It Is Still All About The Economy, Again

The markets enjoyed a nice rally yesterday with the S&P up 3.36% and the DOW up 2.46%. The financials, home builders, auto parts companies, and gaming enterprises all had rallies yesterday. The concept of a Bad Bank being set up by the government was well received by investors as a way to clean up the balance sheets of banks and improve the flow of credit again. This proposal combined with a stimulus plan might jolt the economy ultimately so GDP could grow again.

The ideas are encouraging and investors drove stock prices higher. The only question now is what are the details of the plans?, how long will they take to effect the economy?, and when can we expect earnings to improve? Unfortunately, the consumer needs to replenish his net worth and companies still need to deleverage.

The bottoming process is ongoing but this recession is going to be long and deep. Government's programs will be instrumental in moving the economy forward but corporate earnings won't get better for a while; unemployment will continue to increase; and housing prices will continue to decline. Today investors received news that durable goods declined 2.6% in December while jobless claims rose 588,000. This is a clear sign that the economy is still getting weaker.

We said at the beginning of the week that we may get an Obama rally and markets have risen nicely for the last few days but volatility is still apparent and markets won't go straight up. Today's weak economic news will be combined with more lousy corporate earnings to keep the lid on stocks until the market can accurately discount the timing of the bottom of the economic cycle.