyway) Unpredictable war with Iran will bring back bad memories soon enough, and the depth of sinkage might make Ms. Market think twice about the price she's placed on this recession.

ECB Decision

The European Central Bank maintained its target rate of 4%, as expected. However, dollar enthusiasts and all my Greek friends operating food markets that import foods at an increasing cost were hoping the ECB might move in the same direction as the U.S. Federal Reserve. By maintaining the rate, the ECB reinforces the argument for euro strength versus the dollar.

Even so, the ECB makes a valid argument for keeping its rate steady. After all, inflation in the euro region ticked up again in March. The annual HICP inflation rate increased to 3.5%, up from 3.3% in February. Jean-Claude Trichet views this uptick more important now than the region's GDP growth slippage to 0.4%, quarter-over-quarter, in Q4. You might think Europe is in the same mess we are, perhaps worse, but that 0.4% growth rate represents Q4 over Q3 of 2007, while our meek fourth quarter growth rate compares against last year's period. Also, inflation is more tame here in the states than it is in Europe.

Repercussions

We expect that soon enough, OPEC will actually do what Mahmoud Ahmadinejad is asking for (though not for him) and price oil via the euro. While this will do nothing for what people really pay for oil, there may be a psychological factor at play that is worth considering. Seeing oil priced at 69 euros might actually impact overall consumption patterns (for all goods), but would that be for the better good of global economies or just a greater mistake for individual consumers.

We imagine either Trichet or Bernanke is going to come out of this looking better than the other. If Europe slips into recession with us, they'll be screaming "off with his head" in the streets of Paris. They'll say Trichet could have mitigated it, but was preoccupied with inflationary concerns. Just as easily, Ben Bernanke could find himself shunned by Washington and New York if the economy fishtails out of control, should inflation heat up as a result of his Fed's rate actions.

International Trade

The trade deficit widened, surprisingly. We had noticed a trend of contraction, which we viewed partly the result of improved demand for cheaper U.S. goods overseas. This expansion may signal the global economy is less dependent on the U.S. than we would have hoped. We do not want demand for commodities to remain tight while we are experiencing recession, because that will keep prices from easing as a natural consequence of it. That means, the likelihood of inflation heating up is all the more probable. Most media misses this point on a monthly basis, but once again we are at the forefront of economic thought for you.

The Rest

Weekly Initial Unemployment Claims offered nothing frightening, as it eased off some from the prior week jump. Unfortunately, a draw in natural gas supplies combined with the same weekly change for oil, and energy commodity prices continued to test highs. Do not mistake the Bank of England's action (it cut rates) as a favor, as the U.K. is in deep shish kebab like us, and actually acted for its own purposes. There's no better ally in England then there is in France, just a worse economic situation. Okay protectionists and nationalists?

The Power of One

What's with this upgrade of the tech sector lifting all ships? How can one analyst move a market all by himself? Well, it's because he strikes a point that is common among economic recoveries. The semiconductor sector is a cyclical group, and highly sensitive to changes in economic conditions. We use to get all excited in our research group at my old Mickey Mouse firm. See, semiconductor and semi equipment names can move a whole bunch in a short time if the slightest scent of recovery reaches the market. And the buying is always best when the picture is worst.

You do not look for low P/E ratios when seeking semis for recovery play. It's nice to have industry leaders yes, but don't expect to find a PEG ratio of 1.o or a P/E ratio under 20, if there's even earnings to measure price against! Rather, the P/Es are stretched ahead of recovery, because earnings drop sharply in the cyclical bunch. In other words, you buy semis when they look expensive and sell them when they look cheap... It's an illusory play and counter to logic.

This particular analyst at Bank of America (NYSE: BAC) singled out Intel (Nasdaq: INTC) as an idea he liked. Meanwhile, outside of Wal-Mart's (NYSE: WMT) strong report, retailers posted a miserable March (like we said they would in our week ahead piece). Within that article, we specifically said the top tier discounters would perform well, including Wal-Mart and Costco (Nasdaq: COST), and while we try to remain humble, well, we were right. Still, we also said luxury goods would do well, but we were wrong there as Saks (NYSE: SKS) said it was not holding up ahead of its peasant-like peers. The department stores did not let us down, following the desperate path we cleared for them. J.C. Penney (NYSE: JCP) did poorly, as did empty mall based merchants like Limited Brands (NYSE: LTD) and The Gap (NYSE: GPS).

We hope you enjoyed today's piece, and come back this evening to see our video review, which will now include tomorrow's EPS noteworthies. See our disclosure at the Wall Street Greek site.