March 2011 Archives

The major indexes closed the first quarter with a mixed session. The Dow lost 30 points, the S&P 500 fell 2 points, and the Nasdaq gained 4 points. Twenty-two of the Dow’s 30 components lost ground, led by American Express (AXP), which lost 1%. Volume was light. Advancing issues edged out decliners by about four to three on the NYSE and on the Nasdaq. The prices of Treasuries were mixed, and the price of gold futures gained 1% to $1,439.90 an ounce. The price of crude oil on the New York Mercantile Exchange gained 2.3% to $106.72 a barrel.

For the quarter, the Dow gained 6%, the S&P 500 gained 5%, and the Nasdaq rose by 4%, making this the best first quarter for the major stock indexes since 1998.

In Other Business News:

Next in line for a bailout: Portugal.

Amazon.com puts music in the cloud (and beats Google and Apple to it).

China on pace to publish more scientific papers than the U.S. or the United Kingdom by 2013.

Will there be a double dip in housing?

Obama administration: New goal is to reduce oil imports by one-third by 2025.

“4G” exists mainly as a marketing campaign, not a reality, according to Wired.

Teens in competition with their grandparents for jobs.

A jobs report that met expectations helped push the markets solidly higher, one day before the end of what has so far been a very good quarter for stocks. Mergers and acquisitions activity provided a boost to optimism, as did the latest results of the Business Roundtable survey of CEOs.

The Dow finished up 71 points, with 26 of its 30 components advancing; the S&P 500 gained 8; and the Nasdaq was higher by 19. Advancers led decliners by just over eight to three on the NYSE and nine to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $7.40 to close at $1,424.90 an ounce, and the price of crude oil retreated 52 cents to settle at $104.27 a barrel.

In Other Business News:

The markets traded solidly higher on low volume, likely in anticipation of the employment reports later this week and the lack of any significant bad news from Japan and Libya. The sovereign debt of Greece and Portugal was downgraded yet again, while in the U.S., consumer confidence fell in March due to higher gasoline prices, but the drop wasn’t as much as feared.

The Dow gained 81 points, with 23 of its 30 components advancing; the S&P 500 was up 9; and the Nasdaq was higher by 26. Advancers led decliners by about 11 to 5 on the NYSE and by just under 2 to 1 on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $3.80 to close at $1,417.50 an ounce, while the price of crude oil futures rose 81 cents to settle at $104.79 a barrel.

In Earnings News:

The Fed has dual mandates imposed upon it by Congress: to seek “full employment” and “stable prices.” Admittedly the exact specifications of those objectives are somewhat squishy (meaning there are no explicit inflation or unemployment-rate targets), but the general goal is clear: encouraging employment without igniting runaway inflation. Or, conversely, avoid inflation without crushing employment. It’s fairly easy to see that these goals (generally) contradict each other. The Fed could certainly create more employment by keeping rates very low and thus encouraging borrowing by households and businesses for investments and spending. A free lunch! Well, maybe not quite. Do that for too long and inflation rears its ugly head, not to mention the speculative bubbles that tend to be encouraged by those policies (just Google “Federal Reserve housing bubble” for all the commentary on this topic that you can handle).

So how does one balance these competing mandates of low inflation and low unemployment? One method that I like to look at is a formula called the Mankiw rule, after Harvard economist Greg Mankiw (his formula is a riff on the Taylor Rule, after Stanford economist John Taylor). He formalized this idea in a 2001 paper, “U.S. Monetary Policy in the 1990s.” In it, he posits that the “macroeconomic performance of the 1990s was exceptional,” and at least some of the credit was due to monetary policymakers properly balancing their mandates through interest-rate policy. In short, the Mankiw rule looks to the 1990s to quantify how the Fed responded, via the Fed Funds rate, to changes in inflation and unemployment. Since this is generally considered a period of “good” monetary policy, it allows us to see what the Fed Funds rate “should have” been over any period by simply applying those statistical relationships to the period in question. The chart below does just that.

Potentially fatal levels of radiation were reported in water pooling outside of Japan's compromised nuclear reactors today, a setback to efforts to contain the situation. In the U.S., consumer spending was up—a positive—but for all the wrong reasons, as rising gasoline and food prices accounted for the increased outlays. And in a good sign for an area of the economy that sorely needs it, pending home sales were up in February.

The Dow dipped negative in the last few minutes of trading, closing lower by 22 points, with 17 of its 30 components losing ground; the S&P 500 was down 3; and the Nasdaq fell 12. Decliners led advancers by four to three on the NYSE and by five to four on the Nasdaq. The prices of Treasuries were mixed, with the 30-year strengthening and the 10-year weakening. Gold futures fell $6.30 to close at $1,419.90 an ounce, and the price of crude oil retreated $1.42 to settle at $103.98 a barrel.

In Other Business News:

The past few years must have trained the markets how to handle calamities well. Normally, a week in which one country struggled to contain a potential nuclear catastrophe while a major oil-producing country was bombed by the U.S. and a coalition of allies would cause no small amount of jitters in the markets. But last week the S&P 500 advanced four out of five days to close 2.6% higher.

The advance was despite the dismal housing numbers released last week. It’s been about four years since the housing bubble burst and home prices started falling, and after last week’s data, it’s pretty clear they haven’t stopped falling yet. Existing home sales in February fell 9.6% after falling 12.6% in January, while the median home price is off 5.2% from a year ago. The flood of foreclosures on the market is dragging prices down, not to mention that every foreclosure effectively adds one house to the market that—in better times—might have stayed off the market, while removing one potential buyer from the market as well (the person foreclosed upon, who will have a harder time getting a mortgage in the near- to medium-term). The market most hit by this dynamic is that for new homes. New home sales in February dropped 16.9% in February to an all-time low.

Durable goods orders fell 0.9% in February, which is disappointing at first glance but which conceals a much healthier-sounding 0.4% increase when excluding defense-related items, as our own Brian Jacobsen explained last week.

The major stock indexes advanced for the sixth session out of the past seven trading days. The Dow gained 50 points, the Nasdaq rose by 6, and the S&P 500 advanced 4. Thirteen of the Dow's 30 components lost ground, led by Hewlett-Packard (HPQ) and Bank of America (BAC), each of which lost 1%. Volume was light, and advancing issues outnumbered decliners by five to three on the NYSE and by about three to two on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures lost 0.6% to $1,426.20 an ounce. The price of crude oil on the New York Mercantile Exchange lost 0.1% to $105.40 a barrel.

For the week, the Dow gained 3%, the Nasdaq rose by 3%, and the S&P 500 advanced by 2%.

In Other Business News:

Ongoing economic recovery offers many attractive opportunities in both the fixed-income and equity markets and, particularly, in economically sensitive sectors. But first you need to find the good companies and then determine whether it's the bond or stock of that company that's attractive. Today's guest takes a flexible approach that allows her to participate in both. Joining us for the first time is Margie Patel, managing director and senior portfolio manager with Wells Capital Management. Margie manages the Wells Fargo Advantage Diversified Capital Builder Fund and the Wells Fargo Advantage Diversified Income Builder Fund

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The major indexes moved higher on stronger-than-anticipated earnings reports. The Dow gained 84 points, the Nasdaq rose by 38, and the S&P 500 advanced 12. Twenty-seven of the Dow's 30 components gained ground, led by Hewlett-Packard (HPQ), which rose 2%. The price of Oracle shares (ORCL) moved higher in after-hours trading following an earnings period that was better than expected. Volume was light, and advancing issues outnumbered decliners by about two to one. The prices of Treasuries weakened, and the price of gold futures declined by 0.2% to $1,434.90 an ounce. The price of crude oil on the New York Mercantile Exchange lost 0.1% to $105.60 a barrel.

In Earnings News:

March Madness doesn’t really cost billions of dollars in lost productivity, argues Jack Schafer.

Turning a profit: Fed makes $81.7 billion on investments in 2010.

Egypt’s stock market reopens, circuit breakers kick in seconds later.

Google’s $125 million legal settlement that would allow it to digitize millions of books thrown out by a judge.

Federal Reserve Bank of San Francisco releases paper on recent college grads and the dismal job market; says unemployment among recent grads most likely cyclical, not structural.

Was Deutsche Telekom forced to sell T-Mobile because of the iPhone?

And you thought you’d be spared from hearing the phrase “sovereign debt crisis” for awhile. Not so fast, because it’s back.

Margaret Patel, portfolio manager of the Wells Fargo Advantage Diversified Income Builder Fund, is out today with a piece noting the investment consequences of the tensions running through the U.S. economy, especially when it comes to stocks and high-yield bonds. Manufacturing is steadily expanding, but unemployment and low wage growth put pressure on consumer-oriented stocks. Give the piece a read and feel free to leave your comments below.

Durable goods orders dropped 0.9% in February on lower orders for machinery and defense-related products. This disappointing headline decline is due to the federal government’s budget battle, which has disrupted defense spending. If you exclude defense-related items, durable goods orders actually increased by 0.4%. I believe the focus should be on this increase, which is an indicator of the durability and sustainability of the economic recovery.

Nondefense durable goods orders and shipments have, in fact, been increasing. Some say that this points to a “renaissance in U.S. manufacturing.” To paraphrase Mark Twain, the reports of the death of American manufacturing are greatly exaggerated. U.S. manufacturing, I believe, is being “rekindled,” not “reborn,” because it was never really dead.

The power of productivity
U.S. manufacturers may not employ as many as in the past, but they produce a lot more than they used to. Employment in the goods-producing industries peaked in July 1979 at 25.16 million employees and went down to 17.9 million as of February 2011. Yet, despite that 28.9% drop in employment, the real dollar value of goods produced has gone up more than 209%! In the economic recovery, U.S. companies have been investing more in productivity-enhancing technologies. While this slows the labor-market recovery, it makes it that much more sustainable.  

Gold hit a new high, silver and copper were strong, oil continued to advance on unrest in the Middle East, and stocks managed to have a good day as well. On the downside, new home sales fell to an all-time low, and Portugal’s government was on the verge of collapse after a vote rejecting austerity measures designed to bring its deficit under control.

The Dow gained 67 points, helped by strength in materials stocks like Alcoa (AA), up 3%. Of the Dow’s 30 components, 23 advanced. The S&P 500 rose 3, and the Nasdaq was up 14. Advancers outpaced decliners by about five to four on the NYSE and by about nine to eight on the Nasdaq. The prices of Treasuries weakened. Gold futures climbed $10.40 to close at a record nominal high of $1,438.00 an ounce, and crude oil gained 78 cents to settle at $105.75 a barrel.

A few weeks ago I commented on the potential for $4 gasoline at the pump. With $4 gas on my mind, I was curious if I could associate rising gasoline prices with stock market performance. My thought was that more spending on fuel by consumers and businesses would leave less spending for items other than fuel. Less spending on items other than fuel works its way into lower stock prices. So I compared the percentage of personal consumption expenditures used for fuel and the performance of the S&P 500 to see if any basic correlation could be established.

Since 1980, we’ve spent on average 3.3% of our personal consumption expenditures on gasoline and other motor fuels. From the third quarter of 1991 until the third quarter of 2004, per capita spending on gasoline and fuel was below 3%. During this period, the average annual return for the S&P 500 was 11%. I should note that some of the lowest percentages of personal consumption expenditures used for fuel were in 1998 and 1999, very good years for stock returns. Since the third quarter of 2004 through 2010, however, expenditures on fuel have often been above 3% of personal consumption. During this period, the average annual return for the S&P 500 was 3.6%. That’s a sizable difference from 11%. Of interest, the percentage of expenditures on fuel rose to slightly more than 4% for much of 2008. Many of us will remember 2008 wasn’t the best year for equities. There are many factors that contribute to rising or falling stock prices, but when 4% or more of your personal consumption expenditures are used for gasoline, driving in the equity market might become a bit more treacherous.

All things considered, it was a fairly quiet day for “new” news, which forced investors to dwell on all the many events happening around the world, from Libya, to Japan, to Yemen. The markets drifted modestly lower. Investors were still digesting AT&T’s proposed mammoth deal for T-Mobile, with Sprint Nextel’s CEO saying the deal would be bad for consumers and Verizon Communications Corp. saying the company had no interest in buying Sprint.

The Dow fell 17 points, with 20 of its 30 components lower; the S&P 500 lost 4; and the Nasdaq was lower by 8. Decliners outpaced advancers by about four to three on the NYSE and by about three to two on the Nasdaq. The prices of Treasuries were mixed. Gold futures gained $1.20 to close at $1,427.60 an ounce, and the price of crude oil rose $1.88 to settle at $104.97 a barrel.

In Earnings News:

The 19th-century French philosopher and economist Frederic Bastiat wrote a parable about a broken-window to illustrate a fallacy. It’s a lovely discussion of unintended consequences and unseen costs relative to visible gains. The parable goes something like this. A shopkeeper’s son accidentally breaks a pane of glass in his father’s shop. The crowd of witnesses in the street offers the shopkeeper the condolence that while it is unfortunate for him, it is good for the glazier who will be hired by the shopkeeper to fix the glass. That much is surely true, Bastiat concedes. But then some people expand that logic even further. If it’s good for the glazier to break one window, why not break them all?! As we saw with the shopkeeper’s glass, it caused money to circulate so it must be good for the economy. It only follows naturally that we could all get rich and stimulate the economy through continuous destruction and rebuilding. This is where Bastiat interjects. I’ll let him explain:

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

A big day of news ended with big stock market gains. Japan made progress, albeit very slow, in overcoming the nuclear crisis caused by the earthquake; coalition airstrikes enforced a no-fly zone over Libya; a major bank announced the restoration of dividends; and AT&T announced the biggest deal of the year, a $39 billion cash and stock deal for T-Mobile USA (subject to antitrust scrutiny).

The Dow regained the 12,000 mark after closing 178 points higher, with 27 of its 30 components gaining ground; the S&P 500 was up 19; and the Nasdaq rose 48. Advancers led decliners by about 4 to 1 on the NYSE and by about 13 to 4 on the Nasdaq. The prices of Treasuries weakened. Gold futures rose $10.30 to close at $1,426.40 an ounce, and the price of crude oil resumed its upward trajectory, gaining $1.24 to settle at $103.09 a barrel.

In Earnings News:

The news was dominated by major events overseas: the earthquake, subsequent tsunami, and looming nuclear crisis in Japan; continued street warfare in Libya; and rising tensions in Bahrain. Concerns centered on the potential meltdown of the nuclear reactors in Japan, with matters not helped by speculation from officials in different countries. Volatility spiked, trading volume was often heavy, and, in a sign that investors had a hard time gauging the true impact of the week’s developments, the price of oil swung above and below the $100 mark. The yen strengthened throughout the week until Friday, when the Group of Seven intervened.

The blog covered the emerging crisis from a variety of angles:

The major indexes rallied for the second day after the G-7 nations agreed to stabilize Japan’s currency and a cease-fire was declared in Libya. The Dow gained 83 points, the Nasdaq rose by 7, and the S&P 500 advanced 5. Twenty-five of the Dow’s 30 components gained ground, led by JPMorgan, which rose 2%. Volume was moderate, and advancing issues outnumbered decliners by about five to two on the NYSE and by about two to one on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures gained 0.8% to $1,416.10 an ounce. The price of crude oil on the New York Mercantile Exchange lost 0.5% to $101.85 a barrel.

In spite of two days of gains, the major indexes closed down for the week: The Dow lost 1%, the Nasdaq fell by 2%, and the S&P 500 declined almost 2%.

Target date funds, investment vehicles known for their ease of use, came under fire during the market downturn of 2007 to 2009. That caught Washington's attention, and legislative action was taken to explore and propose regulatory change. What's been happening since then? And what role do target date funds play in an investor's portfolio? Here to explain is James P. Lauder, CEO of Global Index Advisors, a subadvisor to Wells Fargo Advantage Funds. Global Index Advisors manages Wells Fargo Advantage Funds' suite of target date funds.

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Today's a big day for Wells Fargo. Not only is it our 159th birthday, but we're back in New York for the first time since 1918 (at the time, we said we'd be right back, but then we got a little sidetracked out on the west coast for nine decades or so).

Will there be stagecoaches, you ask? Oh yes, there will be stagecoaches. If you're in New York, hop on for a ride. And if you're not, head over to our sister blog Guided by History for more information. This time, we're not going anywhere. Promise. We were founded in New York in 1852, and it feels good to be home.

Today we have a guest post by Michael Bradshaw, CFA, portfolio manager of the Wells Fargo Advantage Precious Metals Fund. Michael gives some background on the reaction of precious metals prices to events in Japan and his outlook.

It is always difficult to predict the future, especially as it relates to something as unique as the events in Japan. However, even though the prices of gold and precious metals were extremely volatile in the wake of the tragedy in Japan, they have since reverted to expected patterns.

Initially all the metals sold off on widespread liquidation as news of the tragedy broke and investors looked to raise cash. This is a normal reaction in times of stress, similar to what we saw in the economic turmoil of 2008 after the subprime mortgage crisis. In addition, the industrial metals such as platinum and palladium sold off on fears of reduced auto demand from the domestic Japanese market and potential drop in auto exports. While the sell-off in gold was initially severe—down as much as $48 on March 15th—it was relatively short lived. Gold recovered $22 over the next 24 hours, and yesterday closed at $1404 an ounce.

One week following the massive earthquake that has crippled Japan and affected global markets, the Group of Seven (G-7) announced that it is willing to intervene in the foreign exchange market to depreciate the Japanese yen. Japanese authorities will buy dollars in exchange for yen, with the added support of Japanese yen sales by the central banks of several other nations, including Canada, the United States, the United Kingdom, and the eurozone. Although the complete scale of the G-7 intervention will not be officially announced until May, this is a concerted effort to bring down the value of the yen, which hit an all-time high against the dollar this past week. 

In times of economic stability and growth, a strong yen enables Japanese citizens to buy foreign goods more cheaply, though it also limits the profits of Japanese exporters. Now is not a time of economic stability for Japan. As a result, the primary focus of Japanese citizens is to reinvest in their local economy. The hope is that a weaker yen will help stimulate the Japanese recovery.

After two days of selling off, stocks rebounded on strong economic indicators. The Dow gained 161 points, the Nasdaq rose by 19, and the S&P 500 advanced 16. Twenty-six of the Dow’s 30 components gained ground, led by Hewlett-Packard (HPQ), which rose 3%. Volume was light, and advancing issues outnumbered decliners by about five to two on the NYSE and by about five to three on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures gained 0.5% to $1,404.20 an ounce. The price of crude oil on the New York Mercantile Exchange gained 3% to $101.42 a barrel.

In Earnings News:

• FedEx announced earnings declined from 76 cents a share a year ago to 73 cents a share in the latest quarter, as revenue increased by 11% but margins were hurt by winter storms and rising fuel costs. However, the company also estimated earnings in the current quarter will be in the range of $1.66 to $1.83 a share, which is higher than Wall Street estimated, and the price of FedEx shares (FDX) gained 3% in today’s session.

We have a guest post today from Tim O’Brien, CFA, portfolio manager of the Wells Fargo Advantage Utility and Telecommunications Fund. Tim has over 28 years of investment experience and has followed the nuclear industry since 1984. He sent along his take on the nuclear crisis in Japan and its potential effects here in the U.S.:

The nuclear crisis currently afflicting Japan will have repercussions around the world, including the United States. China, for example, has frozen new nuclear plant development pending a review of safety standards. Germany has announced its intent to close nuclear power plants built before 1980. India’s ambitious nuclear program will certainly be called into question. While the United States has yet to announce anything formally, we can certainly expect that a review of safety standards and procedures is in the offing, with particular scrutiny directed at nuclear power plants located near major fault lines and on coastal sites.

Nuclear plants use a lot of water, so they are frequently sited on the coast. The Japanese nuclear disaster was the result of, first, a very severe earthquake, and then the resulting mega-tsunami. Nuclear power plants require backup power to operate safety systems in the event of a shutdown. The tsunami wave wiped out the backup generators used to power safety systems in the event of a shutdown, rendering the safety systems inoperable. At a minimum, therefore, the backup power supplies for U.S. nuclear power plants are likely to be required to be hardened and secured beyond standards currently in place.

Grasping for a silver lining: Earthquake a “perverse economic stimulus.”

Disruption of Japanese auto manufacturing could have effects in the U.S.

With all the loose talk of “meltdown,” it helps to brush up on a quick nuclear primer.

Online news is where it's at, as the internet overtakes newspapers for the first time.

Japan’s Central Bank floods the markets with cash.

Don’t overestimate a disaster’s impact on an economy, says a study by the Inter-American Development Bank.

Of the many ways to donate to Japan, this is one of the more interesting: EVE Online, an online video game with a quasi-real world economy, offers an in-game donation system.

The Consumer Price Index (CPI) rose 0.5% in February, according to the Bureau of Labor Statistics, while the Core CPI (the CPI, excluding food and energy) rose 0.2%. Year over year, food prices as tracked by the CPI have increased by 2.3%, and energy has increased by 11.0%. Shelter costs have gone up 0.8%, and new vehicle prices have increased by 0.9%.On the other end of the spectrum, apparel prices have gone down by 0.4%.  

Because the components of the index have been traveling in different directions and at different rates, the Federal Reserve has had a public relations problem. How can it justify loose monetary policy when food and energy have been going up faster than other components of the index? Since 1957 it has taken an average of 21 months for the CPI—known as the headline number—and core inflation measures to converge. Since 1990 the average is approximately nine months. But it can take anywhere from three to 28 months for the CPI and the Core CPI to align.

This gap creates a conundrum for the Fed. Because monetary policy tends to operate with long and variable lags, it is difficult to tell exactly when a change will affect the price of goods and services and the amount of output produced in the economy. It could take anywhere from four months to two years for a change in policy to show results. On the other hand, monetary policy affects financial markets very rapidly because investors look to the future to anticipate those effects and act accordingly.

Current core inflation—rather than current headline inflation—tends to be a better predictor of future headline inflation, and because the year-on-year core number was up only 1.1%, the Fed will likely continue its loose ways. It’s hard to tell exactly how food and energy prices will behave, considering a number of supply factors, such as weather and global conflicts, drive them. But with the Fed perpetuating its loose policy, there seems to be a lot of support for the financial markets.  

All eyes remained squarely focused on Japan and its attempts to bring a looming nuclear threat under control, but rising radiation levels thwarted some efforts. U.S. markets were more subdued to begin trading, but the calm didn’t last long. Reports surfaced that a European energy official said that Japan’s nuclear site “is effectively out of control,” immediately after which stock prices dropped precipitously. However, even after it was reported that the European Union official had no inside information on the matter, prices still remained depressed, indicating how jittery investors are and that risk aversion is dominating the market.

Trading volume was heavy; the CBOE Volatility Index spiked sharply upward; the dollar hit a 16-year low against the yen; and the prices of Treasuries strengthened, with yields 20 to 30 basis points lower than before the crisis. Meanwhile, oil prices rose in response to a worsening confrontation in Bahrain between government forces, soldiers from neighboring countries, and protestors.

The massive earthquake and tsunami in Japan are having tragic consequences in terms of loss of life, and we pray for the success of efforts to rescue survivors and contain the nuclear crisis. And as the people of Japan organize to rebuild and nations around the globe rush to their aid, we wonder how far-reaching and long-lasting the impact of this tragedy will be. Here with some thoughts is Anthony Cragg. Anthony is managing director and senior portfolio manager with Wells Capital Management's Emerging Markets and Asia Pacific Equities team. He manages the Wells Fargo Advantage Asia Pacific Fund.

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* If you'd like to help those affected by the earthquake and tsunami in Japan, Wells Fargo customers have the ability to donate to the American Red Cross relief efforts in Japan at more than 9,000 Wells Fargo branded ATMs across the country. Customers will not be charged any fees for using the service and 100 percent of the donation is sent to the American Red Cross. You can also text REDCROSS to 90999 to make a $10 donation or visit redcross.org.

The tragedy in Japan has fostered substantially greater volatility in the global capital markets, but until the dimensions of the crisis can be gauged with greater precision, the ultimate impact on the U.S. bond market is very difficult to predict. Nevertheless, events of the past week suggest that the Treasury market is again being viewed as a safe haven and that the riskier markets are vulnerable as long as the news about the damaged nuclear plants remains grim.

Economic growth in Japan will probably be negative in March and through the second quarter, and that, in turn, would be expected to have a modest negative impact on world growth. In the U.S., exports to Japan of food, construction materials, medical equipment and other products might increase enough to offset weaker demand in other sectors. The risk, however, is that consumer and business confidence is sufficiently shaken by the drop in stock prices to cause gross domestic product (GDP) to slow somewhat from what was expected to be a 3% to 4% growth path.  At the Federal Open Market Committee meeting this past week, Fed officials were encouraged by signs that the economy is on a “firmer footing,” but they were still somewhat apprehensive about the high rate of unemployment and a depressed housing sector. They decided that, in light of those lingering concerns, the fed funds rate would need to stay near zero for “an extended period.” If the Japanese crisis were to produce a measurable slowing in the U.S. economy, that “extended period” could stretch well into 2012.

The Tohoku Pacific earthquake, the largest in recorded history in Japan, was by its nature unforeseeable. Clearly there are numerous implications from the death, damage, and disruption in Japan for Japanese companies and, indeed, many companies around the world. There is now heated discussion among investment professionals as to how great the overall impact will be on Japan’s economy and financial markets, with opinions ranging from the belief that the effect on the country will be catastrophic to the conviction that the end result could be stimulatory and even galvanizing.

Our opinion is that it is important in such instances to react, but it is also important not to overreact. History has shown that countries, and even stock markets, recover from natural disasters with surprising speed and efficiency, and there is every reason to believe that given Japan’s technologically advanced state and famous social cohesion, it will respond with great determination and resilience. The nearest historical parallel from which to draw any lessons is of course the Kobe, or Great Hanshin, earthquake of January 1995. That earthquake ended up causing less damage to the economy than originally expected but also resulted in less dramatic reconstruction activity than initially hoped for. This time around, the bad news is that the massive Tohoku Pacific earthquake and the equally enormous tsunami it caused have sadly probably caused greater loss of life and more widespread damage, notably to infrastructure and to nuclear power plants. As a result, six million homes are now without power or clean water. It is therefore likely to have a greater impact on Japan’s gross domestic product (GDP) than the Kobe disaster, which caused an estimated 2% damage to GDP.

U.S. markets plunged steeply to begin the day, after Japanese Prime Minister Naoto Kan confirmed that radiation was leaking from the compromised nuclear reactors. The Nikkei index fell 11% while investors engaged in a round of panic selling, as it’s unclear what effects the worsening nuclear situation will have on an already terrible disaster. Other global markets sold off as well, although not as fiercely as Japan’s. U.S. Treasuries strengthened, oil and gold tumbled, Germany’s DAX blue chip index fell 3%, and China’s Hang Seng index fell just under 3%. Meanwhile, the disruption of Japanese auto manufacturing spilled over to the U.S., after Subaru and Toyota announced they would limit output at American plants until they can assess auto parts availability.

The Dow traded down nearly 300 points before recovering after the Fed’s upbeat economic assessment and announcement that it would stay the course on policy. The blue chip index finished down 137 points, with 29 of its 30 components lower; the S&P 500 lost 14; and the Nasdaq fell 33. Decliners led advancers by about four to one on the NYSE and by about three to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures dropped $32.10 to close at $1,392.80 an ounce, and the price of crude oil fell firmly below $100, down 3% to settle at $97.18 a barrel.

In its policy statement today, the Federal Open Market Committee (FOMC) announced that it is making no change to its monetary policy stance. It will follow through on its commitment to purchase $600 billion in U.S. Treasury securities by the end of June and will maintain the federal funds target rate in the 0% to 0.25% range. In assessing the strength of the economic recovery, the Fed referenced recent data that “suggests that the economic recovery is on a firmer footing.” The word “suggests” says to me that the Fed is not 100% sold on the recovery. If it were, then the statement would have said recent data “indicates” or “shows” that the recovery is on a firmer footing. The Fed may need a lot more evidence than an 8.9% unemployment rate to feel confident that the economy can run along without monetary stimulus.

High commodity prices will take care of themselves and will not lead to inflation
The FOMC called commodity price increases “transitory,” an assessment that meshes with my view that high commodity prices are the best cure for high commodity prices. High prices mean that the quantity demanded will go down and the quantity supplied will increase. Because there is no feed-through from high commodity prices to higher wages—a partial prerequisite for a secular increase in inflation—and credit growth is not accelerating at a rapid rate, I’m not too worried about inflation. I would be more worried if credit was being created at a faster rate than the economy was growing. But that’s not the case.

Rebuilding effort in Japan not likely to hurt U.S. Treasuries
Although some voting members of the FOMC have talked about wanting to end the Fed’s large-scale asset purchase program (also called “QE2,” for quantitative easing, part two), they did not register their dissent at today’s meeting. This may be partially due to concerns that the Japanese government and citizens—who hold more than $880 billion in U.S. Treasury securities—will need to sell those securities to rebuild their country after the devastating earthquake and tsunami. But the Japanese are more likely to sell their own government bonds before their foreign holdings. This will exacerbate the debt problem in Japan—where the national debt is 95% owned by its citizens but exceeds 200% of its gross domestic product—but will likely have a minimal effect on the U.S. Treasury market.

Last week the U.S. equity market analysts celebrated the second anniversary of the bear-market lows on March 9, 2009, by contemplating a variety of uncertainties, including political revolutions in North Africa and the Middle East, oil prices, European debt, federal deficit spending, employment, housing, monetary policy, and the sustainability of the domestic and global economic expansions. With all this on their plates, it’s not surprising that investors had difficulty digesting all the data (paralysis by analysis) and that the S&P 500 Index finished the day basically flat. Yet it should not be lost on market participants that stocks have exhibited remarkable resilience over these past two years, essentially doubling off their lows at a historical rate, powered higher by a combination of federal stimulus, monetary policy, corporate expense reductions, renewed sales growth, and earnings that have exceeded consensus expectations for eight consecutive quarters. See Chart 1.

Chart 1: S&P 500 Index—two year performance

Source: Bloomberg
Past performance is no guarantee of future results.

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The effects of the earthquake and subsequent tsunami on Japan turned increasingly deadly over the weekend. The death toll rose sharply, while several of Japan’s nuclear power plants were on the verge of meltdowns. Japan’s Nikkei index fell 6% today, the steepest drop since October 2008.

Japan is the third-largest economy in the world in terms of gross domestic product, behind the United States and the People’s Republic of China, so any setback to the country could have far-reaching effects. Among the many potential effects: In the technology sector, companies up and down the supply chain throughout the emerging markets and elsewhere could be affected by a drop-off in demand; Japan could sell U.S. Treasuries to help fund its reconstruction, thus pushing yields up in the United States; insurers and reinsurers will be examined closely to judge the extent of their exposure; the shutdown of Japan’s auto manufacturing plants could affect auto parts manufacturers and shippers; and the nuclear power industry could receive renewed scrutiny over its safety.

The markets traded down steeply during the morning and early afternoon but recovered toward the close. The Dow lost 51 points, with only 7 of its 30 components advancing; the S&P 500 fell 7; and the Nasdaq was down 14. Decliners led advancers by two to one on the NYSE and by about five to two on the Nasdaq. The prices of Treasuries strengthened. Gold futures advanced $3.10 to close at $1,424.90 an ounce, while the price of crude oil settled three cents higher at $101.19 a barrel.

The earthquake that rocked Japan physically shifted the entire country by eight feet. In addition to being a staggering geological event, the natural disaster had a catastrophic effect on the country’s population. It’s too early to tell what the human toll will be, but early estimates are that 10,000 lives may have been lost. 

When considering the economic impact of the disaster, the movement of the Japanese stock market can serve as a fairly good predictor of the wealth destruction that occurred. The Nikkei 225 was down 6.2%, the largest decline in history. Generally speaking, the word “decimate” is defined as one out of every 10 of something being destroyed. By that definition, it is only a slight exaggeration to say that Japan has been decimated by this quake.

Some commentators have talked about how Japan’s gross domestic product (GDP) will actually go up as a result of the rebuilding effort. That, in my opinion, paints a distorted picture of the immediate and long-term effects of the earthquake. While it is true that rebuilding something that was destroyed creates economic activity, it does not necessarily mean that the country is in better shape than its original state. In the absence of the earthquake, the resources that will be used to rebuild could have been reallocated to improving the country’s infrastructure. That which “could have been” is not accounted for in the economic statistics.

A rollercoaster week was capped off by the tragic earthquake and tsunami that pounded Japan’s eastern shore on Friday. Markets in the U.S. held firm, but the economic (and human) consequences have yet to be fully felt. Our own Brian Jacobsen shared his thoughts about what to expect after this devastating disaster.

The week marked the second anniversary of the market bottom, when the S&P 500 sunk to 677 on March 9, 2009. The stock market coasted through the week on light economic news until Thursday, when initial claims for unemployment rose unexpectedly and it was reported that the nation’s trade deficit jumped 15% in January. The major indexes dropped more than 1.5% for the day, with the Dow retreating below 12,000 and the S&P 500 below 1,300.

Moody’s was also active last week, as it downgraded the debt of both Greece and Spain, raising the prospect, yet again, of sovereign debt troubles.  Also weighing on investors’ minds was the continued rise in the price of oil, which had been steadily marching forward until taking a breather last week. The price of crude oil on the New York Mercantile Exchange closed above $101, although at one point during the week it was trading near $107. Our own Jim Murray took a look at what we can expect to pay for gasoline during the summer driving season.

The fifth most powerful earthquake in more than 100 years rocked offshore Japan and sent tidal waves of destruction ashore. In the early trading, the major indexes retreated on the news, but later they rebounded and closed in positive territory. The Dow gained 59 points, the Nasdaq rose by 14, and the S&P 500 advanced 9. Twenty-four of the Dow's 30 components gained ground, led by 3M (MMM) and Caterpillar (CAT), each of which rose more than 1%. Volume was light, and advancing issues outnumbered decliners by almost five to three on the NYSE and by ten to nine on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures gained 0.6% to $1,421.80 an ounce. The price of crude oil on the New York Mercantile Exchange lost 1.4% to $101.16 a barrel.

For the week, the Dow and the S&P 500 each lost 1%, and the Nasdaq lost 2%.

In Earnings News:

• Ann Taylor Stores announced earnings jumped from break even a year ago to 14 cents a share in the latest quarter. Sales increased by 11%, thanks in part to rising demand for clothing at its online outlet. The price of the company's shares (ANN) gained 12% in today's session.

Stocks hit a bottom exactly two years ago, and since then, they've staged a strong bull market recovery. But it hasn't been without fits and starts, and in all likelihood, the volatility is not behind us. So, approaching stocks still demands carefully evaluating risk and reward. Here to explain is Shannon Reid, CFA. Shannon is head of Wells Capital Management's Large Cap Growth team. The team manages the Wells Fargo Advantage Strategic Large Cap Growth Fund.

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A magnitude 8.9 earthquake hit northeast Japan on early Friday morning Eastern Time. Tsunami warnings have been issued for Hawaii and the West Coast of the United States. As the story continues to unfold, hopefully the loss of life and destruction will be limited. 

Immediately after the first earthquake shock, the Japanese stock market declined, the yen weakened, and oil prices fell. Before markets closed, the yen began to strengthen, which is similar to what happened after the January 17, 1995, earthquake in Kobe, Japan, which killed more than 6,000 people. As people tried to rebuild from the Kobe quake, Japanese investors were repatriating their foreign investments, which drove the yen higher against the dollar.

Japan is a net importer of oil. With their domestic refineries shut down or destroyed, the country will likely cut their oil imports. However, we believe this effect will likely be temporary, as once Japan begins to rebuild, they will have to ramp up activity significantly, perhaps overshooting their prior oil import levels. 

A broad selloff hit the major stock indexes as Wall Street weighed the possibility that the long bull market might be facing a correction. The Dow fell 228 points, the Nasdaq lost 50, and the S&P 500 declined 24. Twenty-nine of the Dow’s 30 components lost ground, led by Caterpillar (CAT), Exxon Mobil (XOM), and 3M Company (MMM), each of which fell 3%. Volume was moderate on the NYSE and heavy on the Nasdaq. Declining issues outnumbered advancing issues by five to one on the NYSE and by six to one on the Nasdaq. The prices of Treasuries strengthened sharply, while the price of gold futures fell 1% to $1,412.50 an ounce. The U.S. dollar strengthened, and the price of crude oil on the New York Mercantile Exchange lost 1.6% to $102.70 a barrel.

In Other Business News:

• The nation’s trade deficit increased by more than 15% to $46.3 billion in January, according to the Commerce Department. It was the biggest one-month climb in more than 18 years and brings the deficit to its highest level in six months. Rapidly rising energy prices boosted imports by 5.2%, which more than offset a 2.7% increase in exports.
• New claims for jobless benefits increased by 26,000 to 397,000 last week, according to the Labor Department. The four-week moving average of initial claims, which smoothes out the volatility of the weekly numbers, increased to 392,250, and some economists expressed optimism that the claims remained below 400,000, which indicates that the economy is continuing to add more jobs than it is losing.
• Cumulus Media, a radio broadcaster based in Atlanta, announced it has an agreement to acquire Citadel Broadcasting of Las Vegas in a deal that will cost Cumulus about $2.4 billion (including Citadel’s debt). The combination, which has yet to be approved by Citadel’s shareholders, would give Cumulus 572 radio stations across the country. The price of Cumulus shares (CMLS) fell 7% in today’s session.

Will the Obama Administration tap into the Strategic Oil Reserve?

Correlation between equities and oil has been breaking lately.

Average duration of unemployment hits new high of 37.1 weeks. Catherine Rampell looks into the reasons.

JetBlue: Standing strong on free pretzels.

Bionic eye, a potential cure for certain types of blindness, approved for use in Europe.

A primer on the Strategic Petroleum Reserve.

Derivatives trading soared in 2010.

Two years ago today, the S&P 500 closed at 677, marking the lowest point of the bear market. Today, the S&P 500 closed at 1,320, making it one of the best two-year runs in almost 50 years. However, that says as much about how far the markets fell in the dismal span of September 2008 to March 2009 as it does about the ability of the markets to recover.

The markets wobbled lower today on uncertainty over the Libyan situation, but that was partially offset by a solid wholesale inventories report and a boost given by IBM. The Dow finished down 1 point, with 17 of its 30 components retreating; the S&P 500 fell 1; and the Nasdaq lost 14. Decliners narrowly outpaced advancers on the NYSE and led by three to two on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $2.40 to close at $1,429.6 an ounce, and the price of crude oil fell 64 cents to settle at $104.38 a barrel after a report showed a rise in inventories.

In Earnings News:

• Bon-Ton Stores Inc.’s fiscal fourth-quarter profit rose 5.9% to $85 million, or $4.41 a share. Revenue was $1.03 billion, helped by a 0.8% gain in same-store sales. Bon-Ton Stores operates Boston Store, Elder-Beerman, Herberger’s, and Younkers department stores. Its shares (BONT) jumped 10%.

Road warriors and soccer parents beware! The price for gasoline at the pump is on the rise and isn’t likely to drop much even if peace breaks out in the Mideast. Here’s why.

As the chart below shows, the national average price for regular unleaded gasoline at the pump started the year at $3.07 per gallon and was moving higher prior to the Mideast unrest, possibly in anticipation of the driving season. You know the driving season; it’s that time of the year when you pack your kids and pets into your motorized vehicle and discover America, or in my case, discover the whereabouts of a soccer field in a different state.

The possibility of an increase in oil production from OPEC helped oil prices take a break from their recent heated advance, giving investors a breather. Domestically, positive comments from Bank of America’s CEO helped propel banks and the major indexes higher, while talks began about a major telecom buyout, with Sprint Nextel in the hunt for T-Mobile.

The Dow finished higher by 124 points, with 27 of its 30 components gaining ground; the S&P 500 advanced 11; and the Nasdaq rose 20. Advancers led decliners by just over three to one on the NYSE and by about five to two on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $7.30 to close at $1,427.20 an ounce, and the price of crude oil fell 42 cents to settle at $105.02 a barrel.

In Other Business News:

• Comments from Kuwait’s oil minister that the Organization of the Petroleum Exporting Countries is considering increasing oil production helped to bring down oil prices. OPEC hasn’t raised production in two years.
• Optimism among U.S. small business owners increased in January, according to the National Federation of Independent Business’s small business optimism index. Smaller businesses expressed more willingness to hire, and many planned to start raising prices on goods and services.
• According to the Manpower Employment Outlook survey, U.S. businesses are more likely to hire now than they were in the first quarter of 2010, although the rate of improvement in hiring has been slow. The improvement was shown across all industries. A further positive development was that the number of companies reporting plans for layoffs fell.

In his appearances before Congress last week, Fed Chairman Bernanke hinted that the Fed’s latest round of quantitative easing (QE2) will end on schedule in June. This will complete one of the most remarkable episodes of monetary stimulus in U.S. history. Since early 2008, the Fed has caused its balance sheet to balloon from around $800 billion to over $2 trillion. They have been buying approximately one-third of the total of the bills, notes, and bonds the Treasury has been selling each month.  Within the Fed and within the markets, these purchases have been controversial. Most Fed officials believe the purchases were and still are needed to stimulate an economy that is in the early, fragile stage of recovering from a near-death experience. Until the economy and the credit markets are functioning better, quantitative easing is essential. Others argue that the Fed is risking a big increase in inflation by expanding its balance sheet and the monetary base by heretofore unheard of amounts.

These questions involving Fed policy will be discussed at length in the months ahead. First is the implication for inflation from the huge volume of Fed purchases and second is the implication for bond yields from the cessation of the Fed purchases. The first is probably easier to answer. Because borrowing by households and businesses has literally collapsed since 2007-08, bank lending in the U.S. has not increased since 2008. If banks are not lending, they are not creating deposits. And, if banks are not creating deposits, the money supply does not expand very much. Last year, growth in the M2, which is the broadest measure of total money supply for the U.S., version of the money supply was only 3%. This leading indicator of inflation is not signaling a significant acceleration. A two-year decline in unit labor costs also suggests that U.S. inflation could stay relatively low in the foreseeable future.

Tom Pence and Michael Harris, portfolio managers of the Wells Fargo Advantage Capital Growth Fund and the Endeavor Select Fund, just published their thoughts on investing in a what’s shaping up to be a slow-growth market. As macroeconomic effects start to fade (the old “rising tide raises all boats” phenomenon), a company’s execution in a difficult environment can help it separate itself from its peers. Take a look to see what factors they think will help growth stocks in the months ahead.

With little economic news to feed the markets, investors instead continued to react to the crisis in Libya and the prospect of a continued disruption to Libyan oil. The price of oil continued to rise, at one point trading near $107 a barrel before retreating. Tech stocks, and especially the Nasdaq, were among the worst performers today after a Wells Fargo & Co. analyst downgraded the semiconductor industry to "market weight" from "overweight."

The Dow finished lower by 79 points, with only 4 of its 30 components gaining ground; the S&P 500 fell 11; and the Nasdaq retreated 39. Decliners led advancers by just under three to one on the NYSE and the Nasdaq. The prices of Treasuries weakened. Gold futures gained $5.90 to close at $1,434.50 an ounce, and the price of crude oil was up $1.02 to settle at $105.44 a barrel, a 29-month high.

In Other Business News:

• Questioned about the U.S. Federal Reserve's loose monetary policy, European Central Bank President Jean-Claude Trichet said central banks worldwide would take the steps necessary to deal with the potential for rising inflation expectations. The ECB has taken a more aggressive stance on inflation than the U.S. Federal Reserve, saying it could raise interest rates as soon as April. Central bankers met yesterday and today in Basel, Switzerland.
• LVMH Moët Hennessy Louis Vuitton announced it will buy a controlling stake in Italian jeweler Bulgari for about $6 billion. The all-stock deal by the French luxury conglomerate is a further sign of the health of the luxury goods market.
• A three-notch downgrade of Greece's debt by Moody's Investors Service raised the prospect of further restructuring needed by the troubled country. Moody's said that Greece's difficulties in establishing reforms, as well as a revenue shortfall, made default likelier than it had been in June 2010, the last time Moody's downgraded Greek debt.
• Dallas Federal Reserve Bank President Richard Fisher said he might vote to end the Fed's bond-buying program, QE2, earlier than expected. Fisher has been one of the skeptics of the effectiveness of the program and said today that rising inflation could put at risk the gains made in the economic recovery by holding back further job creation.
• Subway officially passed McDonald's as the largest restaurant chain in the world in terms of locations. Subway notched 33,749 restaurants at year-end compared with McDonald's 32,737. McDonald's still leads in total revenue.

Investors received moderately good news about employment last week, although it wasn’t a cause to be overjoyed. Payroll processor ADP reported that 217,000 new jobs were created in February, which was closely matched by the official government nonfarm payrolls report on Friday that showed a net gain of 192,000 jobs (222,000 when considering only the private sector, which would be almost dead even with ADP’s estimate). Also encouraging was that initial jobless claims dropped to 368,000, a level not seen since May 2008. However, investors were perhaps expecting more of a blockbuster report, and the markets sank on Friday.

For the week, the S&P 500 was flat. Gold and oil futures, however, continued their upward march, with gold finishing the week at $1,428.60 an ounce and light sweet crude on the New York Mercantile Exchange settling at $104.42 a barrel.

Good news during the week came in the form of higher retail sales in February and a very strong showing for manufacturing in February, with the Institute for Supply Management’s manufacturing index rising to 61.4 (the ISM services index rose to 59.7, also a healthy rate of expansion). The Fed’s Beige Book, meanwhile, an anecdotal summary of the economic standing of each of the Fed’s 12 districts, showed that all 12 experienced moderate growth. And Fed Chairman Ben Bernanke said in his semiannual testimony to Congress that U.S. gross domestic product will expand by 3.5% to 4% in 2011, half of a percentage point higher than estimates in November.

This week is a bit quieter, although Friday has some economic releases of note. The University of Michigan’s consumer sentiment index rose more than expected in February to 77.5. With higher gas prices recently, it should be interesting to see if the index can maintain that level or if consumers start to worry about emptying their wallets at the pump. Also on Friday are the retail sales figures for February, released by the Department of Commerce. Dismal weather was a drag on January’s retail sales, which came in only 0.3% higher. We’ve had indications that personal income has risen, but also that consumer spending has been lackluster, so retail sales this Friday might be proof one way or the other of what consumers are really up to. 

We’re well outside the busiest time of earnings season, but notable earning reports this week include The Boston Beer Co. and Dick’s Sporting Goods on Tuesday and The Bon-Ton Stores Inc. and H&R Block Inc. on Wednesday.

The major indexes lost ground as oil prices moved sharply higher. The Dow lost 88 points, the Nasdaq fell by 14, and the S&P 500 declined by 9. Twenty-six of the Dow's 30 components lost ground. The price of Wal-Mart's shares (WMT) gained 0.12%, and the king of retailers increased its dividend by 21%. Volume was light, and declining issues outnumbered advancers by about two to one. The prices of Treasuries strengthened, the dollar weakened, and the price of gold futures gained 0.8% to $1,428.60 an ounce. The price of crude oil on the New York Mercantile Exchange gained 2.4% to $104.42 a barrel.

For the week, the three major indexes moved fractionally higher.

In Other Business News:

• The economy added 192,000 new jobs to nonfarm payrolls in February, the biggest gain in jobs in nine months, according to the Labor Department. And the unemployment rate fell to 8.9%, its lowest level in two years.
• Orders for factory goods surged by 3.1% in January, according to the Commerce Department. But the gain was driven by a large increase in orders for airplanes, which tend to be volatile. Without orders of transportation products like airplanes, factory orders rose by 0.7%, the smallest increase since October.

Let’s face it, we can’t live without energy and that, sometimes, makes it a good investment. But in the universe of energy stocks, picking the ones that’ll burn brightest is what matters. Here with ideas is Bobby Chen, CFA, from Wells Capital Management’s Value Equity team. Led by Charles Rinaldi, the team manages the Wells Fargo Advantage Small Cap Value Fund and the Wells Fargo Advantage Small/Mid Cap Value Fund.

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February's unemployment rate was little changed from January's. At 8.9%, the unemployment rate has broken through the 9% barrier, which is little consolation to the 13.7 million people that are still unemployed. The number of people unemployed was little changed from January as well, meaning that the labor force failed to grow in February. A vibrant economy should have a growing labor force, not a stagnant one.

Nonfarm payrolls increased by 192,000 in February, which was better than I expected. From February 2010, payroll employment grew by 1.3 million, which is good, but not stellar. Most surprisingly to me was that the payroll gains in February 2011 were in manufacturing, construction, and several service-providing industries. I wasn't surprised by the manufacturing and service gains, it was the construction gains that shocked me. Considering the construction gains were in the specialty trade contractors, the February gains may have come from construction projects that were delayed in January due to the severe weather.

The average workweek stayed at 34.2 hours. Average hourly earnings increased a penny to $22.87. Since February 2010, average hourly earnings have increased by 1.7%. There is still very little wage-price pressure. Without an increase in labor income, higher commodity prices could serve as a drag on consumer spending, but as long as the commodity price increases don't pass through to the consumer or they are merely temporary, consumers will just continue to dip into their savings to smooth their consumption and ride out the price rises.

Good news on the jobs front and lower oil prices boosted the major indexes. The Dow gained 191 points, the Nasdaq rose by 50, and the S&P 500 advanced 22. Twenty-eight of the Dow's 30 components gained ground, led by Caterpillar (CAT), which rose 3%. Volume was light. Advancing issues outnumbered decliners by almost four to one on the NYSE and by about three to one on the Nasdaq. The prices of Treasuries weakened, and the price of gold futures dropped by 1.4% to $1,416.40 an ounce. The price of crude oil on the New York Mercantile Exchange edged lower by 0.3% to $101.91 a barrel on rumors of a brokered peace in Libya.

In Earnings News:

• H.J. Heinz announced earnings rose by 20%, from 72 cents a share a year ago to 84 cents a share in the latest quarter. Revenue grew by 1.5%, and the company announced it would acquire 80% of Coniexpress, giving Heinz its first ownership position in Brazil. The price of Heinz shares (HNZ) gained 1% in today's session.

Apple charges developers and publishers 30% of all the revenue they make through the iPad and iPhone. James McQuivey of Forrester Research thinks that’s a mistake.

A visual map of the S&P/Case-Shiller numbers and how each of the 20 cities has fared.

Which countries are most exposed to Libyan oil? (It’s not the U.S.)

A new economic indicator – the GOP (Gross Oscar Product).

Gas sales accounted for 10% of retail sales in January.

Lower-paying jobs up, higher-paying jobs down.

Many of us lost hours (and rolls and rolls of quarters) in arcades years ago – why it’s no longer the case here, but still is in Japan.

We just posted the latest Market Roundup from our Capital Markets Strategists: Brian Jacobsen, Jim Kochan, and John Lynch.

Much like during the middle of 2008, rising commodity prices are on everyone's minds. Back then, oil hit $147 per barrel. In February 2011 oil hit $100 per barrel. In 2008 "soft" commodities like corn and wheat shot up, just like they have been doing from the middle of 2010 to the end of February 2011. Although the pictures look the same, they are fundamentally different. In 2008 people were hoarding commodities, betting that the emerging markets would buy up all the world's resources. In 2011 it's not a demand-driven price run-up; it's more related to supply: droughts, floods, and political unrest. The supply shocks we've seen in late 2010 and early 2011 are likely temporary. Thus, the price increases are also likely temporary. Although prices could go higher, we think that, absent further political unrest and weather effects, commodity prices are due for a correction. A move down in commodity prices could correlate with a move up in the stock market.

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A choppy day of trading left the markets modestly higher at the end of the session. Crude oil prices again increased sharply after an unexpected drop in U.S. stockpiles and continued tension in Middle East countries. On the jobs front, ADP reported that more jobs than expected were created in February, although investors will likely wait until Friday’s official jobs report for confirmation.

The Dow gained 8 points, with 14 of its 30 components advancing; the S&P 500 was up 2; and the Nasdaq was higher by 10. Advancers led decliners by about five to three on the NYSE and by about five to four on the Nasdaq. The prices of Treasuries weakened. Gold futures continued their push to new record highs, rising $6.50 to close at $1,437.70 an ounce, and the price of crude oil gained 2% to settle at $102.23 a barrel.

In Earnings News:

• Staples Inc. reported 17% higher fiscal fourth-quarter profit on a lower-than-expected effective tax rate and fewer charges. The office goods retailer showed a profit of $274.7 million, or 38 cents a share, compared with the prior-year period of $233.9 million, or 32 cents a share. Total costs fell 3.3%, but North American retail sales and international sales were weaker year over year. Its shares (SPLS) gained 0.19%.
• Costco Wholesale Corp. reported fiscal second-quarter profit of $348 million, or 79 cents a share, versus $299 million, or 67 cents a share, a year earlier. Net sales were strong at the discount retailer, up 11% to $20.45 billion. Results were in line with analysts’ expectations. Costco’s shares (COST) fell 2%.

Protests in Iran and the continuing crisis in Libya pushed the price of oil higher today, and as oil went up, stocks went down, perhaps over the worry that it doesn't seem as if the Mideast will stabilize anytime soon. With the high price of oil, inflation concerns also cropped up after Fed Chairman Bernanke indicated that the Fed would keep intact QE2, its $600 billion bond-buying program. In the U.S., manufacturing activity continued to expand at a rapid clip, but a prolonged period of high oil prices could undermine the economic recovery.

The Dow fell 168 points, with 27 of its 30 components lower; the S&P 500 was down 20; and the Nasdaq lost 44. Decliners led advancers by 3 to 1 on the NYSE and by 10 to 3 on the Nasdaq. The prices of Treasuries were flat. Gold futures advanced $21.30 to close at $1,431.20 an ounce, a new record high in nominal terms (for context on the high price of gold, see our own Melissa Duller's post today). The price of crude oil rose more than 2% to settle at $99.63 a barrel. 

In Other Business News:

• Manufacturing activity picked up the pace in February, according to the Institute for Supply Management's manufacturing index. The index rose from 60.8 in January to 61.4 last month, the highest rate of expansion since 2004.
• In testimony before Congress today, Fed Chairman Ben Bernanke addressed the recent spike in oil prices, saying they are not yet a threat to the fragile economic recovery but that a prolonged oil price increase could slow growth and lead to inflation. He also said, "We do see some grounds for optimism about the job market over the next few quarters," while recognizing that the pace of current job creation is too slow to bring down unemployment.

Like many investors, I've been keeping track of what's going on with gold and other precious metals, and, needless to say, the last year or so has made my job very interesting. Gold prices have been running rampant, increasing 28% from $1,095 to $1,403 per troy ounce in the last 12 months as of last Friday. Investors are often polarized on the issue, with some believing gold is all the value left in the world and others thinking gold is in a bubble, poised to crash down to earth similar to the housing bubble of 2007 or the dot com bubble that burst in 2000. Is that what's going on with gold this time around?

The price of gold has not risen to its current level based on one factor in isolation. There are several reasons why gold prices have risen so dramatically, but prices appear to be founded on fundamental trends, not pure speculation or irrational behavior. Today I want to focus on the increase in gold prices that has stemmed from surging sovereign debt levels. World economies are in a state of flux. As you can see in the chart below, sovereign debt levels have risen substantially as central banks dramatically increased their debt issuance and asset purchases. For example, according to the Organization for Economic Co-operation and Development (OECD), U.S. government debt is projected to be 78% of gross domestic product (GDP) by 2012, and the United Kingdom and eurozone countries are not far behind.

Source: OECD
Shaded area indicates projections