It's Always Sell the News

• ByVincent Farrell Jr.,
• On 8:15 am EDT, Wednesday September 2, 2009

Economic news both in the U.S. and from overseas was good to excellent on Tuesday. The selloff the markets experienced on Monday was triggered by a sharp 6% pullback in the Shanghai index. But two measures of Chinese production both registered solid advances.

The Chinese Federation of Logistics and Purchasing figured its purchasing managers index to be 54, a 16-month high. Markit, a British research firm, concurred with its own measurement that came in at 55.1. The fear is that China's stock market will be hampered by a potential tightening of credit, poor quality of earnings, and a rush of initial public offerings that will sop up liquidity. All of that could be, but the economy seems to be performing well.

Keep in mind the Shanghai index rocketed more than 100% from last November. It has corrected more than 20% but is still up 46% for the year. I don't know where the Chinese market is headed, but rapid run-ups are often corrected by one-third to one-half of the advance and, like I pointed out, the economy is doing well.

The news, on balance, was good from other sections of the world as well. I fuss with this since now, more than ever before, the world can't count on the U.S. consumer to spend the world out of its troubles.

Brazil's industrial production rose for the seventh month in a row, showing a 2.2% gain month on month. While Chile's number still registers contraction, it was up from the prior month. The news out of the U.K. is mixed at best, but German retail sales were up 0.6% in July after falling 1.3% in June. German unemployment also took a slightly positive turn and registered a very small gain in employment, but the expectations were for a healthy increase in the number of jobs lost. The eurozone PMI registered 48.2 up from 47.9 last month and India's second-quarter gross domestic product booked a solid advance of 6.1%.

In the U.S., the Institute for Supply Management index clocked in at a strong 52.9, up from 48.9 last month. This is the eighth month-on-month gain in a row and the measure is now higher than when the recession started in late 2007. New orders were at the lofty reading of 64.9 and deliveries were 57.1. The only downer was employment, which is at 46, indicating we are in a jobless recovery, so far. Inventories contracted again but most are hopeful that we will see a swing as depleted stocks are rebuilt.

July pending home sales rose 3.2% month on month and were 12.9% year over year. The prior month had been up 9.2% compared with last year, so the pace of improvement is growing. This is the sixth month in a row of better numbers and the best since June 2007.

July construction was off a scant 0.2%. Residential construction actually rose the most in four years but nonresidential and public construction fell, which was no surprise to anyone.

So on the strength of all this good news, the market, of course, sold off. There was a rumor of a pending bank failure but the players always need an excuse for the market to do whatever it is doing.

Do we really need so much government? Consider this (with thanks to Sydney Williams): The Pythagorean Theorem contains 24 words; the Lord's Prayer has 66 words; Archimedes's Principle is 67 words; the Ten Commandments contains 179 words; The Gettysburg Address, 286 words; and the Declaration of Independence has a puffy 1,300 words. But the U.S. government regulation on the sale of cabbage contains 26,911 words. Enough!

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Know What You Own: Farrell mentioned pending homes sales. Some of the largest homebuilders in the U.S. are Lennar, KB Home, D.R. Horton, Toll Bros., Pulte Homes, M/I Homes and NVR.

Buzz up!