This morning the market is up on the news that consumer spending was higher than expected while incomes, though up, were lower than expected. The savings rate fell to 3.3%. At least we are still saving something. What was interesting about these numbers was that wages and salaries were up .5% but most of that was caused by working longer hours not with an increase in workers.

In every economic recovery jobs lag but the first sign of a jobs recovery is longer work weeks and an increase in part time workers. That seems to be holding true for this one though it seems slower.

ISM manufacturing for February and construction spending for January were also reported this morning. Construction spending was anticipated to be down .6%, an improvement from last month when it was down 1.2%. The actual number was in line with the expectations. The ISM index was targeted to be 58 but came in at 56.5. The market held up after these reports.

The numbers continue to show a slowly improving, struggling economy. Why hasn’t all that government spending translated into a stronger economy?  Maybe because a lot of the spending will happen this year and next and most of the money so far has been used to save the banks. Maybe that was necessary but at some point the rest of the economy needs to recover. Healthier banks have not helped the overall economy yet.

Good Trading
Steve Peasley

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Also this morning was the Chicago PMI report which was up to 62.6 in February from 61.5 in January. Then a few minutes later February’s University of Michigan Consumer Sentiment Report was released which was down to 73.6 from 74.4 in January.

None of these numbers really affected the market when they came out.

By 7:00 this morning the existing housing sales number came out. Earlier in the week we had the new home sales report which was very weak (down 11%) and that put downward pressure on stock prices. This morning’s report when it came out pushed prices down a little but not by much and the market recovered it all. Existing home sales fell 7.2%, more than expected, and inventory increased to 7.8 months in January from 7.2 months in December.

This week was full of statistics and none of them changed the picture of our economy. It is growing but sputtering and it is not producing any jobs. This has heightened fear in the stock market and that is not a bad thing as it means stock prices are not overheating, but neither is there much reason for the market to rise. It is going to be a stock picker’s environment.

Good Trading
Steve Peasley

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It appears the current corrective phase of the stock market rally that began last March is easing. There have been only three corrections of any consequence in the last year: in June, November and now this one that started in January. The two corrections last year spanned four to six weeks falling 5% to 7%. The current correction is in its sixth week with about a 7.5% correction. Since the correction won’t be over until the prices of the indices recover or exceed their recent highs we can’t say it is over or that it is in fact a correction.

A normal correction is 10% but any fall of 5% or more can be called a correction and a return to a bear market usually means a 20% fall or more. Corrections are normal and during each one fear begins to mount as people speculate on the possibility of returning to the bear market lows of last year. It is normal for fear to grip investors and in fact it is healthy for stock markets when fear has that much power over investors.

It is in the lack of fear where stock markets become over valued. The last clear sign of that was in the dot.com bubble.

So as long as fear holds so many investors frozen on the sidelines and as long as they are making virtually no return in money market funds the stock market will likely only have corrections, not a return to the bear market.

Of course the underlying economy also plays a big roll in bear and bull markets but as we have said in previous commentaries we are in a recovery, slow though it may be.

Good Trading
Steve Peasley

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This week’s report on home sales, both new and existing, will draw strong interest as housing is a very pervasive underlying economic force. Mortgage rates are very low and there have been several months of improvement (though small), but will that trend continue? There is a sense that the foreclosure rate could overwhelm the beginnings of a recovery. Falling prices and over supply might be good news for new buyers but not so good for the overall economy, especially for the banks.

The evidence continues to build that the economy is at an early stage of a recovery. That recovery appears to be broadening and may well have sustainability as our government plans on spending an obscene amount of money this year. That money will further fuel the recovery.

For investors it’s all about sustainability. What happens when the spending stops? What will happen if foreclosures swamp buyers’ appetite to step in to the housing market?

There is always something to worry about. It just seems fear is heightened at this time because we have just survived the worst recession since the Great Depression and we are still not out of its grip. Still, the facts are its grip is lessening.

Good Trading
Steve Peasley

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Wholesale inflation numbers reported this morning also jumped. January’s number was up 1.4% but core inflation which excludes food and energy was up only .3%. The problem is that both numbers were above expectations.

We will see retail inflation numbers tomorrow. I have a feeling that the producers might be experiencing inflation but they are going to have a hard time passing it along to the consumers. The economy is just too weak at this point to absorb price increases.

It may not feel like it but the economy is gaining strength and will likely continue to do so throughout most of this year. The stock market will realize this and will rise, just do not expect it to be in a straight line or expect it to be like last year’s rally. The rally is going to be much more muted this year.

Good Trading
Steve Peasley

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Greece is still a problem as the rest of the EU talks about a bailout without calling it a bailout. Greece itself seems to be walking around like a zombie telling anyone who will listen that they have no problem.

There are many issues that could upset the worldwide recovery as China deals with a budding inflation problem. So far they have tightened their money supply twice this year to hold down inflation.

Despite these headwinds there is a rather large tail wind for our economy. Only about a third of the stimulus package passed last year has been spent. As a result, this year and next will see massive spending in our country and at a time where economic stats are showing us the beginnings of a recovery already. That spending is a major push and should support continued growth.

Will that push stock prices higher? Earnings and growth are the key. The chances are good that both will do well this year.

Good Trading
Steve Peasley

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The concern this morning seems to be over China and its announcement that they are going to tighten money supply again in an attempt to slow down their growth and thus inflation. Their most recent growth was said to be 10.1% for the final quarter of 2009.

In the U.S. retail sales for January were up a higher than expected .5% and November and December’s numbers were revised up. This is good news but we have to remember that this increase is from a low base. In real dollars that are being spent it is not that strong. Of course with a 10% unemployment rate you can’t expect retail sales to take off.

It appears the market is conflicted this week. We have had some good sized up days and down days and the DOW is trying to hold the 10,000 mark. There is no change on the economic outlook as we slowly dig our way out of the recession. Earnings for corporations are surging. These factors tell me this is a correction and not a return to the Bear market.

Good Trading
Steve Peasley

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It doesn’t help that the massive snow storms on the east coast has drastically reduced the number of traders in New York. Light volume usually translates into more volatility.

The stock market does not like uncertainty and we have a lot of questions in our economy and the economies around the world that need to be clarified. In Europe it’s the weakness in the PIGS-  Portugal, Italy, Greece and Spain, all of which are having debt problems and in the U.S. its rule changes for the banking industry and Obamacare. Where are we going?

All these things relate to future corporate earnings. Clarity is often an illusion but investors and traders will react on what they believe will happen and at this point they are unsure.

Good Trading
Steve Peasley

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In a world where there will be increasing scrutiny on government debt loads, currency volatility will surely increase.  This is important when investing in companies that have customers located in other countries and accept payments in other currencies.  In today’s increasingly globalized business world it is hard to find many public companies that do not do some sort of business overseas.  Therefore, when looking at potential stocks to buy you must determine what countries in which their foreign revenue are derived.  Then determine if those countries currencies could possibly be at risk of major market disruption.

Over the long term the dollar will most likely weaken unless our historically imprudent government suddenly becomes frugal and we fix our large trade imbalance.  Both of those events seem unlikely.  This makes it likely that over time foreign stocks will continue to have the wind at their backs.  However, until the markets hash out which countries have been irreparably damaged by the financial crisis there will be greater foreign currency market volatility.   You will notice greater price movements in your stocks as a result.

One final note is that China’s currency is tied to the U.S. dollar so there is no fluctuation between the two at this time.

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Either way this correction restores health to our market. Stock prices do no go in one direction without pause either up or down.The odds are good that we will see another leg up once the correction has shaken out the weak hands.

The earnings reports and more importantly the economic data is clearly showing an improving economy. With outsized government spending taking place, this year the economy should gain strength and that will mean strong corporate earnings for most of this year. The market will recognize that at some point.

At the moment, investors and traders are focused on debt. However, one way to trump debt is by a growing economy which will produce more tax dollars. Cutting spending is the only other way to control debt, but that will have to wait. It’s not possible in this political environment, and maybe we shouldn’t cut debt as the economy is very fragile.

Good Trading
Steve Peasley

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