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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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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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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The market struggled this week but was resilient. In the first part of the week fear about the ’stress test’ hovered over the traders. The unknown result will not be known to the public until next week or the week after. On Tuesday there were hints that Bank of America and Citicorp were being pressured to increase their capital structure though the CEOs didn’t agree. That pressure was a direct result of the stress test- at least that is the assumption.

Consumer confidence increased sharply in April. The Conference Board’s reading went from 26.9 to 39.2. That reading is still low but the degree of increase was unexpected. Later in the week a Consumer Sentiment report was released and it too was higher. I would not read too much into these numbers. You can look at actual retail sales each week which will give you more information than a monthly confidence report. Much of the confidence (or lack of confidence) by consumers may mean very little to us as investors. The swine flu for instance may affect consumer confidence but will that mean consumers will stop spending? They might spend differently. Any recent event will affect how people ‘feel’ about things, good or bad, but will it actually spur them to spend or stop spending? The evidence is unclear.

Also out this week was the Case-Shiller 20 city home index report. The problem with this report is it was for February. That is ancient history to the stock market. It showed a fall of 2.2% adding to January’s fall of 2.8%. Prices year over year were down 18.6% from 19% in January. This report is virtually useless. It tells us what happened two months ago. Who cares! I will not be writing about this report in the future. We know from more recent data that sales in homes are increasing and inventory looks to be flattening. It’s still too early to come to any conclusion. Housing will be weak but evidence suggests a bottom is on the horizon.

Also out this week was the first quarter GDP number which was down 6.1%, a bigger drop than expected. The market rallied strongly when this number came out. Welcome to the psychology of the stock market. So why would it move up? First, this number is also backward looking, but looking closer you will see that there was a large drop in inventory and exports. Managing inventory is something that traders watch closely. Inventory has fallen to a point that requires a build up over the next few months. At the same time consumer spending has gone up putting more pressure to increase inventory. Inventory building will mean a better GDP number in the future. All that is in the future and of course that is exactly what stock investors and traders react to.

On Thursday Chrysler’s bankruptcy was announced by President Obama. This is a good thing. We need to let the bankruptcy laws work. It would probably be better to let other companies file for bankruptcy as well. Did we need to save the banking system? The answer is yes. Do we need to save any other industry? The answer is no. Even in the banking system those responsible for the failed banks need to be punished, but the system needs to be supported for the short term. The real question is how long and how intrusive will the government be in private industry? One of the biggest U.S. criticisms in recent years has been foreign government involvement in foreign companies. Those companies with government backing were seen as unfairly competing with private industry. Now we, in the U.S. are doing the same thing. It damages the U.S. argument that we let free enterprise pick the winners and losers and not support otherwise failing companies with government dollars. That seems a bit hypocritical.

This morning, Friday, a stronger ISM (Institute of Supply Management) indicated that the industrial sector is picking itself up. It is still shrinking but improving. This was the fourth month in a row of an improving ISM report.

No matter what spin you put on it, the stock market is telling us that things are going to get better for the economy. History tells us that over the next year or two there will be a rally of over 50% in the stock market. This will not be a march straight up in prices. Expect pullbacks and use them to buy. Do not let fear control your decisions.

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The first quarter GDP reported today showed us shrinkage of 6.1%, much worse than the 4.5% to 5% expectations. That was close to the 6.3% drop for the fourth quarter last year. Of course the devil is in the details. Much of the decline was caused by the lack of business investment as inventories were strongly reduced and companies shed employees and reduced capacity. However consumer spending increased, rebounding to 2.2% growth and the savings rate rose to 4.2% so the news was not all bad.

This information is interesting and it certainly makes headline news on what has happened in the economy, but for investors it is backward looking. It tells us very little about the future and it is the future in which we invest. The stock market saw these last two quarters coming with a steep fall in prices in 2008 and a sharp further decline in the first two months of this year finally hitting bottom on March 9th. The stock market is forward looking. It has now risen from that March bottom sharply, but lately it has been back and filling, going sideways with a slight upward bias.

The stock market is a leading economic indicator. It is telling us times have hit bottom but since it is still down for the year it is impossible to say the economy is in the clear. It’s not! The market is saying we are in tough times but improving slowly. I will take improving slowly and be happy.

Good Trading
Steve Peasley

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Today we learned that the fourth quarter GDP numbers were indeed one of the worst ever recorded. Only in the Great Depression can we find a more severe three months of a collapsing economy. Add to that the record income and wealth destruction and you have a free fall in our economy.

So why has the market rallied for three weeks in a row? It is simple. Economic numbers are reported from past events and the stock market looks forward to future events. The market is telling us the worst is over. As one of the most reliable economic indicators you can be confident that the economy, though still weak, will have bouts of further weakness, that over all it is likely going to be better six to twelve months down the road.

Expect another fall in stock prices. The move up is too fast. The market fell fifteen of seventeen days before this rally and now we have had three weeks of a strong bounce. There is an ebb and flow of prices. If indeed we get a pullback that will be the one to buy as long as the indexes hold above their old lows.

Good Trading
Steve Peasley

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