It’s been a good week for Wall Street. All three US indexes posted gains on just four trading days. The nasdaq Composite exploded for the week on solid tech results gaining 4.6 percent, the dow jones Industrial Average moved up 1.5 percent and the S&P 500 rose 1 percent.

This week’s real estate data contributed to the optimism we saw in stocks, despite some negative news.

Home values remained weak, with the S&P/Case-Shiller US home price index posting another steep loss of 14.1 percent in the first quarter, the fastest rate of decline in 20 years. The worst loss was in the composite-20 portion of the index, which tracks housing prices in the country’s 20 largest urban areas, which fell by 14.4 percent, setting another record as the largest decline since tracking began.

Sales of new homes were up on a month-over-month basis, posting a 3.3 percent rise in April, setting an annual sales pace of 526,000 units. That would seem like good news on the surface, but upon digging a bit deeper, you’ll see that sales actually would have remained flat had the March numbers not been revised downward from 526,000 to 509,000. The April sales pace was also down 42 percent from the previous year.

mortgage application activity declined last week, with the MBA’s applications index falling 4.6 percent. The volume of refinancing applications, which accounted for 46.1 percent of total activity, fell by 8.9 percent, and purchasing applications rose by 0.1 percent.

The decline in activity has been largely pegged on modest rate increases across the board when compared to the previous week. The average interest rate for the 30-year fixed-rate mortgage rose to 5.96 percent from 5.9 percent, 15-year fixed-rates came up to 5.49 percent from 5.42 percent and one-year adjustable rate mortgages (ARM) rose to 6.92 percent from 6.71 percent.

Durable goods orders proved resilient this week despite a 0.5 percent top line decline for April, given that it actually gained 2.5 percent when you leave out transportation-related items. The ex-transport number marks the largest increase since last July. Transportation orders were off 8 percent, mainly because of a steep 24.4 percent drop in aircraft orders, which is hardly surprising. But electrical equipment orders came in as the big winner, surging 27.8 percent.

Initial jobless claims moved modestly higher to 372,000 last week with 4,000 new claims from the revised numbers for the week of May 24. The four-week moving average of new claims crept down to 370,500, leaving it well below the 415,000 range we saw in the 2001 recession. Continuing claims also rose to 3.104 million from a revised 3.068 million in the previous period, sending the four-week moving average up to 3.069 million.

Although unemployment may be below recessionary levels, consumers are still hyped about their economic prospects, with the Conference Board’s confidence index falling to 57.2 in May, the lowest point since October 1992. As has been the case in previous months, consumers remain concerned about the health of the labor markets and skyrocketing food and energy costs. That’s led to questions regarding the effectiveness of the government’s stimulus package. Many speculate that a large portion of the $46 billion issued so far may be tucked away for a rainy day.

The best news of the week was the upward revision of first quarter gross domestic product (GDP), which was boosted to 0.9 percent from 0.6 percent. Imports and exports were both revised downward, with trade contributing 0.8 percent to growth, but business-fixed Investing jumped to a negative 0.2 percent from negative 2.5 percent.

That new number defies the academic definition of a recession, which requires two consecutive quarters of GDP declines, but it remains weak enough that the jury’s still out on whether or not that will actually happen. But, given the mix of other data, it’s still possible that the Business Cycle Dating Committee of the National Bureau of Economic Research may still call it a recession.

However, there was one disturbing revision: further contraction in domestic consumption. We can’t avoid a recession if we don’t get the big spenders out of the scratch-and-dent aisles.

Finally, we got some inflation data this week. Core personal consumption expenditures, which exclude food and energy spending, gained a slight 0.1 percent in April, which was in line with expectations. Year-over-year core personal consumption expenditures (PCE) was up 2.1 percent last month with total PCE up 3.2 percent.

Those numbers represent a double-edged sword. They do show that inflation may be slowing, but that’s largely because of the broader economic slowdown. There’s nothing like a recession to tame inflation. But the numbers also show that inflation remains simmering under the surface, so when the economy does begin to recover, the Federal Reserve will have to be quick on the draw with rate hikes. And rising rates right out of the gates could temper a recovery.

Investors’ spirits have been buoyed by the decent economic data, fueling this week’s market gains. This is good news, which seems to indicate that we’re not in for a prolonged recession, but it’s hardly enough to convince me to start buying real estate or actually believe I’ll be getting a great deal on a new car. All told, this is--at best--cause for cautious optimism.

Next week, we’re due for some key pieces of information that could help to clinch the case, namely the jobs report and factory orders, which will gives us an idea of the current health of manufacturing. Both have the potential to move the markets, particular if they’re better than expected.

Current expectations are for a 0.1 percent decline in orders and 52,000 jobs lost. I’m expecting better news on the orders, given the continued strength of exports. And although initial jobless claims in May weren’t anything to write home about, I don’t think the jobs number will be as bad as expected.

In last week’s issue of Utility & Income, editor Roger Conrad looked at the cause of $130-a-barrel oil and whether or not it can last. Oil prices have tempered a bit since the article was first published last Friday, but the fact remains that it’s a temporary pull back than a real correction. And despite the hype the Commodity Futures Trading Commission investigation into price manipulation may be getting, I seriously doubt they’ll uncover any meaningful wrong doing.

Markets have a way of humbling even the most prescient prognosticator. That’s definitely been the case for oil this decade.

There have been perfectly good reasons why oil prices couldn’t break, let alone hold, every perceived milestone it’s hit and passed in recent years—from the $20 level taken out in the run-up to the Iraq war to the $100 mark burst through this year. But even with a lot of very smart people betting against it, black gold has pushed on through, and the next impassible point has been shoved higher still.

One of the early bear arguments against oil was its potential to slow the US economy. Some expected every upward burst earlier this decade to sow the seeds of its own reversal by slowing the US economy.

As it turned out, oil’s strength had a wholly unexpected impact. In 2003, 2004, 2005, 2006 and again in 2007, interest rates spiked higher in the spring and summer months only to come down hard in the fall. Each time, the action was more volatile and dramatic.

Last year, the 10-year Treasury note yield—off of which virtually all income investments benchmark—reached its highest level yet for this cycle, moving above 5.3 percent. And its drop over the past nine months has been equally dramatic, falling to its lowest level for the decade well under 3.5 percent.

Rising market interest rates, of course, have historically cooled off overheated economic growth. As the decade has progressed, however, each spike has come with oil prices at a successively higher level.

Rising oil prices also depress economic growth because they prevent consumers from spending on other things and jack up costs on businesses. The result is double jeopardy for the economy and a much greater impact on growth because oil has reached a higher benchmark price.

Up until 1950, America produced all the oil it needed within its own borders. That was a decisive advantage in World War II, when Nazi Germany was forced to invade oil fields far to its east to keep its war machine going. Imports moved steadily higher in subsequent decades. But even during the oil embargoes of the 1970s, the US had a secret weapon: We were the major global market for oil.

No matter what was happening on the geopolitical scene, it was producer nations’ interest to keep the US economy healthy and using oil. There were always the bomb throwers among the Organization of the Petroleum Exporting Countries (OPEC) nations, who wanted to push up oil prices high enough to really cripple the US and, to a lesser extent, Europe. The Saudis and their allies, however, always acted to prevent that from happening, understanding that doing so meant mutually assured destruction and the end of the gravy train.

Eventually, as is the case in every commodity cycle, the consumer nations (mainly the US) changed their behavior in the face of high prices. That resulted in permanent demand destruction in the late ’70s and early ’80s through a switch to alternatives and simple conservation by driving smaller cars. And high prices also encouraged investment to boost production, which paid off with the development of the North Sea.

Permanent demand destruction and new production will ultimately be the case with this oil market cycle. What’s different this time around, however, is permanent demand destruction in the US is no longer enough. The US is still the most important market for oil. But it’s no longer the only one, and it’s becoming progressively less important every day in setting global prices.

Already this decade, we’ve seen China and the US reverse roles in copper demand. As recently as 2002, the US made up more than a quarter of global demand for the red metal, with China coming in at about 12 percent. Today, China consumes close to 27 percent and the US is only around 12 percent.

That dramatic switch isn’t due to significant changes in the US. Demand has dropped some as housing starts have fallen off over the past year, but copper remains an essential material in many areas of industry. Rather, it’s due to massive demand growth in China, which continues as that country upgrades infrastructure and deals with unprecedented migration of tens of millions to already infrastructure-challenged cities.

The same dramatic upturn in demand is happening for a wide range of other vital resources. Oil will take longer to turn because of the size of the market and the huge amount we use in the US. But unless there’s a major break with current trends, sometime in the next 10 to 15 years, China will begin to consume more oil than we do.

When the US was the world’s dominant copper consumer, our level of economic growth basically set the price. The red metal earned the moniker “Dr. Copper, the only metal with a PhD” because its price moves tended to presage the level of US economic growth. Higher prices meant faster growth, while lower prices forecasted slowdowns.

When the US economy began to slow in mid-2007, many mistakenly assumed that copper prices (and copper stocks) were going to head lower in a big way. One of the biggest shocks of recent months has been they haven’t. In fact, global demand for the red metal has remained solid, and many copper mining stocks, such as Freeport McMoRan Copper & Gold, have recently made new highs.

To read the entire article, please visit http://www.kciinvesting.com/articles/8859/1/130-Oil-Can-It-Last/Page1.html.