Economic News Comments

Existing home sales were out this morning and they were up 9.4%. However, almost all of the sales were confined to homes selling for less than $250,000. Dwellings above that price point are not moving at all.

The third quarter earnings season is one-third over and most companies are reporting better than expected numbers. This is something I said would happen last spring, especially for banks because of the record spread margin between long and short term interest rates. It is one reason the stock market has not had the typical September/October seasonal selloff.

I predicted that would happen in early June. It is only the third time in twenty-five years that we have failed to correct off the summer highs during the fall.

The other driving force has been the amount of money that is sitting on the sidelines waiting for a correction. Most market bottoms tend to be in the form of a W. After the March lows, many traders expected a retest of that price level. It never happened. We ended up with a V-shaped bottom instead and all those waiting for the other shoe to drop are still waiting. Thus, every time a small correction occurs, the market sees strong latecomer buying support prices.

November, December, and January are the strongest up-seasonal months of the year. I expect to see the stock market continue to rise through year end. Starting in January, I plan to pull some of my money back out of the stock market. At some point, companies are going to have to show top end revenue growth instead of increased profits from cost cutting which is where most of the earnings growth is currently coming from. By the first quarter of 2010 it should become clear that this rising revenue scenario is going to be slow to realize and this will finally cause a solid correction in the market as we hit the March/April down-seasonal.

My favorite ratio, the Co/Lag Economic Indicator has been rising steadily for months now. This six month lead indicator predicted an end to the recession in September/October 2009 and it appears to have been a spot on forecast.