Market Commentary

Stocks staged a handsome advance on a stronger than expected
February 02, 2010

Stocks staged a handsome advance on a stronger than expected reading for the ISM, a private but influential manufacturing survey.  The headline number was 70, the highest reading since August 2004.  Any reading over 50 suggests an expanding manufacturing sector and consensus was expecting a 62.4 reading.

In my view and more importantly, the Employment Sub Index rose to the highest level since 2006.  The New Order Sub Index is now at the highest level since December 2004 and the Inventory sub index at the lowest reading in its 14 year history.  Wow!

Is this sustainable?  Obviously it depends upon consumer spending and corporate profits, both of which are favorable.

Yesterday’s Personal Spending and Income statistics were also stronger than expected.  Personal spending has now risen for three consecutive months.

Regarding profits, fourth quarter results have increased around 70%, breaking a record nine consecutive quarters if declines.  Analysts were expecting a 62% gain.  I believe these earnings were the primary reason why business investment in equipment and software was up 13% during the fourth quarter.  Capital spending items are cashflow not interest rate sensitive.

Autos/manufacturing and housing has led the economy out of every post war recession.  Will it be different this time or just different people?  I think it is the latter.  As noted above, manufacturing is solid. 

Regarding housing, the number of new homes on the markets is at 1971 levels…232,000.  The US population is about 35% larger.  The number of building starts has been below the magical 1.5 million units required to meet innate demand since December 2006.  During the last eighteen months an average of 622,000 new homes has been started.

Some will talk about the “shadow inventory.”  While I will acknowledge this is a factor, prices and interest rates have now made homes the most affordable in history.

Perhaps Friday’s employment data will offer confidence the worst in housing behind us.  As stated yesterday, for the first time since November 2007 the economy is expected to add jobs in the month of January.  Jobs are the primary determinate of mortgage viability and if the economy is on the verge of creating jobs—a view that I have held since August when I stated I the environment is conducive for job creation by early 2010 for a myriad of reasons—history will again repeat itself.

Is the above nothing other than Pollyannaish thinking?  Expect the unexpected.  Rely upon history in an attempt to discern the future.  Against this background, no.

What will happen today?  Pending home sales and Consumer Confidence are released.

Last night the foreign markets were up. London was up 0.29%, Paris up 0.67% and Frankfurt up 0.59%.  Japan was up 1.63% and Hang Sang up 0.14%.

The Dow should open nominally higher on economic optimism. The 10-year is up 2/32 to yield 3.64%.