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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Most people invest in them through a 401(k), yet they do not know the ins and outs of how to pick a quality fund.  Many investors simply use performance as a decision mechanism, but that is usually very faulty and fraught with danger.  Here are some other metrics to consider when picking a quality mutual fund:

* Alpha – This is a measurement that tells an investor whether the past returns are achieved with an acceptable amount of risk.  If the alpha is above 0 than the fund is achieving their returns without inappropriate volatility.  If the alpha is negative then their historical returns were achieved using excessive risk.
* Category Ranking – Compare funds to their peers in their specific investment category.  It is unfair to put an equity fund up against a bond fund.  This is on par with comparing apples to oranges.  In addition do not compare a domestic equity fund to an international fund, or a small cap to a large cap fund.  Compare relative performance to other funds that have the same investing style (Large vs. Small, Growth vs. Value).  Once you find a few great performing funds within the category adjust the return by considering some risk metrics.
* Standard Deviation – This is the simplest of statistical measures.  It is a straight measure of volatility.   The higher the SD, the more volatile the funds price performance will be.
* Expense Ratio – This measures how much the manager charges for their service of managing the mutual fund.  Expenses vary between types of mutual funds.  A bond mutual fund should not have an expense ratio above 0.75% per year, a domestic fund should not exceed 1.5% and a foreign fund shouldn’t go above 1.75%.  If a funds expense ratio is above these levels they are probably over charging.  This does not mean you shouldn’t buy those funds, it simply means look for  quality options within that space that are cheaper.

As usual however, never buy a mutual fund that charges you a load to buy (front-end loaded) or sell (back-end loaded).  There are plenty of no load mutual funds out there with good managers and a solid track record. A load is the word the industry uses for commission.

–Steve Peasley

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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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