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Economy Not as Weak as Some Think


Employment, crude prices speak to strength.


Yesterday's session was doomed from the start, yet I can't figure out why, except there seems to be a void in the excitement department.

For all the bellyaching and antacids we go through with stretches like last week, which saw a tidal wave of news posted each morning, this week is going to be light on news and therefore light on possible catalysts. There are some third-tier economic releases and earnings from big names like Cisco (CSCO), Disney (DIS) and Fannie Mae (FNM). I think Cisco will beat and give better than expected guidance, Disney will beat and give solid but cautious guidance and Fannie Mae will miss by a mile but offer such an incoherent assessment of the quarter and future it will be a moot point anyway. That will mean investors are left to their own devices and the fact is there isn't enough internal fortitude to get things moving.

By the same token most investors aren't eager to sell here, either. Aggressive investors moved back into commodity plays, which didn't surprise me at all, although the $3 move in crude was a lot more than I imagined. There is a pool of hot money that's very active and it doesn't mind chasing crude at current levels or higher levels. The great thing for those folks is there are so many reasons for crude to be higher:

  • The global economy is strong.
  • Demand is insatiable.
  • Geopolitical issues are getting worse, not better.
  • American economy is strong enough to support higher crude/gasoline.

Just about everyone has weighed in on whether the U.S. is in a recession or not and the overwhelming majority of experts say it's a recession for sure.

Despite this conventional wisdom, the stock market and several economic data points continue to belie the notion the country is in a recession. Moreover, even if a recession is a current reality, the stock market has given enough hints that it will be a short-lived recession, one that could actually already be over.

Of course, the tension pendulum in the financials is swinging back toward "be afraid" from the other side that reads "the coast is clear" and that could be the dark cloud that anchors rallies. The big names in the financial space appear to be fine but the fate of Ambac (ABK). MBIA (MBI), Washington Mutual (WM) and Countrywide Financial (CFC) are still up in the air. It looks like these entities will eventually survive the turmoil, albeit with scars that may never heal.

However, it feels to me like the economy is OK. Even those folks that have crunched the numbers mostly know this will not be a worst-case scenario recession. Many think it will be a "pale recession," which means many parts of the economy will do well as some parts struggle.

I know one thing: there's still enough trepidation in the air that would-be buyers are proceeding with caution and would-be sellers still have one foot in the game, just in case (fear runs both ways for buyers and sellers, both afraid to miss a money making opportunity).

On the Economy

Yesterday we got the ISM report on the service part of the U.S. economy, which is only 90% of the total. The Street was looking for a decline in the report to 49.1 from 49.6 in the previous month, but the actual number turned out to be 52.0.

That is very impressive and if the Institute for Supply Management had a longer track record with this data I think it could have turned the market around. There was an increase in input cost, which fans the flames of the inflation debate.

That was offset by a sharp increase in employment, which bodes well for that data point, the most important one of them all.

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No positions in stocks mentioned.
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