“Signals and Noise in the Economy” - August 27,2009

Lots of chatter on the Street that the deep slide in the economy is about to bottom out. On the surface, the latest data would certainly support the notion:

· The stock market has been up for seven straight days to its highest level since last November.
· Stability in the housing market seems to be returning. The latest new home sales were up almost 10% in July, far beyond expectations, to their highest levels since last September. Earlier in the month, existing home sales were also strong.
· Consumer confidence as measured by the Conference Board rose in August.
· Durable goods orders – goods meant to last 3 years or longer – were also higher than expected.

But you have to dig deeper. Today’s GDP data and some other factors would suggest otherwise.

· Stock market volume has been very thin lately…40% of all trading yesterday was dominated by 4 stocks – Citigroup, Fannie Mae, Freddie Mac, and Bank of America…all recipients of a big chunk of Federal bailout money. This is scary…It suggests the market is being fueled by speculation not fundamental strength.
· The housing market is being helped by low mortgage rates, huge price reductions, and first-time homebuyer tax credits…not boosts in income.
· And consumers aren’t buying anything except essentials…or what is government subsidized.

Our emotions are getting ahead of ourselves. A sustainable recovery is not around the corner.