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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By mid week, after a couple good days, we had a sell off on Thursday which was broad based and painful. However, this morning with the bank stress test and an employment report for April behind us without any surprises the market decided to rally again, at least so far this morning. This is an obvious case of the market climbing a wall of worry.

The economic numbers actually were very encouraging this week. Retail sales were up for April by .3% and for last week up .7%, but what was more surprising was the first time jobless claims which fell by 34,000 this week and the four week average fell as well by 14,759. True jobless claims sit at over 600,000 which are very high but the stock market cares about the trend and is looking for the beginning of the change. That seems to be happening. Can this change turn into actual growth? At some point it will but not for a number of months, maybe by the fourth quarter this year or next. At some point the worry will turn to the strength of the recovery but so far no one is talking about that, yet!

We have had several weeks in which economic numbers, though still showing us that the U.S. economy is in a recession, seem to point to a turn from free falling to just falling or leveling off. The just ended earnings season came in better than expectations. Of course those expectations were severely downgraded at the beginning of the year therefore beating them is not all that difficult. The real test will be the sustainability of improving numbers. Can that happen?

I believe it will. The LIBOR rate is now below 1% when a few months ago it was as high at 5%. That is the rate banks lend to each other. The mortgage rates are at 5% or less and this week we saw productivity increase by .8%. Add these stats to all the others these last few weeks and we have strong evidence that things will get better. Finally, China, who embarked on their own stimulus plan, is already showing signs of strengthening growth despite the slow down in exports. The guidance, by independent firms, is calling for an increase in China’s GDP from 6% growth to 8% this year.

Does this mean the stock market is going to rally straight up from the March 9th low? Probably not. We will have corrections along the way. Any correction will be one to buy not sell. At the same time taking profits every so often is not a bad thing. Since China is already recovering and growing we have increased our exposure to the Asian market. You need to go where the growth is and since the stock markets of the Far East fell a lot harder than ours it has made all of Asia a good place to invest, despite the risks of lack of transparency and multiple books that their companies keep.

It is time to invest and has been for several weeks. No one knows when and where the bottom is but we can look back and clearly see a strong bottom of the various markets that took place on March 9th. Put fear aside and let’s make some money.

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On Friday I wrote about the fear of inflation but also stated that maybe a little inflation is not all bad, and indeed it is preferable to deflation.

Rising prices are always hard on us consumers as many times our incomes do not keep up. So why would inflation be preferable to the alternative which is deflation where prices fall? One very strong reason is that in a deflationary cycle, consumers stop spending. They postpone purchases in an effort to wait to buy lower priced items as they fall month after month. This happened in Japan in the lost decade from 1990 to 2000 where their entire economy shrank.

Also, and just as is important, is as the government takes on trillions of dollars in debt, and that is a lot of money that no one can really visualize, it is much easier to pay that debt off in inflated dollars down the road. With deflation it is much harder to pay off.

If dollars become less valuable, the cost of paying off debt is less. If you buy a house and make a $3,000 a month payment with a 30 year fixed mortgage, in 20 years with inflation that $3,000 dollars will feel much less burdensome. That is inflation at work. The government has the same issue except their mountain of debt is a much bigger problem.

A little inflation is a good thing. A lot of inflation destroys wealth.

Good Trading
Steve Peasley

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New home construction fell to a 50 year low as reported this morning. It could be worse than that as they only started counting 50 years ago. At the same time applications for mortgages last week spiked up by 40% or so over the week before, most of it for refinancing of course.

Today, Obama released his plan to save some people from foreclosure and the market didn’t really care much for it. So far the Obama Presidency has been a large disappointment from a stock market point of view. He does not really pay much attention to the industry, having repeatedly complained about the excesses of Wall Street. However, the stock market is a leading indicator of our economy. It is telling anyone who wants to listen that it does not see an economic turn around as yet.

It is time to be very cautious, holding significant amounts of cash on the sidelines with a few contra positions for protection. If you are going to own stocks, dividends are important as they will give you a cushion. Of course you need to be concerned that the companies you buy can maintain their dividend.

Most traders are waiting to see if the market will break the September lows. We are very close and it’s touch and go at this point.

Good Trading
Steve Peasley

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So much for our new treasury secretary’s rescue package. For the stock market it wasn’t about the package, it was about the stark lack of details. It was a general outline not a plan that was announced. The traders and investors were led to believe that a plan was forthcoming. Since they didn’t get it traders flooded out of the stock market.

This morning cooler heads are peaking above the fray with some cautious buying. Still the market and the country need clarity from our government and so far are not getting it, let alone having any confidence that whatever they do will work.

The key will be housing. The stimulus package working its way through Congress has provisions that look promising but nothing is going to work if interest rates don’t remain low. That might be difficult as fear of inflation, with all this spending on everyone’s mind, is rising.

The market is on a knife edge and will either spring up or fall sharply. Leadership and clarity will make the difference but so far the market is very uncertain of either.

Good Trading
Steve Peasley

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This has been a week of earnings reports and important economic statistics. We started the week with good news. MacDonald’s earnings were better than expected, but more importantly was the existing housing report which showed an increase in sales for December, not a reduction as expected and it showed a significant reduction in inventory from 11.2 to 9.3 months from the month before. Also, the leading economic indicators report, which gives us a gauge of future health for our economy, was up when the expectation was for it to be down. The beginning of the week gave us some hope.

That hope extended into mid week because of President Obama’s spending package and talk about setting up a good bank/bad bank to buy toxic loans and get them off the back of the banking industry. That hope faded on Thursday as we had a number of poor earnings reports, unemployment claims rising, durable goods sales falling and new home construction falling sharply with an accompanying spike in inventory of unsold homes.

It is obvious that foreclosures have pushed home prices to such a low point that sales that would normally go to new homes are going to used homes. This week’s numbers tell the story clearly. Builders are not going to recover in 2009 even though sales in housing might. The raw data for new homes was that 331,000 new homes were sold for December down from 399,000 in November. Inventory for new homes stands at 14.7 months up from 12 months. As this is the opposite of the existing housing numbers out earlier in the week the conclusion is clear.

Last Saturday at our conference in Berkeley we reviewed the reaction of the stock market in each recession going back to the Great Depression. The conclusion is that the stock market ‘will start’ to rally long before the economy recovers. The average lead time is 4 months with some stock market recoveries starting only a month or two before the economic recovery and some as long as 8 months. The average stock market rally for those few months is 23%. That does not include the continued rally after the economy continues to strengthen. The 23% is only from the start of the stock market recovery to the start of the economic recovery. That is a sharp move up that most people will miss. Also, we will not see the recovery in the economic numbers for at least 6 months past the start. These statistics mean you are not going to be able to look into that crystal ball and determine ‘when’ the stock market recovery will start. There will be bad news everywhere and the stock market will be ignoring it.

Finally, in last Saturday’s conference we looked for the economic recession that most closely matches the current one with a similar fall in stock prices. It appears the 1973-74 recession closely matches in many ways the problems we are having today. In that recession the stock market fell 45.1% from the start to the end of the recession, the stock market started to recover 2.8 months before the economy begin its recovery and the net change up in those 2.8 months was 33.0%.

The question is ‘when’ will this recession end? It is already one of the longest recessions on record if you count the start being that of when job losses began. It is very likely that we will have at least 4 quarters in a row of falling GDP and of course it could be longer since no one knows. Most count the start of a recession with two quarters of falling GDP in a row. Once that happens you are in a recession. So by any definition we are in a recession. This morning GDP numbers for the last quarter of 2008 were reported and it fell 3.8%. That was in sharp contrast to the expectation of at least 4.5% and some were expecting much higher. Most experts are saying that we will see two more quarters of shrinking GDP before the end. Of course most experts are wrong as well.

Since none of us know when the recovery will start you have to make a decision. That decision is all about ‘when’ not ‘if’. Once it starts it is going to be fast and very large if history is any guide. The pain will be in the waiting.

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  Earnings have taken a back seat to the announcement that the Obama Administration is preparing some type of good bank /bad bank program. The details are missing but it is an effort to remove toxic assets from the balance sheet of banks. The idea is to get the under performing loans off the banks‘ balance sheets thus improving their financial strength but more importantly removing the fear that these assets will take the banks to the road of bankruptcy.  

It is a good idea but no one knows if it will work. The banks made bad loans and maybe there needs to be a rash of banks going under before a recovery can happen. That thinking will prolong the recession or make it deeper which is what the Fed is fighting.  

The more important question is should we do this? The answer is probably. Banking is the life blood of the world economy and that blood is the cash it lends. That lending needs to continue. When good quality borrowers can’t get loans for building, expanding, and short term payroll and financing needs then they shut down and lay off people. That makes everything worse.  

But do we have confidence in our government to solve this problem or will a free economy right itself on its own? Government interference got us in this problem with pressure to loan low income families money to buy homes they couldn’t really afford; a good intention, but economics take no prisoners even those with good intentions.

Good Trading

Steve Peasley 

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  There will be a lot of earnings releases this week and a

There was surprise in both reports and instead of a negative surprise it was positive. Sales for existing housing was up, not down as expected. It was not up much but any improvement is a breath of fresh air to the stock market. Also, just as important, inventory fell from 11.2 months of supply to 9.3 months. That is a big decline. A normal inventory Level is 4 to 6 months therefore we are far from normal but it is moving in the right direction.  

Leading indicators were expected to be down as well. This report gives us a hint of what the future might look like for the economy. It went up, albeit only a fraction, but it was up instead of down which was the expectation. 

New home sales come out in Thursday and the final quarter GDP numbers are released on Friday; two very anticipated numbers. This will be an interesting week.  

Good Trading
Steve Peasley 

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