Spring Blooms Too Soon - TheStreet

A spring rally bloomed on Wall Street on Wednesday, as falling oil prices, solid semiconductor earnings and benign economic data news bounced stocks from some of their lowest levels of the year. A closer look, however, suggests the thaw could prove premature.

The

Dow Jones Industrial Average

soared 133 points, or 1.28%, to 10,538, and the

S&P 500

was higher by 15 points, or 1.32%, to 1,180, after both indices closed near their 2005 lows yesterday. The

Nasdaq

posted the biggest gain, rising 29 points, or 1.47%, to 2002, having closed at a new five-month low Tuesday. The tech-heavy index was helped by

Micron's

(MU) - Get Report

stronger-than-expected results for the second quarter.

Crude oil prices slid 24 cents to close at $53.99 a barrel in Nymex trading, off a session low of $52.50.

The major indices also were helped, allegedly, by a weaker-than-expected revision to fourth-quarter GDP. Growth remained unchanged at 3.8% against expectations it would be revised to 4.0%.

Time to burst the bull's bubble. Below the headlines, Micron's earnings, the dip in oil prices, and the GDP data were perfect circumstances for short-covering and customary end-of-quarter portfolio adjustments.

Ahead of key economic reports Thursday and Friday, Wall Street is still gyrating between concerns over inflation and uncertainty about the impact of higher rates and oil prices on growth.

While it fell below forecasts, the final reading of the fourth-quarter GDP at 3.8% remained strong and its inflation component was even revised upward at 0.2%. The overall growth trend of the deflator is now at levels not seen since 1991, notes the Wachovia economics group.

Likewise, the slide in crude oil prices was seen as a positive by Wall Street on Wednesday. How so? Presumably, by lowering the threat of inflation. But the

Federal Reserve

has made it clear that it is already worried about the impact of surging oil over the past year. One day's modest relief won't change that.

And what about the impact of higher oil prices on growth going forward? As noted yesterday, consumer confidence, as measured by the Conference Board, fell in March due to weakness in the future expectations index, which typically anticipates lower spending patterns.

Wednesday's slide in oil prices was led by a surge in crude inventories but also by a larger-than-expected drop in gasoline inventories. Gasoline inventories are now important as gas stations prepare for summer, the busiest driving season of the year. With gasoline prices at historic highs, consumers will be paying a lot for their summer fun. Where will they spend less?

"They will spend less money on other things, that's for sure," says Wachovia senior economist Mark Vitner. "They'll buy less souvenirs, they won't be going out as much, and

they'll spend less on eating," he says.

Based on that, you can decide which stocks to short in the third quarter.

A further deceleration in housing prices would be even worse news. While the Mortgage Bankers Association said that its weekly index of mortgage application activity rose 2.4% in the week ended March 25, refinancing applications dropped 2%. Last week, applications slumped 9.5% and refinancing plunged 16.5%.

Perhaps all of these concerns are overblown for the longer term. Perhaps wages and other compensation have been keeping up with job growth, as we may find out in tomorrow's personal income data or in Friday's employment report. But wait -- doesn't that mean more inflation?

Well, for a key insight of the Fed's thinking on inflation, don't miss tomorrow's February core personal consumption expenditure (PCE) price index, which is part of the personal income report.

The PCE is based on goods that are actually purchased, unlike the CPI, which is based on the price of a basket of goods. The Fed prefers this indicator to the CPI, because "for inflation to take place, a transaction has to take place," notes Wachovia's Vittner.

The PCE has been trending lower than the CPI, which might explain why the Fed has been taking "baby steps" to raise rates. If the PCE catches up, so will the Fed's pace of tightening.

What did the bond market do Wednesday?

Portfolio adjustments seem to have pushed prices higher, while the yield on the 10-year Treasury fell to 4.55% from 4.59%. More interestingly, an auction of two-year Treasury notes found soft demand. More interestingly, indirect bidders -- which include foreign central banks -- represented 30.6% of the buyers, down from 31.8% last month, and from a typical average of 35%.

Diversification, anyone? On top of the weaker-than-expected GDP, that helped the dollar lose some of this recent shine Wednesday. The buck even eased slightly against the yen, while Japan's Tankan survey showed industrial production fell more than expected last month. The dollar last traded at 107.47 yen from yesterday's 107.57, while the euro rose to $1.2957 from 1.2921.

Winners and losers

Shares of Micron gained 35 cents, or 3.46%, to $10.47, as the chipmaker swung to a second-quarter profit of $118 million, or 17 cents a share, on sales of $1.3 billion, beating estimates on the top and bottom lines.

American International Group

(AIG) - Get Report

fell $1.03, or 1.77%, to $57.17. AIG said Wednesday that a much-scrutinized 2000 transaction between it and

Berkshire Hathaway's

(BRKA)

General Re unit doesn't qualify as insurance and must be reclassified. The concession came in a press release announcing a one-month delay in the filing of AIG's 10-K with the

Securities and Exchange Commission

.

Elsewhere,

Hewlett-Packard

(HPQ) - Get Report

continued higher after being raised to a buy from neutral Wednesday at First Albany. The brokerage cited optimism about new CEO Mark Hurd, who came over from

NCR

(NCR) - Get Report

on Tuesday. The stock, which added 10% in yesterday's session, gained another 17 cents, or 0.78%, to $21.95.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.