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

Add to:

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

Add to:

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.

Add to:

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

Add to:

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.

Add to:

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.

Add to:

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

Add to: