February 2010 Archives

In high school, one of the plays we had to read for our English class was about Thomas Becket.  Becket, as you know, was the former confidant of King Henry.  As King Henry's chancellor, he was extremely zealous in collecting taxes due the king from all landowners, including churches.  But when King Henry appointed Becket to the position of Archbishop of Canterbury, Becket's position changed.  Instead of moving to collect taxes from churches for King Henry, Becket consolidated those revenues for the Church.  That essentially was a declaration of war from the Church against the Crown.  Eventually, this struggle led to Becket's death and martyrdom, with King Henry at one point reported to have exclaimed "will no one rid me of this turbulent priest?"

While it's highly unlikely that the chair of the Commodity Futures Trading Commission (CFTC) will end up being beheaded, his transformation in many ways mirrors that of Becket's.  Gary Gensler, a former Goldman Sachs partner, was portrayed by liberal critics as too tied to investment bankers to be an effective regulator.  Gensler was on the staff of then Treasury Secretary Larry Summers when the push to exempt most derivatives from regulatory oversight passed in 2000.  Because of this, democratic lawmakers held up his nomination for five months before finally agreeing to appoint him to his current role.

Gensler said that his transformation came about after seeing the havoc that unregulated derivatives trading wreaked on financial markets.  In fact, some of the people who Gensler tangled with during the push to deregulate derivatives trading, such as former CFTC chair Brooksley Born, now say that Gensler is "committed to robust regulation."  And the director of investor protection for the Consumer Federation of America said that Gensler has "been the strongest advocate of reform" in the Obama administration.

Gensler wants to shine the spotlight on derivatives trading.  Many companies that consume commodities use these as hedges to protect them from price swings in the supplies they need in order to function.  Southwest Airlines, for example, was aided by its hedges in oil at a time where many of its counterparts were filing for bankruptcy.

However, sophisticated traders at five major banks -- Goldman Sachs, Bank of America, JPMorgan Chase, Morgan Stanley, and Citigroup -- dominate trading and reap billions in profits.  Gensler wants to highlight the big margins the traders at these firms enjoy.

Gensler has turned out to be one of the biggest assets that those pushing for regulation have.  When banks claim that regulations being considered are too strict and would destroy their ability to function, Gensler has been known to say "that's crazy.  I used to do it all the time."

In response to the financial crisis and the role derivatives played in them, Congress moved to enact legislation that would require derivatives traders to work through clearinghouses.  These clearinghouses would require the traders they serve to hold capital in order to prevent default on their obligations.  And the CFTC would be able to more easily monitor trading.

However, Gensler says this is not enough.  He is most critical of an exemption that would allow non-financial companies seeking to hedge against fluctuations in fuel, currency swings, and other typical risks to trade outside of the clearinghouses.  He says that even these exemptions, which seem innocent, will allow hedge funds and financial firms to take major risks on derivatives to goose their profits.

This is why Gensler is pushing the Senate hard to enact regulations that clamp down harder on derivatives trading.  He wants to go even further than his boss, President Obama, in regulating derivatives trading.  The reason for this, according to Gensler, is that "interests [of the banks] are not necessarily aligned with the American public's interests."

Gensler says that while he once shared the goals of the bankers he will be responsible for regulating -- maximizing profits and bonuses -- his obligation is now to the taxpayers.  When asked what the biggest obstacle to enacting tough regulations was, he pointed to the bankers in the room and said "you."

Gensler's transformation -- which he hasn't donned a hair shirt like Becket did, it's just as remarkable -- means that the taxpayers and small investors have an ally in the current administration.  Let's hope that he doesn't end up with his head being cut off like Becket did.

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• Top Derivatives Regulator: "We Haven't Filled The Gaps" (VIDEO) (huffingtonpost.com)
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• Gary Gensler CFTC Chairman: Three Key Reforms Will Prevent Another Derivatives 'Inferno' (huffingtonpost.com)

After a run of bad economic news on the consumer confidence, housing, manufacturing, and jobs front, investors got some much needed good news.  The Commerce Department reported that GDP in the fourth quarter of 2009 increased by 5.9 percent, higher than the 5.7 percent originally reported.  This is the second estimate, and a revised one will be released in March after the government gets more data to analyze.

Personal consumption, according to the Commerce Department, increased by 1.7 percent.  Real estate was also a driver of GDP growth, with non-residential real estate growing by 6.5 percent and residential real estate climbing by 5.0 percent.  Equipment and software sales surged by 18.2 percent.  And exports jumped by 22.4 percent.  Imports, which take away from GDP, also increased, climbing by 15.3 percent.

Many have said that it's government spending that propelling the economy forward.  However, that doesn't appear to be the case, at least in the fourth quarter.  Spending by the federal government was essentially flat, dropping by 0.1 percent.  And spending by state and local governments decreased by 2.0 percent.

Analysts had expected that the government's revision for fourth quarter GDP growth would come in at the 5.7 percent that was initially estimated.  All estimates were for growth, ranging from 4.2 percent to 6.3 percent.  The actual growth rate was the best in six years, according to the Commerce Department.

An economist at MF Global in New York said that a lot of the growth seen in the fourth quarter was driven by businesses replenishing their inventories.  However, he said that inventory replenishment still can help boost GDP and that "a clear pickup in the labor market" is required to for sustained GDP growth.  That pickup in hiring, he said "is coming."

The big cloud over the economy is jobs.  We are seeing many things fall in place, but until the jobs situation gets better, it's difficult to see how the economy can grow rapidly.  And even if employers start to add to their payrolls, with over eight million jobs lost since the recession began in December 2007, it will take a long time before we get back to the lower unemployment rates we saw in the middle of the decade.

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• GDP Growth Revised Higher (online.wsj.com)
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Yesterday in testimony before Congress, Federal Reserve Chairman Ben Bernanke said that the recovery underway is "nascent."  Today's economic data helped show this is the case.

Initial jobless claims climbed by 22,000 to 496,000, according to the Labor Department.  The four week moving average also climbed, increasing by 6,000 to 467,750.  The number of individuals collecting unemployment increased by 6,000 to 4.617 million, with the four week moving average climbing as well.  That number increased to 4.601 million, an increase of 4,250.

There were 13 states with a decrease of more than 1,000 claims, led by California's decrease of 5,540.  On the downside, there were three states with an increase of more than 1,000 claims, with North Carolina's increase of 5,897 the highest.

Analysts had expected that initial claims would come in at 460,000, with estimates ranging from 425,000 to 500,000.  According to one economist at High Frequency Economics, the data shows "strong manufacturing is not enough to support the labor market as a whole."

But even the manufacturing sector didn't do well in the last month.  Across town from the Labor Department, the Commerce Department released its data on durable goods.  This data showed that durable goods orders increased by 3.0 percent.  Excluding the volatile transportation sector, durable goods orders decreased by 0.6 percent.  Thus, most of the increase in the durable goods number was due to increased orders in aircraft.  Transportation equipment, which includes aircraft, increased by 15.6 percent in the last month.

Economists had projected that durable goods orders would increase by 1.5 percent, with durable goods excluding the transportation sector would increase by one percent.  Forecasts for the durable goods number ranged from a decline of 0.5 percent to an increase of five percent.  Excluding transportation, orders were expected to increase by one percent.

An analyst at JPMorgan Chase said "capital spending is probably still increasing but not at the robust pace we saw in the fourth quarter.  It looks like in the first half the recovery is slowing from the pace we saw in the fourth quarter."

The news on jobs and durable goods is likely to make for an interesting day for Bernanke.  He will be in front of Congress for a second day, and the politicians that want to show their constituents that they are doing something are likely to seize on this data and use it in their questioning.  The problem is that Bernanke's tools to bring the economy out of recession are limited to keeping interest rates low, something that he's done already.

After yesterday's horrible consumer confidence numbers, which were dragged down by concerns over jobs, Federal Reserve Chairman Ben Bernanke is likely to face tough questions in his testimony before Congress.  The economy has lost more than eight million jobs since the recession began in December of 2007.  Even though a recovery is underway, with GDP showing growth in the third and fourth quarters of 2008, the job market remains weak.  While the payroll numbers recently are far better than they were in the days when 800,000 jobs were lost in a month, we are still seeing payrolls cut.

Two of Bernanke's counterparts in San Francisco and Atlanta said that economic growth won't rapidly bring down the unemployment rate, which stands at 9.7 percent.  Analysts concur, with a New York University professor of economics saying "it sure looks like we are in the middle of a jobless recovery.  In the current recovery, credit market frictions and general uncertainty may be the main factor dampening hiring."

Bernanke is likely to repeat his intent to keep interest rates low for "an extended period."  It's likely that he'll say that this will remain his intent until there is a pick up in employment.  Since World War II, the Fed has kept interest rates low until about six months after the peak in unemployment.  When inflation is in check, they have kept interest rates low for longer.

Congress is going to focus much of its questioning on jobs.  Senator Bob Menendez said that jobs "will be a big topic."  He added that Bernanke will face questions on "what is he going to do and the Federal Reserve going to do to help grow this economy?"  Another Senator, Sherrod Brown, said that he would ask Bernanke "how he's going to rebuild American manufacturing."

It is likely that the politicians will not be happy with Bernanke's answers.  The Fed is doing pretty much all it can do by keeping interest rates low.  The emergency measures put in place in response to the financial crisis are being removed, which only makes sense since the financial system is no longer at risk of imploding.

Still, the politicians will need to be seen as asking tough questions about jobs so that their constituents feel like they're doing something.  The hard truth is that the medicine has been given to the patient, and it doesn't work overnight.  The patient is recovering in part due to the medicine given, but he's still sick.  And just like with a sick patient, time is needed to cure the disease.

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• Ben Bernanke to face tough questions from Congress on when new jobs will arrive (telegraph.co.uk)
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The Conference Board's consumer confidence index, which had been trending up, slumped badly.  The index, which came in at 56.5 during January, dropped by more than ten points to 46.0.  Analysts expected that the index would come in at 55 for February, with estimates ranging from 50.9 to 59.0.

The research director for the Conference Board said "concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level" since February 1983.  The short term outlook was also down, "with fewer consumers anticipating an improvement in business conditions and the job market over the next six months."  Furthermore, consumers were "extremely pessimistic" about their earnings prospects.  The net result, will be consumer spending that remains in check.

Jobs were the main factor in driving consumer confidence down, with those saying jobs are hard to get climbing to 47.7 percent from 46.5 percent last month.  Those saying that it was easy to find a job decreased from 4.4 percent to 3.6 percent.

The drop in consumer confidence led some analysts to warn that the economy may not be out of the woods yet.  "Consumer spending is going to disappoint throughout most of the year," said the chief economist at Mizuho Securities USA in New York.  And the CEO of FaithShares said "consumers are still just very confused.  Until we get more consistently positive trends, it's like to be choppy like this."

Adding to the negative outlook for consumers when it comes to jobs is the situation in Washington.  "The vicissitudes of the political situation in Washington cannot be helping.  There has been a lot of sizzle on job stimulus proposals but no meat is coming out of the sausage factory," said the chief economist at IHS Global Insight in Lexington, Massachusetts.

On the negative news, the markets sold off.  All of the major indices were off by one percent.  The Dow dropped by one percent to 10,292.  The S&P 500 was lower by 1.2 percent to 1,095.  And the Nasdaq fell by 1.3 percent to 2,213.

While today's news was bad news, it's consistent with the beginning of an economic recovery.  Jobs don't pick up until both consumers and companies are confident that the economy is recovering.  And consumers don't feel good until they believe that jobs are out there and companies are hiring.  So we get a situation where the economy takes two steps forward and one step back instead of steadily progressing.

That is going to be the case for a while.  Investors hoping for a nothing but positive economic data are likely to be disappointed.  That may be the case with Thursday's initial claims figures if the consumers in the Conference Board's survey are correct.

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Investors looking for clues on the performance of the economy will get plenty of data they can use this week.  The week kicks off with testimony by Fed chairman Ben Bernanke, who will head to Congress twice this week to testify before both chambers.  Monday he'll head to the House, and on Thursday, the Senate gets its turn to grandstand.  Once again, we'll have members of both the House and Senate, most of whom are clueless on financial issues, try to grandstand for their constituents.  If you want to see why Congress can't get anything done, watch Bernanke's testimony.

Sandwiched in between Bernanke's testimony will be the release of data on consumer confidence on Tuesday and new home sales on Wednesday.  Since consumers drive two thirds of the economy, if they're not feeling good, then the economy can't really grow.  The data on new home sales will help provide more insight into whether or not the housing sector is recovering.  That's the sector that dragged the economy into the worst downturn since the Great Depression.  Without growth, or at least flatlining, in that sector, it's difficult to see how the economy can grow.

More data on the course of the economy will be released on Thursday.  We'll get the weekly data on initial unemployment claims, which will give some insight into the jobs market.  In addition, data on durable goods orders will be released on Thursday, thus showing how the manufacturing sector is performing.  Investors should look at the durable goods orders as well as the performance of the manufacturing sector in the initial claims data for insight.

Finally, the week closes with data on GDP, consumer sentiment, and existing home sales.  This will give traders information on how the economy is a whole is performing as well as the housing sector.  It will also give clues on what the consumer might do.

Every week brings us data on what's happening in the economy.  This week, we can see how various sectors, which are so critical to the recovery, are performing.

The Federal Reserve's move to raise the discount rate, which is the rate that banks charge each other for overnight loans, was a sign to the markets that they are beginning to return to a more normal monetary policy.  The Fed did this despite no signs of inflation getting out of control.

The Labor Department reported that the consumer price index rose by 0.2 percent in January.  The main reason for the increase in the CPI was energy, with gasoline, fuel oil, and natural gas moving higher.  In fact, after stripping out the volatile energy and food sectors, the CPI declined by 0.1 percent.  This was the first decline in core CPI since December 1982.

Housing, new vehicles, and airline fares drove the core CPI down.  The decreases in these sectors were enough to offset the increase seen in health care and used vehicles.  Food prices rose as well, with the increase in prices driven by dairy products and fruits and vegetables.

Analysts had expected that the CPI would increase by 0.3 percent, with estimates ranging from prices remaining flat to an increase of 0.6 percent.  The core index was projected to increase by 0.1 percent.

The CPI numbers bolster Fed Chairman Ben Bernanke's position that inflationary pressures remain subdued, which would allow the Fed to keep interest rates low for "an extended period."  Analysts concurred, saying that with unemployment remaining high, companies will have problems raising prices.  An economist at Moody's Economy.com said, "the broader picture remains one of subdued inflation, and this gives the Fed ample reason to stay on the sidelines until at least very late in the year."

Despite the low inflationary pressures, the Fed raised its discount rate.  This isn't a move to raise the federal funds rate, but it's a way for the Fed to start to remove liquidity from the system.  That shows that the Fed is taking actions in line with its belief that the economy is growing.

A former Bank of England official said, iIt's another minor step in a long march towards normalization."  The Fed itself echoed that sentiment, saying it was a "normalization" of the lending process, not a precursor to an increase in the federal funds rate.  The Fed has taken other actions to move towards normalization, letting many of its quantitative easing programs put in place in response to the financial crisis of 2008 expire.

Still, analysts said that the Fed's action is a positive sign.  A professor at the London School of Economics said "the Fed has seen early signs of recovery" and that the actions are encouraging.  And the CEO of Lafarge, the world's biggest cement maker, said the Fed's move "shows some confidence in the economic pickup."

Today's economic news and the Fed's action are positives for the economy.  The increase in the discount rate shows confidence -- which is key to a recovery -- is growing.  And the muted inflationary pressures will allow the fed to keep its federal funds rate low, thus helping the economy recover.

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What's the biggest story from the Olympics thus far?  The mechanical failure of the fourth part of the Olympic torch during the opening ceremonies?  The snow on Cypress Mountain that has competitors comparing it to mashed potatoes?  Lindsey Vonn's gold medal and quest for a second one despite a shin injury?  These are all big stories, but from a business perspective, the biggest story is one of failure.

Fortress Investment Group, a private equity firm, took Intrawest private about four years ago, during the height of the real estate bubble.  Among the properties that Intrawest owns are Snowshoe, Steamboat, Stratton, Tremblant, Winter Park, and most importantly, Whistler Blackcomb.  Yes, that Whistler Blackcomb, where the Olympics are being held.

Intrawest missed a payment of $1.4 billion that was due in December.  Since then, its lenders, which include the bankrupt Lehman Brothers, have been seeking to take over the company's assets.

An auction of Intrawest's assets, including Whistler Blackcomb, was scheduled to take place in New York on February 19.  However, that auction has been delayed until February 26, to avoid a black eye to the Olympics.  One of the bidders for Intrawest's assets is likely to be Vail Resorts, which was once its biggest competitors in the resort business.

Fortress has been hard hit by the downturn in the real estate market, and its investment in Intrawest is a perfect example of this.  The purchase, which closed in August 2006, has resulted in a $1.7 billion investment in the resorts company shrinking to four cents on the dollar as of October 2009.  If you think your investments took a pounding, at least you didn't do as poorly as Fortress.

One of the reasons Fortress bought Intrawest was for its real estate.  According to an analyst at Rochdale Securities in Stamford, Connecticut, "Intrawest has a lot of real estate at the base of its mountains, with several projects having been in development at the time of acquisition, and much of it properly zoned to build out condos."

"In a good real estate market that had a lot value but in a bad times it's an albatross."

Like a homeowner who has lost his job, Intrawest has been selling off assets in order to attempt to pay its bills.  In the past few months, it has sold off Panorama Mountain Village, San Destin Golf and Beach Resort, and Copper Mountain.  These sales brought in $165 million, which is far short from the $1.4 billion the company owes to its creditors.

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One of the signs that the seasons are changing is when major league baseball pitchers and catchers report to training camp.  Today is the day where that happens, and that's a sign that the snow and cold of winter will soon be replaced by sunny spring days.

For the economy, something similar occurs when economic data starts to turn positive.  As the economy tries to turn the page on the worst recession since the Great Depression, we look to economic data to see if that's happening.

This morning, we got some data that indicates the economy may be leaving those cold recessionary days behind.  The Commerce Department reported housing starts increased by 2.8 percent in January, climbing to 591,000.  Compared to January 2009, housing starts were up by 21.1 percent from 488,000.

The consensus estimate for housing starts was for them to come in at 580,000, with estimates ranging from 530,000 to 700,000.  Analysts said that the increase in housing starts shows that a recovery in that sector is underway.  As you know, the recession began in the housing sector and the economy needs that sector to recover before robust growth can begin.

Analysts said the data released this morning shows that the recovery is beginning.  "The housing recovery is under way," an economist at Barclay's Capital in New York said.  In something that could be applied to the economy as a whole, that economist added, "housing starts may be sluggish in the near term until sales pick up and builders gain more confidence about the outlook."

However, while the data is good news, there are still challenges facing the housing sector.  First, foreclosures continue to rise.  According to RealtyTrac, in 2009, there were 2.82 million homes which were foreclosed.  That record is expected to be beat this year, with an estimated three million houses subject to repossession.  Furthermore, according to an analyst at Weiss Reseach, "traffic through models and sales offices is nowhere near what builders would like to see."

Furthermore, the housing market will be slow to recover as long as unemployment remains high, for obvious reasons.  With unemployment projected to average 9.5 percent throughout the year, the job market isn't going to be strong.  Without that, it is impossible to have a strong housing market.  And 8.4 million people have lost their jobs since the beginning of the recession, which means that a lot of people are going to struggle to keep the houses they own now.

Still, the housing starts data is a positive sign that the economy is recovering.  It joins multiple data points that suggest a recovery is underway, even though it may not be one that's robust.

The New York Fed's survey of companies in its area showed what was labeled "a healthy pace in February."  The general business conditions part of the survey showed a nine point jump to 24.9  Among respondents, 42 percent said that business conditions had improved over the past month, compared to only 17 percent who said that they had worsened.  New orders, while declining by 12 points, remained positive at 8.8.  Shipments dropped as well, from 21.1 to 15.1, and unfilled orders held steady at 2.8.  Numbers above zero indicate growth, and even though a number of components of the survey showed a decline, all indicators show that manufacturing is growing in the New York area.

More good news was found in this report's employment section.  The index showed growth in employment -- though slow -- for the second consecutive month.  The employment index was at 5.6, and the hours worked index came in at 8.3, an increase of three points from last month.  An increase in hours worked is often a precursor to employment growth, as employers give their current employees more hours before they hire new ones.  And about two thirds (64 percent) of respondents said they plan to increase hiring during the next year, while only 15 expected to cut payrolls.

Analysts had expected that the Empire State Manufacturing Index, which is the name of this survey, would come in at 18.  Estimates ranged from 7.5 to 28, so the actual figures were on the optimistic side of estimates and way ahead of the consensus.  It's also important to note that even the least optimistic projection was for growth.

An adviser at Ameriprise Financial in Detroit said that growth in the manufacturing sector is to be expected.  "Improving end demand from both consumers and businesses is forcing producers to play catchup."  An economist at Jeffries & Co in New York said the report is "indicative of continued good strength in the manufacturing sector."

As you know, manufacturing is one of the sectors that's been hardest hit by the recession and which has shed a lot of jobs.  Trends are pointing to improvement in this sector, which bodes well for the economy as a whole.

We will get more data on another sector that has been hit hard by the recession, housing, this afternoon.  The National Association of Home Builders will release their index on the housing market.

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The markets were closed today for the President's day holiday.  The long weekend, and the reluctance of traders to have open positions over the weekend, may have spurred some profit taking on Friday.

However, just because it is a short week doesn't mean that there isn't a lot of data that will drive markets.

Tuesday will bring us a glimpse into the state of the housing market, which is where the contagion that spread throughout the economy originated from.  We'll get the National Association of Homebuilders Index released on Tuesday.  We will also get some data on the health of the manufacturing sector on Tuesday, as the Empire State Manufacturing Index is released.

Wednesday will bring us more data on the housing market.  The government will release data on the number of new home starts and building permits.  And, the manufacturing sector will also be highlighted once again, with capacity utilization and industrial production numbers being on the agenda.

On Thursday, the focus will shift to jobs and inflation.  As always, the weekly jobless claims figures will be released by the Labor Department.  But we will also get data on the producer price index and the core producer price index.  That will give us some insight into whether the job market is improving and whether the Fed can keep interest rates low to help spur job creation.

Finally, the week closes out with a very important inflationary number, the consumer price index.  This will be another indicator as to whether inflation is subdued, as most economists believe, or the hyperinflation that some have speculated about is on the way.

While there are only four business days this week, they definitely are full of data that investors will need to watch.

The conventional wisdom is that republican Presidents are good for businesses, investors, and the economy, while democratic Presidents are not.  How many times have you seen traders on the floor during an election year say they're worried that a democrat will get elected because they may implement policies that will cause problems for businesses and cause the market to tank?

Or how often do you hear pundits and politicians talk about big government democrats and free market republicans?  Going by this conventional wisdom, you'd think that the only President in the past 40 years to shrink the size of the government was Ronald Reagan or maybe George Bush Sr. or Jr.  You'd be wrong.  The only President in recent history to shrink the size of the government was Bill Clinton.

You've also probably heard that investors should favor a republican candidate versus a democratic one.  You'll hear that democrats will tax your capital gains.  Well, in order to tax capital gains, you need to have them.  And it's far more likely that you'll have them under a democratic President than you will under a republican one.  A New York Times article done during the Presidential campaign of 2008 showed that under democratic Presidents, the average annual return for the S&P 500 or its predecessor was 8.9 percent.  Under republican Presidents, the average annual return was 0.4 percent.  That's a better than 22 to one margin for the democrats.

Let's assume that a democratic President jacks up the capital gains tax to 50 percent and a republican President will cut it to zero.  Both scenarios are not likely, but let's pretend here.  That would mean that the after tax return under a typical democratic President would be 3.9 percent, and under a republican President, it would be 0.4 percent.  Even assuming ridiculous capital gains tax policy, you still get a ten to one margin for a democratic President.

This huge difference between the benefits of the economic policies of democrats and republicans extends beyond the stock market.  You can visit the blog from PERRspectives to see the academic studies used to draw this conclusion.  The bottom line is the democratic Presidents are better for the economy when you measure performance by the unemployment rate, job creation, GDP growth, and -- in what must gall some -- even corporate profits as a percent of GDP.

Yet the mindset -- totally contradicted by facts -- that republicans are better for the economy and investors is still evident.  As the editor of Stock Trader's Almanac said, "I don't know why people are convinced republicans are good for the stock market."

It seems like even "conservatives" know this.  During the time when the market was plunging to its lows back in the early part of 2009, you probably recall many "conservatives" talking about the "Obama market."  Obama's policies -- keep in mind they hadn't even been talked about in Congress at the time, much less implemented -- were to blame for the market's plunge, they said.

Getting tired of hearing this, yours truly offered to bet the first three people who were willing to take the bet $1,000 that the return on the Dow would be better during Obama's first term than it was under Bush's first term.  And not surprisingly, the bet was not taken.  All of the sudden, those who blamed the market's plunge on Obama's policies suddenly said well, there are too many things involved to make that bet.  It's funny how people change their tune when money is on the line!

It's too bad they didn't take the bet.  After one year of Obama's first term, the Dow is up by 29.5 percent.  Under Bush, it was down by 7.7 percent.  An offer would have been made to settle the bet for $100, just to prove the point, but the odds of getting payment are about as good as the odds that a watch offered to you by one of the Salahis is real.

Here are the top five performances of the Dow during a President's first year:

• Roosevelt:  96.5 percent
• Truman:  30.9 percent
• Obama:  29.5 percent
• Johnson:  21.6 percent
• Bush Sr:  19.6 percent

And the bottom five are:

• Bush Jr:  -7.7 percent
• Reagan:  -12.7 percent
• Hoover:  -15.6 percent
• Nixon:  -17.0 percent
• Carter:  -19.6 percent

You can check out the rest of the Presidents by going to Business Week and looking at their slide show.

The bottom line is this.  Just like the headline says, the conventional wisdom is often not wise.  Investors should look at the numbers themselves before accepting the conventional wisdom.  It's clear that the reputation that republicans have for being good for the economy and investors is undeserved, but it still is the conventional wisdom.

Those following this piece of conventional wisdom and moving their money into stocks when a republican is President and out of stocks when a democrat is would end up paying for it.

The Commerce Department today released data that showed retail sales increased by 0.5 percent.  Excluding the volatile auto sector, retail sales increased by 0.6 percent.  Sales were up by 4.7 percent from the year ago period, and they were up by 4.6 percent excluding the auto sector.

Sectors seeing gains higher than the 0.5 percent gain for retail sales as a whole were the food services and drinking, non-store retailers, general merchandise, food and beverage stores, sporting goods, hobby, and book and music, and electronics and appliance sectors.  Sectors that didn't match the 0.5 figure were the motor vehicles, furniture and home furnishings, building materials, gasoline stations, clothing and accessories, and miscellaneous sectors.

Retail sales were expected to increase by 0.3 percent, with estimates ranging from a decline of one percent to an increase of 0.7 percent.  Excluding autos, retail sales were expected to increase by 0.5 percent.

Analysts said that the improvement in retail sales is another sign that the economy is improving.  As the chief economist of the International Council of Shopping Centers said, "the retail recovery continues."  His counterpart at Hermann Forecasting in Summit, New Jersey concurred, but warned that "consumers are still relatively cautious, spending what they're making and not taking on debt."

Economists expect consumer spending, which accounts for two thirds of the economy, to increase by 2.3 percent in the second half of 2010 and by 2.5 percent in 2011.  In contrast, during the two decades through 2007, consumer spending increased by 3.3 percent.

Still, an increase in consumer spending is good news, even if it's at a slower pace than we've seen in the past.  The past two decades, where debt exploded, can be seen as similar to the steroid era in baseball, when home run totals skyrocketed.  After the performance enhancers -- whether they're steroids or debt -- are removed from the equation, things return to normal.

The Labor Department reported today that initial unemployment claims fell by 43,000 to 440,000, down from last week's revised 483,000 claims.  This was the lowest level of claims in five weeks.  The four week moving average also declined, dropping by 1,000 to 468,500.  Last week's four week moving average was revised to 469,500.

Continuing claims also fell, decreasing by 79,000 to 4.538 million.  Last week's revised figure was 4.617 million.  This was the lowest level of continuing claims since January of 2009.  The four week moving average was 4.604 million, down by 17,750 from last week's revised 4.621 million.

There were four states reporting decreases in claims of more than 1,000, led by New Jersey's decrease of 1,819 claims.  Pennsylvania led the states who reported increases in claims of more than 1,000, with an increase of 10,495 claims.  The increase in Pennsylvania was due to layoffs in the trade, construction, and service industries.

The consensus estimate for claims was for 465,000, with estimates ranging from 440,000 to 485,000 claims filed.  Thus, the actual number came in at the low end of estimates.  Analysts said that the numbers showed that the jobs market is not deteriorating like many had feared would occur, but as the chief economist for Societe Generale in New York said, "unfortunately, it doesn't show much improvement."

Companies remain cautious when it comes to hiring.  The president of the airline division of UPS said "even though the economy has begun to turn around, UPS anticipates a very gradual recovery and a continued need for belt-tightening."  This comes despite S&P 500 companies building up a big cash hoard.

Companies like General Electric, Caterpillar, and UPS are among those who have built up a cash cushion of $1.19 trillion.  One of the reasons why this cash has built up is because S&P 500 companies have cut spending on capital projects by 42 percent.

While some companies like Cisco, which said it hired 2,300 people in the last quarter and plans to hire around 3,000 more in the next quarter, many remain cautious.  The CFO of Walgreen's said "just because we're generating cash doesn't mean that we're going to feel compelled to do something that doesn't earn a good, robust return for the company and for the shareholder."

Still, some analysts said that the economy is on the verge of adding jobs.  The chief economist of RBS Securities in Stamford, Connecticut said "firms are going to be in a position very soon where they're going to have to hire people.  We're starting to see signs that we're fast approaching that point."  He added that the economy is "on the cusp" of adding jobs, and is projecting that by the end of the year, payrolls will increase by 200,000 to 300,000 per month.

Even at that pace, however, it will take a long time to for the 8.4 million jobs that have been cut since the beginning of the recession in December 2007 to be replaced.

The snowstorm that's pounding the Washington area caused Congress to cancel Federal Reserve Chairman Ben Bernanke's question and answer session.  However, he did release the text of his opening comments.

For the first time, Bernanke said that he and the rest of the Federal Reserve's open market committee are prepared to raise interest rates.  "[B]efore long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate."  Bernanke said that any changes to this spread is not a sign that the Fed is ready to end its policy of low interest rates.  Instead, he said, that action "should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets."  He added that any change "should not be interpreted as signaling any change in the outlook for monetary policy."

Bernanke added that the alphabet soup of emergency programs that were put in place to inject liquidity into the financial system when it was on the brink of collapse are winding down.  Most of the emergency programs wound down during 2009 or at the end of January.  The two remaining programs will be wound down soon, Bernanke said.  "[T]he final TAF auction will be conducted on March 8, and the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS."

The economy, however, is still in need of "exceptionally low levels of the federal funds rate for an extended period."  Bernanke pointed to "low rates of resource utilization, subdued inflation trends, and stable inflation expectations" as justification for keeping interest rates low.

With his comments, analysts said that Bernanke is signalling that while the Fed will not be increasing interest rates any time soon, they are aware that actions will be needed to meet one of their two dual mandates, which is to prevent inflation from getting out of control.  "He's trying to tell people that while the Fed is not contemplating any tightening of monetary policy at the moment, they're fully prepared to do what's necessary to ensure that their commitment to price stability is made effective," said a senior economist at the Potomac Research Group in Washington.

Bernanke's comments don't really provide any insight into when he will start to raise interest rates, just that he's aware that it will need to be done eventually.  Also, his comments on the economy show that he's not looking for a strong economy, as he said that the economy will continue to require easy money in order to grow for a while.

It's often said that you don't fight the Fed.  If the Fed doesn't see strong growth and will keep interest rates low, then it's best to not get too optimistic.  Certainly there are trading gains to be made, but it's very possible that the easy money has already been made.

Whatever happened to removing the shackles governments put on the free market?  For the past year, it seems like one surefire way to get stocks to rally is for governments to start spending.

It looks like a Greek tragedy will be averted, as Germany said that it will would work with other financially sound members of the European Union to provide loan guarantees to Greece.  This will ease concerns that many have about a potential default on Greece's sovereign debt.  The Greek government's plans to reduce its deficit have provoked strikes as a protest against those measures.

The challenges that Greek finance minister George Papandreou face were highlighted by the strikes planned by workers in the health care, education, and transportation sectors.  They will shut down hospitals, schools and airlines in order to protest the deficit reduction measures proposed by Papandreou.

However, if the measures are implemented, Fitch Ratings said they'll have an impact on the deficit spending of the Greek government.  Nobel Prize winner Joseph Stiglitz said the deficit reduction plan would prevent a default and called on European Union governments to help Greece fight "speculative attacks against its debt.  "I've been very impressed with the comprehensive approach" the Greek government is taking, he said.

"There's clearly no risk of default. I'm very confident about it."

But a bailout has risks.  First, the citizens of countries like Germany and France, which are in sounder financial condition than some of their European Union members like Greece and Portugal, are likely to oppose a bailout.  In addition, the issue of moral hazard, which the government of the United States faced with its bailout of AIG, Citi, General Motors, and Chrysler, will rear its ugly head.  This can be countered, a senior economist at the European Policy Centre, "as long as it is very clear that any support only comes with very, very stringent conditions attached."

On the news, the markets rallied.  The Dow climbed by 1.5 percent, breaking above the psychologically important 10,000 level to close at 10,059.  The S&P 500 was up by 1.3 percent to 1,071.  And the Nasdaq gained 1.2 percent, closing at 2,151.

Analysts said that the reaction of the markets showed just how critical what governments say is to investors.  Even though it has been nearly two years since the financial system nearly imploded, "people are scared that the entire delicate reconstruction of the system...might be shattered," the chief investment officer from Alpine Woods Capital Investors said.  "If the leaders are riding to the rescue then the market will feel renewed confidence."

So much for markets needing to be cut loose from the shackles of the government.  Instead of that being the case, it seems like they're sucking on the government teat harder than any welfare queen ever did!

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The Labor Department's monthly report on the employment situation showed that employers shed 20,000 jobs in January and the unemployment rate dropped from 10.0 percent to 9.7 percent.  The Labor Department said that employment was "essentially unchanged" and that has been the case for the last three months.  However, the total of jobs lost since the recession began in December 2007 increased to 8.4 million.

Jobs losses were seen in the construction and transportation and warehousing sectors  The construction sector saw 75,000, bringing its total loss since the recession began to 1.9 million.  Transportation and warehouse workers saw their ranks shrink by 19,000, with messengers and couriers losing 23,000 jobs.  That sector has lost 223,000 jobs since January of 2009.

On the positive side, employers hired more people in the temporary help, manufacturing, retail trade, and health care sectors.  There were 52,000 more employees in the temporary help sector in January.  Manufacturers added employees for the first time in nearly three years, with 11,000 more people getting paychecks in that sector.  Retailers added 42,000 employees, after showing little change in the previous two months.  And the health care sector, which is one of the few to have added employees since the recession began, added 14,500 employees.  Employment of health sector workers has increased by 218,000 since January 2009.

The report shows that the economy is very close to adding jobs instead of shedding them.  It's like a drunk teetering on his bar stool after slamming down a line of shots.  The shots in the case of the economy are the stimulus package and easy money, and just like a drunk who's had one too many, it's about ready to topple over and jobs will stop being shed.

Analysts had expected the payrolls figure to come in with a gain of 15,000, with estimates ranging from a decrease of 100,000 to a gain of 100,000.  The unemployment rate was projected to remain at 10.0 percent, with projections ranging from 9.8 to 10.3 percent.

The chief economist at Credit Suisse in New York said that "the labor market...is beginning to find its bottom.  We're still teetering on the cusp of job growth."  A research director at GFT Forex in New York concurred, saying there was " a slow improvement in the labor market...but it wasn't quite good enough to push us into positive territory just yet."

But the economy is not out of the woods yet, an economist at Deutsche Bank in New York warned.  "The economy is moving slowly and it takes time for companies to turn around from where they were to where they are going," he said.

That process will not be helped by irresponsible, grandstanding politicians who don't have a clue about economics like Michael Steele.  Steele, in response to the jobs report, slammed the Obama administration's stimulus package, saying that approximately two million jobs were lost since the stimulus began and claiming that the stimulus isn't working.  This is, of course, ridiculous.  Virtually all credible economists say that the stimulus has helped the economy grow.

Furthermore, Steele, in his haste to score political points, ignores the fact that while two million jobs have been lost since the stimulus was enacted, the total number of jobs lost since the recession began is 8.4 million.  That means that 6.4 million jobs were lost in the approximately 14 months before the stimulus was implemented.  The job loss rate before the stimulus was enacted was approximately 457,000 per month.  After the stimulus, the loss rate was approximately 200,000.

But those numbers don't help irresponsible politicians like Michael Steele.  His irresponsible and inaccurate comments do not help the economy grow and he and the rest of the grandstanding politicians -- on both sides of the aisle -- would be well served to shut up.

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The statistics released by the Labor Department today painted a mixed picture of the economy.  The good news came in the productivity numbers, which increased by 6,2 percent in the fourth quarter of 2009.  Output increased by 7.2 percent while hours worked only increased by 1.0 percent.  Over the course of the year, productivity increased by 5.1 percent, which was the biggest gain since 2001-2002.

Analysts warned that these types of gains may not be sustainable, as employers were able to keep from adding to their payrolls even though sales stabilized.  As the chief economist from Deutsche Bank Securities in New York said, "the productivity gains of 2009 are unsustainable."  The gains can be attributed to "rising output amid ongoing labor cuts" and as employers begin to hire people as growth picks up, they are unlikely to continue.

The release of the weekly initial unemployment claims data from the Labor Department was the bad news part of the equation.  Initial claims increased by 8,000 from last week's revised figure of 472,000, coming in at 480,000.  The four week moving average increased to 468,750, an increase of 11,750 from last week's revised 457,000.

Continuing claims increased by 2,000 to 4.602 million.  The four week moving average for continuing claims was 4.618 million, a drop of 51,250 from last week's revised figure.

There were 31 states reporting a drop of more than 1,000 claims, with California's decrease of 22,674 leading this group.  On the down side, Puerto Rico and Oregon had more than 1,000 more claims than the prior week.  Puerto Rico saw an increase of 2,439 claims and Oregon's claims increased by 4,336.

Both the productivity figures and initial claims came in below the consensus estimate.  Productivity was expected to increase by 6.5 percent, with estimates ranging from 4.3 percent to 8.5 percent.  And initial claims were projected to come in at 455,000, with projections ranging from 440,000 to 475,000.

Many expect the trend of a slow and steady recovery to continue.  The CEO of Eaton Corp said "the economy has continued to move along the slow recovery path that we thought it would."

This is a trend that investors need to keep track of.  When will the economy pick up steam?  We'll get another indicator of whether this is happening tomorrow, when the government releases its monthly payrolls data.

The January survey of employers by Automatic Data Processing showed that private sector employers shed 22,000 jobs in January.  December's job losses were also revised down, from 84,000 to 61,000, an improvement of 23,000 for the month.  The January job losses were the lowest since February 2008, which is when ADP's survey first showed that recessionary pressures were causing employers to lay off workers.

In the report, ADP said that employment in the services sector increased by 38,000.  This was the second month in a row where employment in that sector rose.  However, that increase was offset by a decline of 60,000 in the good producing sector.  Manufacturing shed the most jobs, with 25,000 jobs lost.

Large and small employers continued to cut their payrolls, with employers of 500 or more laying off 19,000.  Small businesses, defined as those with less than 50 workers, cut 12,000 jobs.  However, medium sized businesses, with 51-499 workers, added 9,000 workers.  This was the first gain in employment among these businesses since January 2008.

The ADP report is seen by many as a precursor to the government's payroll figures, which will be released on Friday.  It tends to be more negative than the government's report, totaling 500,000 more job losses than the Labor Department in the six months ending December 2009.

The consensus estimate was for a loss of 30,000 jobs, with estimates ranging from a gain of 50,000 jobs to a loss of 110,000.  Thus, the actual data came in better than the consensus, around the midpoint of estimates.

Analysts said the ADP number showed that the labor market is headed in the right direction.  An economist at Ameriprise Financial in Detroit said the data shows "trends are heading in a positive direction for the labor market."  He added that companies are starting to hire again as they start to believe "the economy does have legs."

While it's often said that jobs are a lagging indicator and we have often said that listening to those who say "this time is different" is a good way to lose money, that may very well be the case this time.  Consumer spending is two thirds of the economy and until the consumer feels secure about the employment picture, it's likely to remain tepid.

There cannot be a strong recovery without the jobs picture improving.  And that's why Friday's report from the Labor Department is so important.  Investors may want to protect their gains ahead of that report by either taking profits or using trailing stops to protect gains.

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A few releases of data today will help determine this.  Today, we'll get some data that will either confirm or call into question the Institute for Supply Management's manufacturing index data from yesterday.  That number, which came in higher than expected, will need to be evaluated in light of the release of auto sales today.  The consensus estimate for auto sales is for sales to come in at an annual rate of 8.37 million vehicles.  If the actual number comes in higher, especially given the negative publicity surrounding Toyota, that will be another positive sign for the manufacturing sector.

We'll also get the release of pending home sales from the National Association of Realtors.  This information will show whether or not the housing market has recovered after an expected downturn due to a planned expiration of an $8,000 tax credit for new home buyers in November.  The expected expiration of that credit caused sales to be moved forward.  The tax credit has since been extended, and investors will look to the pending sales numbers to get insight on how the housing market is performing.  As you know, housing dragged the economy to the brink, and without a recovery in that sector, any recovery in the economy as a whole will be slow.

The International Council of Shopping Centers-Goldman Sachs store sales number showed an increase of 0.1 percent for the week and a 0.4 percent increase versus last year.  This data helps to confirm yesterday's retail sales numbers, which showed that while sales were increasing, they are increasing at a slow rate.

Adding to the data that traders will evaluate today in order to determine what moves to make will be the release of earnings data by 26 members of the S&P 500.  UPS kicked off the earnings releases on a positive note, beating expectations.  However, the management of the company said that it had a cautious outlook for 2010.

It will be an interesting day for traders and investors today.  Investors may want to take a cue from UPS and be cautious with their trades.

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Stocks bounced off a three month low, as good news on personal income and manufacturing were the catalyst for a rally.  The morning started off on a good note with consumer spending ticking up by 0.2 percent in December and personal incomes increasing by 0.4 percent.  The good news continued, as the Institute for Supply Management's manufacturing index rose to 58.4.  This was significantly higher than the consensus estimate of 55.5.

Exxon Mobil added fuel to the rally, with fourth quarter earnings coming in at $6.05 billion, or $1.27 a share.  This was above the consensus estimate of $1.19 a share.  On the news, the company's shares were up by 2.7 percent and it helped move the energy sector up by three percent on the day.  The only sector in the S&P 500 to have higher gains was the commodities sector, which gained 3.7 percent.

In a reversal of the pattern that we've seen for the past few days, where good news on GDP and the reappointment of Ben Bernanke caused stocks to decline, the markets climbed on the good news.  The Dow was up by 1.2 percent, closing at 10,186.  The S&P 500 climbed by 1.4 percent to 1,089.  And the Nasdaq rose by 1.1 percent to 2,171.

David Dreman, chair of the value investing firm that bears his name, said "the trend of the market is up.  There's still good value to be picked up and we're getting close to 100 percent invested in stocks."  His optimism was shared by the chief investment officer of Wilbanks, Smith & Thomas in Norfolk, Virginia, who said "we won't get more than a 10 percent correction because the corporate earnings numbers are simply too good."  Another concurring voice of optimism came from Christiana Bank & Trust in Greenville, Delaware, which said that "the manufacturing number...stops the near-term sell-off in the market and it supports Friday's GDP data."

Other analysts were talking about the possibility of the January employment report coming in higher than the consensus and warned that a better than expected jobs report could cause the Fed to not only end its quantitative easing but to being to raise interest rates more quickly than anticipated.  This would squelch any rally in stocks.

Still, though, the portfolio manager of the Alpine Dynamic Dividend Fund said that the latest economic data showed "the economy and the recovery seem to be on track," which is positive news for investors and the country as a whole.

If the analysts and portfolio managers are correct, then investors should take advantage of any pullback in the market to add to their positions.  When good companies are on sale, investors need to take advantage of this.

In another sign that the economy is recovering, consumer spending increased by 0.2 percent in December and it was accompanied by an increase in personal incomes of 0.4 percent according to the Commerce Department.  This was the third month in a row where consumer spending, which accounts for two thirds of the economy, increased.  Without growth in consumer spending, there cannot be a strong recovery.

Disposable personal income, which is money that individuals have left to spend after paying for non-discretionary items, also increased by 0.4 percent.  Personal savings, which is disposable income less spending, increased to 4.8 percent in December from November's 4.5 percent.

The increase of 0.2 percent in consumer spending was less than the 0.3 percent that economists had projected.  Estimates ranged from no change to an increase of 0.7 percent.  Economists had estimated that personal income would grow by 0.3 percent, so the actual increase was better than expectations.

An economist at Wells Fargo Securities in Charlotte, North Carolina said that the consumer spending numbers show that "households appear to have set a course of moderate spending.  Our outlook for 2010 is an improvement in consumer spending."

Agreeing with the assessment of Wells Fargo Securities was PNC Financial Group in Pittsburgh.  An economist there said "consumers have the wherewithal to support good spending, however they are going to be reticent until they see a few good months of job gains.  2010 is lined up to be a moderately good year."

We'll see how the markets react to this positive news.  Last Friday, they got word that Ben Bernanke was given a second term by the Senate and a much better than expected GDP number, but they still sold off.  During the run up since the lows of March 2009, markets took news that things were getting bad less quickly and bought stocks.  Recently, we've seen them take actual good news and sell off.

Will that trend continue or will today's trading show otherwise?  Stay tuned, and make sure that your gains are protected with either trailing stops or put options.