Beware A Downward GDP Revision is Coming

Real GDP growth for the fourth quarter was revised higher Thursday, into positive territory from the initially reported contraction. However, I expect forecasts for the full year of 2013 to be revised downward near-term given what looks like sure spending cuts that will cost growth.

Whether it be via the sequester plan or a more politically plausible set of cuts devised in a midnight hour negotiation, cuts are coming. The Budget Office and the Federal Reserve Chairman see those cuts as costly to economic growth by six-tenths of a percentage point. In his testimony to House and Senate financial committees this past week, the Fed Chief said the 0.6% impact would be part of a 1.5 percentage point drag to economic growth this year on recent changes to fiscal policy. Chairman Bernanke suggested policy makers would do better to limit near-term cuts while the economy remains vulnerable, and plan out more aggressive reductions for the long-term.

The market celebrated Thursday’s revision to fourth quarter GDP, which took it to +0.1%, up from the initially reported contraction of 0.1%. Through the close of trading on Thursday, each of the major ETFs measuring the market was higher. In fact, the stock market defiantly stood against the probable austerity measures for most of the week, as investors received a slew of reassuring positive economic data. The strange contrast of economic impact and stock market strength led to some question as to the real significance of the sequester cuts.

Index Security	Thursday to 1:20 PM	Week-to-Date
SPDR S&P 500 (NYSE: SPY)	+0.6%	+0.5%
SPDR Dow Jones (NYSE: DIA)	+0.2%	+0.8%
PowerShares QQQ (Nasdaq: QQQ)	+0.5%	+0.7%

However, one very important positive economic data point will very likely be revised shortly. Revisions to economic growth forecasts must follow the latest cost cutting measures. In its December 2012 publishing, the Federal Reserve saw improving economic growth this year and next. As you can see in the table below, revisions to those projections should not reflect recession, but my simple 0.6% adjustment may prove to be understated. That’s because when the estimates were last produced, the economic prognostication had not foreseen or incorporated the depth of slippage that actually resulted in Q4 2012.

A relief recovery for Q1 2013 GDP might be expected post the passage of the fiscal cliff and debt ceiling circumstances. Those issues likely stymied economic activity at the end of 2012, due to the uncertainty they created about the economic environment. However, the expiration of the payroll tax break may not have been included in those forecasts either, and supports the case for a slower set of growth forecasts nonetheless.

Year	December Forecast	Likely Revised Pace
2013	2.3% to 3.0%	1.7% to 2.4%
2014	3.0% to 3.5%	N/A

Reductions to economic expectations will quell some of the latest enthusiasm generated by recent economic reports. They should also serve to settle stocks a bit, especially cyclical leaders within the financial and industrial sectors. Names like Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), BHP Billiton (NYSE: BHP) and Caterpillar (NYSE: CAT) should soften short-term. Also, high beta stocks that may have been accelerating in an environment more accepting of risk might ease off a bit temporarily. For instance, biotech names lacking FDA news catalysts and ETFs like the iShares Nasdaq Biotechnology (NYSE: IBB) should see short-term softness as a result of the economic recalculation. The same should go for Tech and Telecom ideas like Oracle (Nasdaq: ORCL) and Cisco Systems (Nasdaq: CSCO).

However, I expect just a short-term slip here, as the economy does seem to have traction on the back of a finally recovering real estate sector and special opportunity therein. Low mortgage rates and dissipating distressed inventory are finally allowing for a favorable imbalance between supply and demand in housing. The sector has such broad reach that it affects the economy significantly. Though, the high flying (and high beta) housing stocks are vulnerable to profit taking if economic worries become excessive. Ancillary ideas like Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are still attractive, though they are getting harder to find.

Capital wants to flow into equities, and it has been, given the start of a more positive outlook for the U.S. economy. Such capital flows and the relative strength of the U.S. versus some of the world’s other markets offer important supports that will only allow for slight slippage. However, partisan politics in the U.S. have been an obstacle to efficient recovery, and must be resolved in these times of perilous economic and financial consequences. This sequester issue has only served to shine a spotlight on the problem.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Seriousness of the Sequester

There’s a debate at play in the market this week as to whether the “Sequester” is serious enough of an issue to worry about or if it’s just an overblown political ploy. I for one do not see the Sequester as anywhere near as serious an issue for investors to consider or stocks to discount as the debt ceiling or the fiscal cliff, and I believe the market agrees. Still, there are some specific points about this Sequester issue that are still highly concerning, all of which focus attention on the silly way our politicians are going about our business and still failing at it.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Sequester

The Sequester is a set of self-inflicted wounds pending implementation on March 1st unless other offsetting action is taken by the government to redirect and control budget cuts. Dreamt up in 2011, the set of sequester cuts have been designed to be so undesirable to both political parties as to lead our politicians to a better compromise. However, even this self-destructive and politically preposterous consequence has so far been unable to get our bifurcated government to budge.

Federal Reserve Bank Chairman Bernanke opposes Sequestration, indicating that it adds an unnecessary burden to a not so hot economy. The impact of Sequestration is estimated by the Budget Office to be 0.6% against Real GDP growth this year. That contributes to a 1.5 percentage point drag to Real GDP caused by spending cuts this year, according to Bernanke’s prepared testimony to Congress this week. Chairman Bernanke adds that a slower recovery would actually lead to less deficit reduction due to its stifling of economic growth. Bernanke suggests replacing Sequestration with policies that reduce spending less dramatically in the near-term, though more substantially over the long-term.

Still, take note that the Sequester does not threaten to drive the economy into recession. We realize that our budget deficit is a serious long-term issue, especially if entitlement programs are not addressed. So bearing some cost now may be beneficial to us later. You might consider it like bearing fever while your body fights off a virus; it’s necessary though painful. And like the debt ceiling issue, controlling the budget should help to support the full faith in credit of the United States and so keep our borrowing rates manageable, but it does so in a very meaningful way. Raising the debt ceiling just sort of passes the buck. Unlike the fiscal cliff, the Sequester does not put as much direct pressure on the economy as a whole, but on sectors of it. Only certain consumers will be burdened instead of all of them or the most in need. Where the fiscal cliff threatened to drive the economy into recession, the sequester cuts (or cuts of some sort to replace them) represent a lesser drag but reflect important medicine.

Stocks have been moving lower off early year highs on fear, with the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) all volatile lately. However, today, as we near the implementation of the $85 billion in spending cuts scheduled for March 1st, the SPY, DIA and QQQ are actually gaining ground. Positive economic data is proving more powerful than the sequester threat.

While it’s unfortunate that the forced spending cuts aren’t leading the government to work together for better solutions, it’s worse that the defense sector gets held hostage for it. After feigns and fake outs too many other times though, the stocks in the sector have not flinched until recently. There’s a sort expectation that things will be worked out as always, but I’m not sure they will be this time. As you can see by the table below there’s no relative underperformance visible in the sector or the specific stocks listed against the performance of the SPY. Still, if the cuts go into effect stocks operating in the specific areas of cuts will likely see impact. Obviously, a heightening likelihood of the confrontation of Iran is working in the group’s favor and helping to support shares nonetheless.

Security	February Through 2/26
SPDR S&P 500 (SPY)	+0.2%
PowerShares AeroSpace & Defense (NYSE: PPA)	+1.1%
General Dynamics (NYSE: GD)	+0.9%
Honeywell (NYSE: HON)	+1.9%
Northrop Grumman (NYSE: NOC)	Unchanged
Rockwell Collins (NYSE: COL)	-0.1%

But what bothers me most about sequestration is the fact that the government had to resort to ploys to force itself into action, and what’s worse is that those ploys have not even worked as yet. All the government has done is shined the spotlight on itself and its weaknesses, and that only serves to further destabilize it and bring radical powers and parties into greater favor, like we are seeing now in Europe. Our representatives had better wake up and lead before they are replaced because of their ineptness, and by their own doing. As we stand today, I am not sure if Washington has done more to help stocks or to hold them up, but I am certain that it could do more for the investment sector.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Manufacturing Monday

Two economic reports make the market Monday morning, both covering regional manufacturing measurements. The first will be the Chicago Fed National Activity Index at 8:30 AM ET. We don’t have a consensus forecast figure for you, but last month’s data showed the index declined to 0.02 in December, down from 0.27 in November. Based on the fact that the three-month moving average stuck below zero, the Chicago Fed construed that growth was under historic trend in December. It’ll be interesting to see if we fall below zero on the monthly data point for January. Readers of the blog should be aware of our belief here that the fiscal cliff fiasco paralyzed businesses into the turn of the year. Perhaps a relief valve switched in January, and business resumed. We’ll see…

At 10:30 AM ET, we’ll receive news from the Dallas Federal Reserve Bank as it publishes its Texas Manufacturing Outlook Survey for February. January’s report illustrated improvement in the measure to 5.5 from 2.5. Zero is the breakeven point for these measures, and so the direction of the number was far more exciting than the value of the data point itself. Economists surveyed by Bloomberg see this measure slipping a bit in February to 4.0.

At 7:00 PM, Atlanta Fed Bank President Dennis Lockhard gives a speech on the economy.

President Obama will address a gathering of the nation’s governors, many of whom I’m sure are concerned about possible job losses on the pending “sequester”. I saw a governor speak on television last week, saying that, “Every governor wants to be a job creator,” and the Federal government is making that harder to do today.

The new Secretary of State, John Kerry, kicks off a trip to visit with the nation’s allies in Europe with a first stop in London Monday.

The corporate wire has analysts meetings at Darden Restaurants (NYSE: DRI) and BE Aerospace (Nasdaq: BEAV). The BMO Capital Markets’ Metals & Mining Conference highlights presentations by Goldcorp (NYSE: GG) and Newmont Mining (NYSE: NEM). The Morgan Stanley (NYSE: MS) Technology, Media & Telecom Conference highlights presentations by Altera (Nasdaq: ALTR) and Discover Communications (Nasdaq: DISCA). The Citi Global Healthcare Conference (NYSE: C) highlights presentations by Baxter Int’l (NYSE: BAX) and Aetna (NYSE: AET). The corporate earnings wire highlights the results of Autodesk (Nasdaq: ADSK), Firstenergy (NYSE: FE), ONEOK (NYSE: OKE), Lowe’s (NYSE: LOW), Amsurg (Nasdaq: AMSG) and more.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Real Estate is Fueling Inflation

Housing has served to quell prices generally over the past several years, but that’s all changing now. With real estate prices clearly on the rise, this important sector with its many tentacles threatens to give lift to prices of all sorts.

Rental Rate Rise
The latest Consumer Price Index (CPI) published this past week for the month of January showed pricing for shelter up 0.2% month-to-month, and it was up 2.2% for the year. Not all of the increase was due to the real estate recovery though. For instance, the real estate collapse almost immediately affected residential rental rates in an inflationary manner, because as homeownership diminished, shelter was still necessary. So, as demand for rentals increased, given limited supply, rental prices rose and they are still rising. The CPI report showed that rent and owner’s equivalent rent increased by 0.2% in January 2013. That’s good news for Apartment Investment & Management (NYSE: AIV) and peers but not for American renters.

Commercial Property Cull
The economic recession that followed the real estate collapse and financial sector crisis put pressure on commercial property leasing rates. But as the economy recovers, with accelerating GDP growth anticipated for this year and next by the Federal Reserve, commercial property rates should inflate in kind. Indeed, they have been and continue to appreciate.

Residential Rise
With distressed housing supply dissipating and with demand spurred by low rates and lower home prices; plus aided by the support of population and economic growth, residential housing prices are also finally on the rise. Indexes of home prices produced by the FHFA and S&P Case Shiller each indicate an apparent appreciating trend for real estate prices. It’s an important change from recent years past, with extensive consequences.

Materials Cost Increase
As demand for new homes and for home improvement products increase, so does demand for construction materials and the retailers which provide them, including Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). Building materials and supply makers like USG (NYSE: USG), Weyerhaeuser (NYSE: WY) and Fastenal (Nasdaq: FAST) should see raw materials costs increase but they are gaining more pricing power as well.

Higher Cost of Labor
The real estate collapse led to a massive purging of construction sector employment, with millions of laborers losing their jobs. Many of those former construction workers have moved on and found other work, and in some cases, careers. So as the sector recovers, a labor shortage has developed as confirmed to me by Toll Brothers (NYSE: TOL) executives earlier this month. Where supply does not meet demand, prices rise, and so labor costs for homebuilders should likewise be on the rise. All of these matters matter to homebuilders like Ryland Group (NYSE: RYL), PulteGroup (NYSE: PHM) and Hovnanian Enterprises (NYSE: HOV).

Peripheral Price Rise
Similarly, prices for the things that fill homes should gain support now. This means furniture makers and retailers and manufacturers of home items like Pier 1 Imports (NYSE: PIR), Ethan Allen Interiors (NYSE: ETH), Whirlpool (NYSE: WHR) and General Electric (NYSE: GE) should gain some pricing power as they see increasing demand.

Mortgage Rate Rise
Mortgage lenders are also benefiting from increasing demand for homes. Mortgage rates are on the rise despite the Fed’s best efforts to keep rates down through monetary policy and its asset purchase programs. We recently suggested that there is a lender shortage, due to the business fallout during the crisis and the regulatory rules established after the fact. Big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) are contending with hefty aggregate loan balances, while the two and peers Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp (NYSE: USB) also deal with the low returns available to them. This is drawing smaller players back into the game, but perhaps not fast enough.

As you can see, demand for shelter is an important factor in the inflation equation. It has extensive reach and broad consequences. Price gains here are symptomatic of a recovering economy and asset class, but they also mark cost of living increases for American consumers nonetheless. Inflation threatens and housing is one sure factor that will fuel it.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

We Must Address American Labor Force Attrition & Atrophy

By The Greek:

The latest Weekly Initial Jobless Claims Report looks harmless enough to the casual reader, but upon closer inspection, it continues to reveal great attrition in the American workforce. It’s the reason why I recently suggested the real unemployment rate was closer to 11.8% than the government’s reported 7.9% rate.

Weekly unemployment insurance filings increased by 20,000 in the period ending February 16, but only rose to 362K. That’s mild enough for a market used to rates running nearer to 400K for what seems like the last decade now. Indeed, the claims count was just a few thousand higher than the economists’ consensus expectation for 359K this week, as compiled by Bloomberg. The four-week moving average for jobless claims reveals a less dynamic environment, with an 8,000 increase in the latest period, to 360,750.

However, what is bothering me today is the ongoing trend in American labor that is hiding the true state of affairs. A tragic number of Americans have been unemployed for far too long, with some 4.7 million Americans or 38% of the total unemployed count out of work for at least 27 weeks. The way the system works is that these people are counted for as long as they are letting the government know about their situation. They have incentive to do so when collecting unemployment insurance, either through the regular program or the extensions program. But if they are to continue to be counted post the expiration of their 99 weeks of extended benefits, then they must file for welfare or some sort of other government support and report their ongoing unemployment. I’m not even certain the government has its act together well enough to count people who remain in the system in this way.

So, as a result, what we have seen is a shrinking labor force count that a lot of economists want to attribute to demographics and the retiring of baby boomers (some 10K a day estimated). However, the employment participation rate has dropped too substantially too quickly, and I think it’s because of the factor I’m laying out for you here today.

In this weekly report, the Department of Labor offers information on the total number of Americans receiving benefits of some sort through all programs. Now, extended benefits are no longer being offered in any state to those Americans just now filing for their regular benefits. In the period reported, for the week ending February 2nd, the total number of unemployed Americans receiving a benefit of some sort was 5.6 million.

Please take a seat now as I report to you something very important. In the just reported February 2nd period, this number dropped by 307,848. Some will say it’s due to an improving American economy and retiring baby boomers, but it is surely also due to American laborers simply falling off the radar screen. It’s unfortunate and it angers me. We must get a good count of these people, so that the government can focus on helping them in some way, either through training programs or some sort of support if they are not receiving any currently. I have a great concern that many jobs lost as a result of the financial crisis may never be recovered, and that certainly will be the case if we do not go the extra mile here.

Now, there is a worker shortage in construction, as I heard from Toll Brothers (NYSE: TOL) during a recent investor conference I attended in Philadelphia. So, many of the long-term unemployed and some of the forgotten described herein will start to hear about new opportunities at homebuilders now. Though, builders recently backed off a bit in terms of their enthusiasm about prospective buyer traffic.

Also, there are small mortgage lenders hiring like mad now in order to fill the mortgage lender shortage that has arisen. It’s due to the destruction of so many firms through the real estate collapse, and the burden major mortgage lenders still bear today, especially Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS). Many of the day’s biggest lenders, including Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM) are applying tighter standards today as well. But BofA and the others are also shy to lend more due to the size of their outstanding mortgage loan bases and lingering questions about MBS liability. Plus, the returns have not been very attractive, thanks to Federal Reserve created synthetic demand for MBS.

We need to get a good count of the real unemployment rate so that we may target those struggling Americans for training and other forms of support. It’s time for Americans to go the extra mile and to give our struggling brothers a leg up before they fall down for good. I believe if this situation were better understood, the SPDR S&P 500 (NYSE: SPY) and the SPDR Dow Jones Industrials (NYSE: DIA) would not be quite as hot as they have been this year. But the truth always comes to the surface, so we have an opportunity to preserve the situation if we act on long-term unemployment rather than stand by waiting for it to heal or go away.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Stock Market Preview

A busy day for economic data offers two important reports in the premarket. First, investors will be attuned to the Weekly Jobless Claims data, though they could be blizzard impacted. The economists’ consensus sees an increase in claims to 359K, up from the 341K reported last week. Also at 8:30 AM ET, look for the latest Consumer Price Index report for the month of January. The economists’ consensus sees the CPI up slightly by 0.1%, versus December’s absence of change. Excluding food and energy prices, the Core CPI is seen higher by 0.2% this month, versus the 0.1% increase in December.

Two lightly followed data points reach the wire next. The Markit PMI Manufacturing Index is up at about 9:00 AM. The consensus view is for a slight deterioration in February, with the index seen falling to 55.5, down from 55.8 in the final reading for January. This report is the “flash” reading or first reading of the index for February. At 9:45 AM ET, we’ll get the latest Bloomberg Consumer Comfort Index. This weekly measure of consumer sentiment rose slightly last week to -35.9. It’s down though from highs reached toward the end of last year.

We’ll have another manufacturing data point at 10:00 AM Thursday when the Philadelphia Federal Reserve Survey is produced. This regional index is expected by economists to have improved in February to a mark of 1.1. In January, the index read negative 5.8, which marks contraction, so such a change would be meaningful. At the close of last week, the NY Fed Index improved substantially and broke well into expansionary territory.

Leading Economic Indicators are due for January at 10:00 AM ET. In December, the LEI posted a solid 0.5% increase, but the index was definitely impacted positively by Hurricane Sandy, which set Weekly Jobless Claims lower. Economists are looking for the LEI to rise by 0.3% in this report. This is an important data point given the Q4 GDP contraction of 0.1% noted earlier this month.

Also at 10:00 AM, Existing Home Sales will be reported for January. Economists surveyed by Bloomberg see this measure of the used home market showing an annual pace of sales of 4.9 million, which is down just slightly from December’s pace of 4.94 million.

Both of the weekly EIA energy reports will be released Thursday, with the Natural Gas Report first up at 10:30 AM ET. The Petroleum Status Report is second at 11:00 AM ET.

A slew of Federal Reserve Bank presidents are scheduled to speak Thursday, including James Bullard (St. Louis Fed), John Williams (San Francisco) and Richard Fisher (Dallas).

The corporate wire includes some big names Thursday. Analyst and investor meetings are scheduled for ReachLocal (Nasdaq: RLOC) and WGL Holdings (NYSE: WGL). The Barclays (NYSE: BCS) Industrial Select Conference highlights presentations from Tyco International (NYSE: TYC) and Boeing (NYSE: BA). The Consumer Analysts Group of New York Conference highlights presentations by Procter & Gamble (NYSE: PG) and PepsiCo (NYSE: PEP). The day’s earnings schedule highlights reports from Acadia Research (Nasdaq: ACTG), Aircastle (NYSE: AYR), American International Group (NYSE: AIG), AMN Healthcare Services (NYSE: AHS), Analysts International (Nasdaq: ANLY), Approach Resources (Nasdaq: AREX), Aruba Networks (Nasdaq: ARUN), Atlantic Tele-Network (Nasdaq: ATNI), Atlas Energy (Nasdaq: ATLS), Atlas Resource Partners (NYSE: ARP), AVG Technologies (NYSE: AVG), Balchem (Nasdaq: BCPC), Bazaarvoice (NYSE: BV), Bill Barrett (NYSE: BBG), BioMarin Pharmaceutical (Nasdaq: BMRN), Bloomin’ Brands (Nasdaq: BLMN), Boingo Wireless (Nasdaq: WIFI), Brady (NYSE: BRC), BSQUARE (Nasdaq: BSQR), BuildersFirstsource (Nasdaq: BLDR), Cabot Oil & Gas (NYSE: COG), Calgon Carbon (NYSE: CCC), Carlyle Group (NYSE: CG), CEC Entertainment (NYSE: CEC), Century Aluminum (Nasdaq: CENX), Chesapeake Energy (NYSE: CHK), Ciber (NYSE: CBR), Clayton Williams Energy (Nasdaq: CWEI), CMS Energy (NYSE: CMS), Coeur d’Alene Mines (NYSE: CDE), Cogent Communications (Nasdaq: CCOI), Community Health Systems (NYSE: CYH), Corelogic (Nasdaq: CLGX), Dana Holding (NYSE: DAN), Del Frisco’s Restaurant (Nasdaq: DFRG), Denbury Resources (NYSE: DNR), DexCom (Nasdaq: DXCM), Digimarc (Nasdaq: DMRC), eLong (Nasdaq: LONG), Ensco (NYSE: ESV), ExactTarget (NYSE: ET), Exelixis (Nasdaq: EXEL), Fifth & Pacific (NYSE: FNP), First American Financial (NYSE: FAF), Flowserve (NYSE: FLS), Frontier Communications (NYSE: FTR), GTX Inc. (Nasdaq: GTXI), Hewlett-Packard (NYSE: HPQ), Hittite Microwave (Nasdaq: HITT), Holly Energy Partners (NYSE: HEP), Hormel Foods (NYSE: HRL), HSN (Nasdaq: HSNI), Hudson Global (Nasdaq: HSON), ICG Group (Nasdaq: ICGE), Idacorp (NYSE: IDA), Integra LifeSciences (Nasdaq: IART), InterMune (Nasdaq: ITMN), Internap Network (Nasdaq: INAP), Intralinks (NYSE: IL), Intuit (Nasdaq: INTU), IPC the Hospitalist (Nasdaq: IPCM), JAKK’s Pacific (Nasdaq: JAKK), Joe’s Jeans (Nasdaq: JOEZ), Kaydon (NYSE: KDN), KongZhong (Nasdaq: KONG), Lawson Products (Nasdaq: LAWS), Lexicon Pharmaceuticals (Nasdaq: LXRX), Libbey (NYSE: LBY), Life Time Fitness (NYSE: LTM), Linn Energy (Nasdaq: LINE), Marriott Vacations (NYSE: VAC), Marvell Technology (Nasdaq: MRVL), Mcgrath (Nasdaq: MGRC), Medidata Solutions (Nasdaq: MDSO), Merit Medical (Nasdaq: MMSI), Mohawk Industries (NYSE: MHK), MRC Global (NYSE: MRC), National Cinemedia (Nasdaq: NCMI), NeoPhotonics (Nasdaq: NPTN), Newmont Mining (NYSE: NEM), Nordson (Nasdaq: NDSN), Nordstrom (NYSE: JWN), Novatel (Nasdaq: NVTL), NPS Pharmaceuticals (Nasdaq: NPSP), Olympic Steel (Nasdaq: ZEUS), Onyx Pharmaceuticals (Nasdaq: ONXX), Orthofix (Nasdaq: OFIX), Parker Drilling (NYSE: PKD), Patterson Cos. (Nasdaq: PDCO), PBF Energy (NYSE: PBF), Performance Technologies (Nasdaq: PTIX), PG&E (NYSE: PCG), Plains Exploration & Production (NYSE: PXP), Public Service Enterprise (NYSE: PEG), Quanta Services (NYSE: PWR), RCM Technologies (Nasdaq: RCMT), Reliance Steel & Aluminum (NYSE: RS), Rocky Brands (Nasdaq: RCKY), Safeway (NYSE: SWY), Sanderson Farms (Nasdaq: SAFM), SBA Communications (Nasdaq: SBAC), SCANA (NYSE: SCG), Select Medical (NYSE: SEM), Shutterstock (Nasdaq: SSTK), Soundbite (Nasdaq: SDBT), Sourcefire (Nasdaq: FIRE), Spectranetics (Nasdaq: SPNC), Spectrum Pharmaceuticals (Nasdaq: SPPI), StealthGas (Nasdaq: GASS), Sun Communities (NYSE: SUI), Superior Uniform Group (NYSE: SGC), Swift Energy (NYSE: SFY), Symmetry Medical (NYSE: SMA), TASER Int’l (Nasdaq: TASR), Teekay (NYSE: TK), Teekay LNG Partners (NYSE: TKG), Teekay Offshore Partners (NYSE: TOO), Teleflex (NYSE: TFX), The Chef’s Warehouse (Nasdaq: CHEF), The GEO Group (NYSE: GEO), TheStreet.com (NYSE: TST), Tornier (Nasdaq: TRNX), Toro (NYSE: TTC), TreeHouse Foods (NYSE: THS), Tutor Perini (NYSE: TPC), UIL (NYSE: UIL), Universal Electronics (Nasdaq: UEIC), Valassis Communications (NYSE: VCI), VASCO Data Security (Nasdaq: VDSI), Vipshop (Nasdaq: VIPS), Volcano (Nasdaq: VOLC), WebMD Health (Nasdaq: WBMD), Wal-Mart (NYSE: WMT), West Marine (Nasdaq: WMAR), West Pharmaceutical (NYSE: WST), World Fuel Services (NYSE: INT), Wright Medical (Nasdaq: WMGI) and Zale Corp. (NYSE: ZLC).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Wednesday's Drivers Were Powerful

Stocks slowly sank into the 2:00 PM FOMC Meeting Minutes release, and then dove deeper from there in Wednesday trading. We said it in our weekly preview, that the driver this week and today would certainly be the Fed minutes, and that was the case.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Fed’s Sexy Ways are Tiring

The S&P 500 sank 1.2% on the day, with the majority of the loss posted after 2:00 PM. Investors are worried that the Fed will eventually have to back away from its asset purchases and low rate policy, either due to an improving economy or emerging inflation. Despite the recently reported Q4 2012 GDP contraction, the outlook for the economy is for improvement, and so trading around Fed meetings will begin to prove problematic from here on out as it weighs backing out.

Former Fed Governor Frederic Mishkin appeared on CNBC this evening and said Fed members were beginning to raise concerns about the Fed’s low rate policy leading to excessive risk taking. I have concern that the Fed balance sheet could prove unmanageable if our economic operating environment were to experience significant and abrupt change, perhaps due to an outside catalyst.

A second housing data point found the wire this morning, when the Housing Starts report came due for January. The annual pace of housing starts slowed to 890K, down from a revised December pace of 973K (adjusted from 954K). Economists were expecting housing starts to measure 914K, and so housing stocks marked a second leg lower Wednesday. This followed Tuesday’s disappointment in the Housing Market Index decline. Still, Builder Permits edged up to a pace of 925,000 in January, up from December’s revised pace of 909,000. Economists were expecting improvement, but only to 920K. Because good news is built into housing stocks at this point, any disappointment is going to be meaningful for industry shares, as we’ve seen the last two days.

The Mortgage Bankers Association reported its Weekly Applications Survey of mortgage activity this morning. Mortgage application activity decreased by 1.7% in the period ending February 15, after declining the week before by 6.4%. Again, the key factor was rising effective mortgage rates, with the 30-year fixed rate mortgage rate on conforming loans up three basis points to 3.78%; that is the highest it has been since August. We recently wrote about the impact of a lender supply shortage on mortgage rates, which could be another factor behind the rise. Still, these holiday and weather affected periods are hard to read, so investors will want to look forward to beyond the next report as well (due to President’s Day) for a clear read on activity.

The Producer Price Index was reported this morning for the month of January. The PPI increased 0.2% month-to-month, versus the economists’ consensus expectation for a 0.3% rise and against the 0.3% decrease (revised from -0.2%) in December. Excluding food and energy prices, the more important Core PPI also rose by 0.2% against expectations for the same. In December, the Core PPI was up 0.1%. The news certainly didn’t take pressure off the Federal Reserve nor did it alleviate the market’s concerns about potential future inflation. We’ll get the Consumer Price Index, which is obviously going to play bigger than PPI, tomorrow morning. Economists are looking for a Core CPI increase of 0.2%, which shouldn’t be supportive of stocks tomorrow.

The International Council of Shopping Centers reported Weekly Same-Store Sales for the period ending February 16. Sales increased by 2.7% this week, versus the 2.5% decline the week before. Obviously, Valentine’s Day played big for the period. On a year-over-year basis, sales gained by just 1.8% last week, versus the 2.1% increase in the prior year period. The blizzard that just nailed New England probably had something to do with the year-to-year comparison.

Wednesday’s corporate wire had investor/analyst meetings at Genpact (NYSE: G) and Triumph Group (NYSE: TGI). The Barclay’s (NYSE: BCS) Industrial Select Conference highlighted presentations by Danaher (NYSE: DHR) and Praxair (NYSE: PX). The day’s earnings schedule included 51Job Inc. (Nasdaq: JOBS), A. T. Cross (NYSE: ATX), Acadia Healthcare (Nasdaq: ACHC), Achillion Pharmaceuticals (Nasdaq: ACHN), AerCap (NYSE: AER), Ameren (NYSE: AEE), American Equity Investment (NYSE: AEL), American Railcar (Nasdaq: ARII), Avista (NYSE: AVA), Baltic Trading (Nasdaq: BALT), Cinemark (NYSE: CNK), Clean Harbors (NYSE: CLH), Clearwater Paper (NYSE: CLW), Cobra Electronics (Nasdaq: COBR), Commtouch Software (Nasdaq: CTCH), Concho Resources (NYSE: CXO), Crocs (Nasdaq: CROX), Curis (Nasdaq: CRIS), Curtiss-Wright (NYSE: CW), Denny’s (Nasdaq: DENN), DENTSPLY (Nasdaq: XRAY), Depomed (Nasdaq: DEPO), Devon Energy (NYSE: DVN), DISH Network (Nasdaq: DISH), Dixie Group (Nasdaq: DXYN), Drew (NYSE: DW), Dynamics Research (Nasdaq: DRCO), DTE Energy (NYSE: DTE), Eaton Vance (NYSE: EV), EchoStar (Nasdaq: SATS), EMC Insurance (Nasdaq: EMCI), Encore Wire (Nasdaq: WIRE), Energy Transfer Equity (NYSE: ETE), Equity Transfer Partners (NYSE: ETP), Exact Sciences (Nasdaq: EXAS), EXCO Resources (NYSE: XCO), FleetMatics (Nasdaq: FLTX), Fluor (NYSE: FLR), Forest Oil (NYSE: FST), Franklin Electric (Nasdaq: FELE), Garmin (Nasdaq: GRMN), Genco Shipping & Trading (NYSE: GNK), Goodrich Petroleum (NYSE: GDP), Gray Television (NYSE: GTN), Healthcare Realty Trust (NYSE: HR), Heico (NYSE: HEI), Helix Energy (NYSE: HLX), Heritage Crystal Clean (Nasdaq: HCCI), HomeAway (Nasdaq: AWAY), Horsehead Holdings (Nasdaq: ZINC), Hudbay Minerals (NYSE: HBM), Huron Consulting (Nasdaq: HURN), Iconix Brand (Nasdaq: ICON), InterDigital (Nasdaq: IDCC), Isle of Capris Casinos (Nasdaq: ISLE), Jack in the Box (Nasdaq: JACK), KAR Auction (NYSE: KAR), KBR (NYSE: KBR), Leap Wireless (Nasdaq: LEAP), LifeLock (Nasdaq: LOCK), Lithia Motors (NYSE: LAD), Lumber Liquidators (NYSE: LL), Macquarie Infrastructure (NYSE: MIC), Maiden Holdings (Nasdaq: MHLD), ManTech Int’l (Nasdaq: MANT), MedAssets (Nasdaq: MDAS), Medicines (Nasdaq: MDCO), MGM Resorts (NYSE: MGM), Neenah Paper (NYSE: NP), Newport (Nasdaq: NEWP), Noranda Aluminum (NYSE: NOR), Orient Express Hotels (NYSE: OEH), Owens Corning (NYSE: OC), Pegasystems (Nasdaq: PEGA), Penn Virginia (NYSE: PVA), PGT (Nasdaq: PGTI), Polypore (NYSE: PPO), PVR Partners (NYSE: PVR), Quality Distribution (Nasdaq: QLTY), Questar (NYSE: STR), Radio One (Nasdaq: ROIA), RealPage (NYSE: RP), Regency Energy Partners (NYSE: RGP), Responsys (Nasdaq: MKTG), Rubicon (Nasdaq: RBCN), Safe Bulkers (NYSE: SB), Sauer-Danfoss (NYSE: SHS), Six Flags Entertainment (NYSE: SIX), SM Energy (NYSE: SM), Sodastream (Nasdaq: SODA), Solazyme (Nasdaq: SZYM), Sonic Automotive (NYSE: SAH), Southwestern Energy (NYSE: SWN), STAG Industrial (Nasdaq: STAG), Sunoco Logistics (NYSE: SXL), Synacor (Nasdaq: SYNC), Synopsis (Nasdaq: SNPS), Tesla Motors (Nasdaq: TSLA), The Boston Beer Co. (NYSE: SAM), The Cheesecake Factory (Nasdaq: CAKE), Toll Brothers (NYSE: TOL), TOR Minerals (Nasdaq: TORM), Trinity Industries (NYSE: TRN), Tronox (Nasdaq: TROX), United Online (Nasdaq: UNTD), USA Mobility (Nasdaq: USMO), Vantiv (Nasdaq: VNTV), Vermillion (Nasdaq: VRML), WageWorks (Nasdaq: WAGE), Walter Energy (NYSE: WLT), Waste Connections (NYSE: WCN), Williams Cos. (NYSE: WMB), Williams Partners LP (NYSE: WPZ) and more.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Hot and Bothered by the Housing Market Index

By The Greek:

It’s not the one point decline in the Housing Market Index that worries me, but the why and the how the index declined. I think the component measures of this index say a lot about the real state of housing inclusive of smaller non-public builders. As far as the public companies go, I continue to see those firms gaining market share due to their capital advantage and crisis survival, where smaller builders failed. Still, even the larger builders face some negative fallout from the crisis and that is also discussed herein.

The National Association of Homebuilders (NAHB) reported its Housing Market Index (HMI) for the month of February Tuesday. The HMI declined by a point to a mark of 46, down from 47 in January. Economists were looking for another increase in the recently improving trend that would have taken the index to a mark of 48 this month. The NAHB attributed the softness to the usual suspects, an uncertain employment situation and constraints to consumer borrowing. Obviously, that second factor is for the industry’s own good and the result of the excesses of the financial crisis and real estate collapse.

However, the NAHB added a couple new issues to the spectrum of challenges facing homebuilders. The organization indicated that rising materials costs and a labor shortage in construction were working against recovery. The labor issue was a topic that came up during the presentation by Toll Brothers (TOL) at the Emerald Groundhog Day Investment Forum, which I was privileged to attend this year in Philadelphia. Construction shed jobs measuring in millions through the industry purge post real estate collapse, but it should be luring manual laborers back as it regains steam. Still, many of those former construction workers will have developed new skills and found other work by this point, and that’s the issue the industry must confront now. It pushes the cost of labor higher, though both higher materials costs and labor are also the result of housing demand in this case, and that’s a good thing.

What has me hot and bothered about the HMI this month are the component indexes, which continued to illustrate a difficult truth. The NAHB offers measures of the industry’s current sales conditions, forward sales expectations and traffic of prospective buyers. While both the current sales conditions metric (down 1 to 51) and the forward sales expectations read (up 1 to 50) marked ground above the break-even threshold of 50, the real measure of actual prospective buyer traffic remained deeply underwater. With the traffic mark falling by four points to a level of 32, it represents a sad state of affairs that actually deteriorated in February. Expectations can be built on what builders are reading here and elsewhere about the housing recovery, but prospective buyer traffic is a true measure of actual activity, and it says a lot about the state of housing.

What it tells us is that the many small builders still being surveyed by the NAHB remain troubled due to a lack of access to capital and their relative inability to compete in terms of pricing and marketing. This is the reason why this recovery is so bifurcated, with the surviving large public builders gathering up massive market share from the purge of the disease stricken little guys. That said, the news of the overall index slippage still harmed housing stocks broadly Tuesday, with many major builders seeing share price decline.

Builder & Ticker	2/19 Change
SPDR S&P Homebuilders (NYSE: XHB)	-0.2%
PulteGroup (NYSE: PHM)	-1.8%
D.R. Horton (NYSE: DHI)	-1.6%
K.B. Homes (NYSE: KBH)	+0.8%
Toll Brothers (NYSE: TOL)	-0.5%
Beazer Homes (NYSE: BZH)	-0.8%
Lennar Homes (NYSE: LEN)	-0.7%
Hovnanian (NYSE: HOV)	-4.3%

Of this group, K.B. Homes (KBH) likely benefited from the appearance of Weyerhaeuser’s (NYSE: WY) CEO on CNBC Tuesday, and the company’s continued enthusiasm about its strongly improving California market. KBH has serious west coast exposure. The NAHB Likewise had some good news to report on a regional basis for the West Coast. The regional metric for the West showed a four point uptick to a reading of 55. The Northeast measure was up three points to 39, but the Midwest and South regions both deteriorated by two points to 48 and 47, respectively.

Toll Brothers (TOL) was down slightly ahead of its later reported earnings disappointment, but readers of this column should have been prepared for that given our expression of concern yesterday regarding visibility into the current result for TOL (see page 2). Our report linked here, offers insight into the rest of the week for real estate as well.

The HMI data reminds us that this recovery is not all encompassing, with varying degrees of activity by region and by industry player. The change in industry shares on such a small adjustment also tells us that much of the good news is priced in to homebuilder shares, making them especially sensitive to bad news.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Trading Week Ahead

The holiday shortened week should still be meaningful, with the release of the minutes of the January FOMC meeting scheduled. Otherwise, the economic slate looks soft to me, though the Leading Economic Indicators report for January could prove supportive of stocks after the fourth quarter GDP disappointment. The entire stock market schedule follows, with economists’ consensus expectations for all the major economic data points, and the corporate slate as well.

Week Ahead

Monday was President’s Day in the U.S. so securities markets were closed.

Tuesday
A slow start to a short week will begin with news from overseas. The Bank of Japan (BOJ) is due to publish the minutes of its January meeting. With the markets attuned to the stealth currency war many believe is happening despite the recent reassurances of major central banks, this news will be worthy of some attention. Japanese finance and economic ministers will hold a news conference as well Tuesday. In a second bit of international data, Spain will auction treasury bills on the day.

In the U.S., the National Association of Homebuilders (NAHB) is due to report its Housing Market Index Tuesday morning at 10:00 AM ET. This report for February is expected to show improvement according to Bloomberg’s survey of economists. The consensus expectation is for an index reading of 48 this month, versus 47 in January. Anything below 50 means that there are still more homebuilders with a pessimistic view of the market than a positive one. However, significant improvement has been noted in this index over the past two years.

Tuesday’s corporate wire has UPS (NYSE: UPS), Perry Ellis (Nasdaq: PERY) and Cardinal Health (NYSE: CAH) holding an investor meetings. American Electric Power (NYSE: AEP) is having an investor meeting in Japan. The Consumer Analyst Group of New York Conference highlights presentations by Sysco (NYSE: SYY) and ConAgra Foods (NYSE: CAG). Look for earnings reports from Dell (NYSE: DELL) - which we had something to say about recently, Medtronic (NYSE: MDT), Analog Devices (NYSE: ADI), Nabors Industries (NYSE: NBR), Actavis (NYSE: ACT) and Sealed Air Corp. (NYSE: SEE).

Wednesday
The most important data on the day will without a doubt arrive at 2:00 PM ET when the Federal Reserve releases the minutes of the January FOMC meeting. Investors will have keen interest in whether the Fed intends to alter its quantitative easing strategy and/or when it might edge off its low rate policy.

We will also get more housing data on Wednesday, when Housing Starts are reported for January at 10:00 AM ET. The annual pace of starts are seen increasing this month, to 914,000, up from 954,000 in December. Builder Permits are expected to edge up to a pace of 920,000 in January, up from 903,000 in December. Good news is built into housing stocks at this point, so any disappointment could meaningfully affect industry shares.

Wednesday produces the Weekly Applications Survey, the Mortgage Bankers Association (MBA) report on weekly mortgage activity. Mortgage application activity decreased last week by 6.4%, as effective rates mostly increased across mortgage types. We recently wrote about the impact of a lender supply shortage on mortgage rates. These holiday and weather affected weeks are hard to read, so investors will want to look forward to beyond the next report as well for a clear read on activity.

The premarket also produces the Producer Price Index for the month of January. Economists expect the PPI to increase 0.3% this time around, after decreasing by 0.2% in December. Excluding food and energy prices, the Core PPI is expected to rise by 0.2% in January after edging up by just 0.1% the month before. As this report precedes the FOMC minutes, it could inspire some discussion and concern if it shows significant price increase at the producer level.

Weekly Same-Store Sales will be reported on Wednesday this week due to the holiday. Last week’s data from the International Council of Shopping Centers (ICSC) showed sales decreased by 2.5% in the period ending February 9. That compared against the prior week’s increase of 2.4%. On a year-over-year basis, sales gained by 2.1% last week. Redbook had the yearly comparison at plus 2.4%.

Wednesday’s corporate wire has investor/analyst meetings at Genpact (NYSE: G) and Triumph Group (NYSE: TGI). The Barclay’s Industrial Select Conference highlights presentations by Danaher (NYSE: DHR) and Praxair (NYSE: PX). The day’s earnings schedule highlights news from DENTSPLY (Nasdaq: XRAY), Devon Energy (NYSE: DVN), Newfield Exploration (NYSE: NFX), DTE Energy (NYSE: DTE), Ameren (NYSE: AEE), Toll Brothers (NYSE: TOL), Akzo Nobel (OTC: AKZOY) and Fluor (NYSE: FLR).

Thursday
A busy day for economic data offers two important reports in the premarket. First, investors will be attuned to the Weekly Jobless Claims data, though they could be blizzard impacted. The economists’ consensus sees an increase in claims to 359K, up from the 341K reported last week. Also at 8:30 AM ET, look for the latest Consumer Price Index report for the month of January. The economists’ consensus sees the CPI up slightly by 0.1%, versus December’s absence of change. Excluding food and energy prices, the Core CPI is seen higher by 0.2% this month, versus the 0.1% increase in December.

Two lightly followed data points reach the wire next. The Markit PMI Manufacturing Index is up at about 9:00 AM. The consensus view is for a slight deterioration in February, with the index seen falling to 55.5, down from 55.8 in the final reading for January. This report is the “flash” reading or first reading of the index for February. At 9:45 AM ET, we’ll get the latest Bloomberg Consumer Comfort Index. This weekly measure of consumer sentiment rose slightly last week to -35.9. It’s down though from highs reached toward the end of last year.

We’ll have another manufacturing data point at 10:00 AM Thursday when the Philadelphia Federal Reserve Survey is produced. This regional index is expected by economists to have improved in February to a mark of 1.1. In January, the index read negative 5.8, which marks contraction, so such a change would be meaningful. At the close of last week, the NY Fed Index improved substantially and broke well into expansionary territory.

Leading Economic Indicators are due for January at 10:00 AM ET. In December, the LEI posted a solid 0.5% increase, but the index was definitely impacted positively by Hurricane Sandy, which set Weekly Jobless Claims lower. Economists are looking for the LEI to rise by 0.3% in this report. This is an important data point given the Q4 GDP contraction of 0.1% noted earlier this month.

Also at 10:00 AM, Existing Home Sales will be reported for January. Economists surveyed by Bloomberg see this measure of the used home market showing an annual pace of sales of 4.9 million, which is down just slightly from December’s pace of 4.94 million.

Both of the weekly EIA energy reports will be released Thursday, with the Natural Gas Report first up at 10:30 AM ET. The Petroleum Status Report is second at 11:00 AM ET.

A slew of Federal Reserve Bank presidents are scheduled to speak Thursday, including James Bullard (St. Louis Fed), John Williams (San Francisco) and Richard Fisher (Dallas).

The corporate wire includes some big names Thursday. Analyst and investor meetings are scheduled for ReachLocal (Nasdaq: RLOC) and WGL Holdings (NYSE: WGL). The Barclays (NYSE: BCS) Industrial Select Conference highlights presentations from Tyco International (NYSE: TYC) and Boeing (NYSE: BA). The Consumer Analysts Group of New York Conference highlights presentations by Procter & Gamble (NYSE: PG) and PepsiCo (NYSE: PEP). The day’s earnings schedule highlights reports from Hewlett-Packard (NYSE: HPQ), Wal-Mart (NYSE: WMT), American International Group (NYSE: AIG), Safeway (NYSE: SWY), Nordstrom (NYSE: JWN) and Chesapeake Energy (NYSE: CHK).

Friday
The European Commission (EC) just published its fourth quarter GDP estimates last week. On Friday, the EC will issue its interim economic forecasts.

In America, the SEC Chairman and its commissioners participate in SEC Speaks.

More Federal Reserve representatives are set to speak on Friday, including Fed Governors Daniel Tarullo and Jerome Powell, as well as Boston Fed President Eric Rosengren.

The corporate news wire has analyst/investor meetings at Rock-Tenn Shared Services (NYSE: RKT) and InnerWorkings (Nasdaq: INWK). 3D Systems will split its shares 3-for-2 at the close. The Consumer Analyst Group of New York Conference highlights presentations from Coca-Cola (NYSE: KO) and Estee Lauder (NYSE: EL). The earnings schedule highlights reports from Interpublic Group (NYSE: IPG), Abercrombie & Fitch (NYSE: ANF), Pinnacle West Capital (NYSE: PNW), The Washington Post (NYSE: WPO), Barnes Group (NYSE: B) and Charter Communications (Nasdaq: CHTR).

The Italian elections begin on Sunday, and Sergio Berlusconi may emerge from the dead to regain power. Don’t forget to catch the Academy Awards Sunday evening.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Explaining the Divergence in the Market and Economy

Considering the depth of economic contraction just reported in Europe, and given the GDP contraction just reported in the U.S., are stock investors laughing at hellfire as they bid shares higher? How safe are the latest stock gains considering the most recent economic data?

Stocks are on a tear, with securities that track the broader indexes all up substantially since the start of the year. The market has moved impressively higher when tracking the indexes from off the lows of mid-November, and if we look as far back as the start of June 2012, the gains are even more impressive. There’s a trending bull market no doubt, but the economy seems to be deteriorating outside of the recovery in real estate. So has the market ignored an important detour sign as it continues to run higher? Is there a moronic mismatch and divergence between stocks and the economy?

Market Security	Year-to-Date Gains	Since Mid-Nov.	Since Early June
SPDR S&P 500 (NYSE: SPY)	+6.9%	+13%	+21%
SPDR Dow Jones (NYSE: DIA)	+7.2%	+12%	+18%
PowerShares QQQ (Nasdaq: QQQ)	+4.3%	+10%	+14%

What Got Us Here
One driving force in 2012 was the ongoing revival of the once critical and still important real estate sector. Data has noticeably improved in housing, and served as an important relief valve for the market’s concerns. It’s for good reason too, as housing affordability offers homebuyers a special opportunity today. There may not be a better time to buy real estate in terms of home and mortgage value for a generation.

Certainly, an important catalyst behind this year’s gains was the passing of the fiscal cliff and the debt ceiling fiascos at the start of the year. The removal of those troubling issues from the investment equation has sort of given stocks an all-clear signal, and one which we sounded for stocks at the blog as well.

Likewise, after tensions intensified on the Greek elections, they were also soon relieved when the result was not a radical overhaul of the Greek government or a disturbing change to Greece’s agreements with its troika financiers. Europe’s finally escaping its debt crisis in late October, thanks to a brave declaration in July and later follow through by ECB chief Mario Draghi, was an important driver for stocks from November forward.

What’s Different Now?
Today the data seems to be clearly deteriorating again, not improving, and yet stocks continue forward for the most part. Fourth quarter GDP, just reported for the U.S. a few weeks ago, showed more significant impact than was anticipated by economists. It’s estimated that GDP actually contracted by 0.1% in the fourth quarter.

Much of the blame in the U.S. can still be attributed to the Congressional fumbling of the fiscal cliff issue. I predicted this stalling of economic activity through the close of 2012 as Americans anticipated debilitating changes. The good news is that it would, therefore, be temporary, which could imply the market is now looking forward to better days. The market does predict economic changes and tends to gyrate up and down as it incorporates future risk and reward possibilities.

However, this past week, the outlook for Europe got much worse. The euro area economy was estimated to have contracted by 0.6% in Q4. It was down 0.9% compared to the fourth quarter of 2011. The outlook gets worse when considering that European lynchpin, the German economy, likely also contracted by 0.6%. The critical French economy fell by 0.3%. And though outside the euro zone, the economy of the United Kingdom fell by 0.3% as well, after exiting recession in Q3. Long-term GDP charts show a trajectory that is simply depressing, and it appears things might get worse before getting better; and when recovery might take place remains questionable. Unemployment was just reported higher in Greece, up to 27% now, and radical governments are gaining steam across Europe. Yet, a look at European shares seems to show no fear, similarly to U.S. shares.

ETF Security	YTD Gain	52-Week Gain
iShares S&P Europe 350 (NYSE: IEV)	+2.4%	+14%
Global X FTSE Greece (NYSE: GREK)	+9.5%	+5.3%
iShares MSCI Germany (NYSE: EWG)	+0.6%	+15%
iShares MSCI France (NYSE: EWQ)	+0.3%	+15%
iShares MSCI UK (NYSE: EWU)	+1.6%	+9.4%

Capital Flow Support
Perhaps it’s about time for markets to pause and recalibrate, but it would seem that inflows into equity funds might not allow for that. The four-week average for capital flows into equity mutual funds increased to $12.1 billion in the period ending February 13, 2013. It is not due to an exodus from bond funds, though, as capital seems to be coming from money market funds (down $5.7 billion), as those have trended lower. Fund flows show that the little guy on Main Street is coming back into the investment game. This could be yet another factor behind the apparent divergence between economies and markets.

Capital is also coming out of gold and silver, whether it is from investments in the metals or the securities allowing investors so many new ways to hold interests in precious metals. The SPDR Gold Shares Trust (NYSE: GLD) is down 10.3% from its October 4, 2012 peak and the Market Vectors Gold Miners ETF (NYSE: GDX) is down 26% from its September 21 peak. The iShares Silver Trust (NYSE: SLV) is down 15% since October 4, 2012. So capital has been coming out of precious metals for at least as long as the market’s trajectory higher has steepened. Investors are seeking higher return and accepting greater risk.

Looking Forward
The divergence in stock performance and the economy could be explained by an ingenious market looking forward to an improving economy, and accepting more risk for return, or by individual investors chasing stock momentum despite signs of economic deterioration. In actuality, it’s a combination of the two that have worked to drive shares higher.

Moving forward, the market should begin to weigh concerns about the budget now and a potential government shutdown, but those issues are not as concerning as the debt ceiling and fiscal cliff forays were. Thank God, It seems the U.S. government has now realized the importance of keeping the full faith in credit of the United States out of political play. There’s also a question as to whether increased payroll taxes are affecting consumer spending or not, and so we’ll need to keep an eye on consumer spending trends and signs. We might expect the market to take a breather here as it evaluates these issues, but if capital continues to flow into stock funds, then a bid should remain supportive of stocks.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.