Friday, September 24, 2010

Markets Rip on Lackluster Data

Equities rallied this morning on the heels of some relatively lousy data. Durable goods orders were down 1.3%, slightly worse than the 1% decline the average economist was expecting. Sales of new homes remained at a 288,000 annual pace, also worse than expected and the second-worst month of new home sales data going all the way back to 1963. So what gives? Why are equities in such a good mood today? Can it really be excitement over German business confidence numbers? Has anyone involved in the US markets ever cared about German economic numbers until today?

Perhaps the truth is that the data was pretty bad. Bad enough for the Fed to want to keep the monetary spigot open. But not so bad that we're scared the economy is collapsing again. Not so bad that we're worried the European Union is going to fall apart again and create another credit crisis. Maybe the new Goldilocks is just limping along with virtually zero growth, just enough to keep the Fed involved, but not enough to fall off a cliff. After all, the market doesn't care if unemployment is at 10%. It wants interest rates at zero. It wants the Fed to keep buying securities. And as long as some people are shopping at Walmart, that's enough to keep us going.

The WSJ has an interesting article about how frustrated stock pickers are in this market. Correlations remain high, at roughly 66% in recent weeks, lower than the 80% during the European debt crisis, but still much higher than the 27% average between 2000 and 2006. How are you supposed to pick good stocks if everything just moves in lockstep for no apparent reason? Like ripping higher on lousy economic data? Further proof that nobody really cares about fundamentals. Only about the Fed's next move. Unless you're Bill Gross and you get to tell the Fed what to do, what's the point of investing in a market like that?

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