March 2010 Archives

There is probably very little that the Obama administration and the tea party movement agree on.  Clearly, they didn't agree on health care reform.  Given the demographic makeup of the tea party movement, which is mostly comprised of older white males, it's highly likely most of them didn't vote for Obama in November 2008.

So what can bring the tea party and the Obama administration together?

Two things.

Executive compensation.

And jobs.

Treasury Secretary Tim Geithner, when addressing the United Steelworkers at their headquarters, said, "the economy is about to begin creating jobs on balance."  He added that administration policies such as the stimulus and the bailout of the financial industry helped move the economy towards job creation, saying "it didn't happen on its own."

Credible analysts -- let's ignore for a while the economic ignoramuses like John Boehner and Michael Steele who claim the stimulus didn't create any jobs -- such as IHS Global Insight, Macroeconomic Advisers and Moody's Economy.com say that the stimulus created or saved 1.6 to 1.8 million jobs.  They expect that the stimulus will have created or save 2.5 million jobs once it's run its course.

But the Obama administration has repeatedly said that they don't consider the current labor market acceptable and that they want to move the unemployment level down.  They've said that they want to help create green jobs through investment in alternative energy, and that they want to create a more educated population which will be more easily able to find jobs.

They'll find agreement on those goals from the tea party movement.  According to a survey conducted for Bloomberg.  The survey found that 70 percent of tea party movement members want a government program that creates jobs.  In our view, we believe they've already got one.  It's called the stimulus package.

Another thing that the Obama administration is pushing for are limits on executive compensation.  Public outrage at the huge bonuses paid to the "talented" staff and executives at companies like AIG who developed the products which imploded and created the need for a government bailout has driven this.  And the news that companies are paying more in cash and less in stock is likely to fuel this anger even more.

Kenneth Feinberg, the administration's special master for compensation, has said that the administration wants to change compensation plans to give executives more incentive to oversee actions that will contribute to the long term success of the companies they run.  They'd like to see less cash compensation, fewer perks, and more incentives paid in stock so that executives would have their interests better aligned with those of shareholders.

The administration's desires, however, are clearly being ignored by the compensation committees of many companies.  At American Express, cash compensation for its CEO rose from $7 million to $11 million.  While total compensation for the CEO declined, the percentage of compensation in cash rose from one third to two thirds. 

And other companies are fighting the say on pay proposals put forth by shareholders, who would like to have an advisory vote on executive compensation.  Keep in mind that this would not be a binding vote, where a company would have to tear up its contracts with executives if the shareholders didn't agree with the pay package.  Companies have trotted out the same old excuse about how they need to keep talented executives and how this would hamper them from providing them with the pay needed to do so. 

Does anyone see the hypocrisy of how top management insists on paying the employees who do the actual work and generate the revenue at or below the average of comparable workers but insists on paying their executives more than their peer group?

But that's a digression.  Getting back to the point, Feinberg said that he sees some good signs, such as the CEO of Goldman Sachs taking all of his bonus in restricted stock that cannot be sold for five years.  However, Feinberg warned, without regulations on financial firms and big changes on how companies are governed, there cannot be "true executive compensation reform."

Feinberg would find agreement on that point with members of the tea party movement.  According to the Bloomberg survey, approximately half of tea party members say they want the government to regulate executive pay.

When two groups that have such divergent viewpoints agree on something, it's a sign that something should be done.  Tea party members don't agree with the Obama administration on much.  The fact they agree on having the government step in to regulate executive compensation and to create jobs speaks volumes.

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College football fans are no doubt familiar with Lee Corso.  While often wrong with this picks, he's known for saying "not so fast, my friend" when his fellow anchors pick a certain team to win.

Well, the ADP National Employment Report played the role of Corso this morning.  We had a streak of good economic data on consumer spending, consumer confidence, and housing.  Many analysts -- including this writer -- thought that these were indicators towards a positive employment situation report from the Labor Department on Friday.

ADP said that private sector employers shed 23,000 jobs from their payrolls in March,  They noted that this was the lowest decline in employment since payrolls started shrinking in February 2008.  Still, the consensus estimate was for an increase in payrolls of 40,000, with estimates ranging from a loss of 20,000 to a gain of 100,000.

The service sector, which comprises the majority of the economy, showed a gain of 28,000 jobs, which was the second consecutive month of gains.  However, that gain was not enough to overcome payroll cuts of 51,000 in the goods production sector of the economy.  Employment declined among all sizes of employers.  Employers of over 500 cut 7,000 jobs.  Small businesses, with payrolls of less than 50 workers, shed 12,000 jobs.  Medium employers cut 4,000 jobs.

Analysts said that the data from ADP indicates that the employment gains many are hoping for may not materialize.  "The economic recovery has not been long enough or strong enough along the way yet to produce the kind of rapid employment that people are hoping for," said the chairman of Macroeconomic Advisers.

And anecdotal evidence backs this claims.  While there are companies like Caterpillar that say they are seeing enough of a pickup to increase hiring, there are also companies like JM Smucker who are cutting jobs.

The ADP data as well as anecdotal data shows that the labor market is still in flux.  We're on the cusp of adding jobs -- and may very well do so according to the Labor Department on Friday -- but we are still a long way from sustained strong growth in employment.

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According to the Commerce Department, consumer spending increased in February by 0.3 percent, in line with the consensus estimate.  Personal incomes were essentially unchanged, as bad weather on much of the east coast kept hours worked and hiring lower than expected.  That kept the personal incomes figure from meeting expectations, which were for an increase of 0.1 percent.

Even though the bad weather kept personal incomes from increasing, there was a small gain ($2.0 billion) in wages and salaries.  This was offset by a drop in incomes by proprietors, which was off by $6.1 billion.

With a flat level of personal incomes and increasing spending, you'd expect the savings rate to decline.  That was the case, as savings declined to 3.1 percent from January's 3.4 percent.

There were no signs of inflation, as the personal consumption expenditures index increased by 1.8 percent from February 2009.  Excluding the volatile food and energy sectors, the index was up by 1.3 percent.

Analysts viewed the news as generally positive.  However, warnings were raised about the unsustainable nature of the increase in consumer spending without a matching increase in personal incomes.  Calling the boost in spending due to a falling savings rate "played out," the president of ClearView Economics said that further increases in spending must come from "good old fashion advance of employee compensation."  An economist at Capital Economics concurred, saying "households will not be able to continue to spend at this rate in the coming quarters.  This is especially the case when they can no longer supplement incomes with credit."

Another concern raised by the data was the potential for deflation.  A senior economist from State Street Global Markets wrote in a note to clients "the risks are that inflation may continue to decelerate."  However, as long as deflation doesn't set in, the low inflation rate is good.  That means that the Fed will be able to keep interest rates low in order to boost the economy.

For a while, we had markets rallying on news that was less bad.  That appears to be, in the words of ClearView Economics, played out.  Now we need actual good news.  Consumer spending increasing for the fifth month in a row is actual good news.  However, while this is good news, we need to see matching increases in personal incomes.  With consumers unwilling and likely unable to use credit to boost their spending, without a boost in incomes, there's simply no way spending will continue to increase.

We will likely see that happen soon.  Analysts expect payrolls to start to grow, and the February data on personal incomes was pushed down by the back to back blizzards that hit much of the eastern half of the country.

If we see payrolls start to grow -- no more of this it's less bad than when we saw 800,000 jobs evaporate in a month -- then we can start to conclude that the economic recovery is picking up speed.  Until then, increases in personal spending will have to be taken with a grain of salt.

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The week of March 29 to April 2 may not be one with lots of trading, as many traders will leave the office or not show up at all at the end of the week due to Good Friday.  However, the week is full of economic data which will give us information on whether or not the economic recovery is picking up speed.

We'll start the week with data on personal incomes and expenditures.  That data will be released by the Commerce Department at 8:30, before many people have had their first cup of coffee for the workweek.  Last month, incomes were up by 0.1 percent, and that's the figure that analysts expect to see this month.  Spending was up by 0.5 percent last month.  This month, the tea leaf readers say it will be up by 0.3 percent.

On Tuesday, the Conference Board will release its consumer confidence index at 10:00 AM.  Last month, this fell by almost ten points to 46.0.  Analysts expect to see a better reading this month, with the consensus estimate coming in at 50.  As you know, there are two components to this reading.  One measures the feelings of consumers for current economic conditions and one measures future expectations.  What will be important here is what consumers expect to see in the future.  If they are more optimistic about the future, it's more likely they'll open their wallets up and boost the economy.

On Wednesday, we'll get some information on the number one issue on the minds of the typical American -- jobs.  We'll get the ADP employment report at 8:15 AM.  This report only measures private sector employment, but it's seen as an indicator of what will happen with the more comprehensive Labor Department report. 

We'll also see what's going on in the Midwest and in the manufacturing sector, with two reports coming out within 15 minutes of each other.  At 9:45, the Chicago PMI, which measures business conditions in the Chicago area, will be released.  Analysts here expect the reading to drop from 62.6 to 61.0.  Then at 10:00, we get data on the manufacturing sector with the release of factory orders data from the Commerce Department.  Analysts expect an increase in factory orders of 0.4 percent, on the heels of a 1.7 percent increase last month.

Thursday is going to be a data heavy day.  At 8:30 AM we get our weekly report on initial unemployment claims from the Labor Department.  The consensus estimate is for a drop to 440,000 from last weeks 442,000.  This will be seen as another indicator of what the report on jobs will show.

We also get more data on manufacturing from the Institute of Supply Management.  They'll release their manufacturing index at 10:00.  Analysts expect the index to decline slightly from 56.5 to 56.1.  Also at 10:00 will be the release of construction spending from the Commerce Department.  Here, a drop of 1.1 percent is expected, which is worse than the 0.6 percent drop we saw in the prior month's data.

Throughout the day on Thursday we'll get data on auto sales from the various manufacturers.  Sales of domestic nameplate vehicles is expected to come in at an annual rate of 9.0 million, up significantly from the 7.6 million rate seen in February.  However, the back to back blizzards seen in the Mid-Atlantic are seen as a big drag on auto sales and thus a spring back is expected.

Finally, on Friday, we'll close the week out with the number one economic concern -- jobs.  The Labor Department will release its employment situation report at 8:30.  Analysts expect that payrolls will move from a drop of 36,000 to a gain of 200,000.  The unemployment rate is expected to remain steady at 9.7 percent.  Those with jobs are expected to make slightly more money, as average hourly earnings are expected to climb by 0.2 percent and the average workweek is expected to increase by 0.8 hours to 33.9 hours.

By the end of the week, we will know better whether the expected pickup in the recovery has arrived or is something we'll still have to wait for.  Even though volume is likely to be light this week, there's plenty for investors and traders to watch.

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It's been a long time since mainland China was referred to as Red China, but with red flags appearing for companies attempting to do business there, it may be time to bring that name back.  By now, anyone who has been paying attention has heard about Google's spat with the authoritarian regime.  As you know, Google alleges that its system was hacked by government officials trying to get access to emails of human rights activists.  Trying to live up to its motto of "don't be evil," Google directed searches from China to its servers in Hong Kong, where search results are not censored.

But it's not just Google that's been having problems in China.  The list of companies charging China with "systematic efforts by China to develop policies that build their domestic enterprises at the expense of U.S. firms" includes such companies as Microsoft, Boeing, Motorola, Caterpillar, United Technologies, and General Electric.  Beijing uses tough standards on products ranging from cell phones to cars to hide a push to favor domestic industries, according to Joerg Wuttke, director of the European Union Chamber of Commerce in China.

For many companies, "the golden China opportunity" has "become a mirage," an executive at a major tech company who wants to remain nameless said.

Why has the golden opportunity that many saw in China disappeared?  According to the director of the Center for International Political Economy at Peking University, the Chinese "people feel that foreign brands have taken too much market share."  The statistics back them up.  In their own home market, General Motors and Volkswagen are fighting for the top spot for market share.  China's homegrown Geely and Chery are lagging.  Nokia owns the top spot for market share in mobile phones, with about a third of the market.

So it's only natural that the Chinese would start to get irritated at being looked at as a low cost producer of low cost goods.  They've got pride, and they've got companies that are trying to become well known brands overseas.  If you asked a typical person to name a Chinese company, you might get them to say Lenovo.  Maybe Haier as well.  But beyond that?  There are very few Chinese companies with that kind of recognition.

China's leadership does not want the grumblings from a few companies to turn into a major trade war.  Premier Wen Jiabao told reporters the government would try "to level the playing field for foreign companies."  He also met with foreign delegates and said that a trade war "won't help us cope with difficulties but just curb cooperation."

And some outside of China say that the complaints are overblown.  A China expert at the Center for Strategic & International Studies said that Beijing needs foreign technology and won't shut the door on foreign companies.  As an example, he points out that China needs wind turbines.  But its technology is far behind that of those made abroad.  Because of this, he said, the Chinese "won't wait for Chinese innovation.  They will choose American, European, or Japanese products that are cheaper."

Still, there are definitely barriers being raised by the Chinese government.  Some of these lie the standards put in place by China.  You may hear from certain talking heads that it's easier to open a business in China than it is in the United States.  Ask those talking heads about the standards for more than 10,000 products that China issues every year -- more than the rest of the world combined.  And those standards are used as tools to make things more difficult for non-Chinese companies.

Ever since China was admitted into the World Trade Organization, many pundits and talking heads contributed greatly to climate change by spouting a lot of hot air about how everyone needed to invest in China.  Voices who pointed out that investing in a country with an authoritarian government and a distrust of foreign companies entailed risks were shouted down and told that things were different this time.

Some companies may be learning an expensive lesson that things are rarely different, and that when the conventional wisdom is to do one thing, it may be wise to think about doing something else.

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The weekly release of initial unemployment claims from the Department of Labor came in much better than expected.  For the week, there were 442,000 initial claims for unemployment, down by 14,000 from the prior week's revised figure of 456,000.  The four week moving average also dropped by 11,000 to 453,750.  Continuing claims also fell, with this week's figure of 4.648 million down by 36,500.  The consensus for initial claims was for a drop to 450,000 claims, down by 7,000 from the previously reported 457,000 claims. 

So, the report came in better than expected by analysts, and it's another positive sign for the economy.  We recently got news that the average home in the United States is undervalued by 8.9 percent.  Today, some analysts say that hopes are rising that the United States economy is on the verge of large scale job creation.  It will, of course, take some time to replace the 8.4 million jobs that have been lost since the beginning of the recession in December 2007.

But according to Brusuelas Analytics in Stamford, Connecticut, companies will resume "hiring this year."  He expects employers to add 225,000 jobs to their payrolls in March, up from February's decline of 36,000 and a lot better than the nearly 800,000 jobs lost on a monthly basis in the latter part of 2008 and early part of 2009.

Why the good news on the job front?  One of the factors is the hiring of census workers by the government.  That will swell the number of people getting government paychecks by as much as 635,000.  While the jobs are temporary, they are still jobs, and that will help boost spending and the payroll of other employers.

Furthermore, according to Brusuelas Analytics, the economy will add around 50,000 private sector jobs per month if the economy continues its trend.  On top of that, the employment subindex of the Institute of Supply Management's manufacturing and service indices showed improvement.  The employment subindex for manufacturing showed accelerating growth.  For the service index, the news wasn't as good, as the employment index still showed contraction.  However, the rate of contraction is slowing.

Put it all together, and the indicators are for growth in the job market.  Jobs are often the last part of the puzzle to fall into place for the economy.  Combine that with stabilization in the housing market, and it points to better economic conditions.

Nobody is predicting a return to the go go days of the 1990s, but even slow growth in employment and slow but steady growth in the GDP would be a tremendous improvement over what we've seen lately.

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As the Commerce Department reported that new home sales declined by 2.2 percent in February to 308,000, the lowest level since the government began reporting on this in 1963, the question has arisen among some economists as to whether or not the housing market is now undervalued.

That is the argument put forth by economists at IHS Global Insight and PNC Financial.  Economists at these companies examined housing prices in 300 metropolitan areas from 1985 to 2009. They calculated a theoretical price for housing based on local income levels, population density, and other fundamental housing factors.

During the height of the housing boom in 2005, their analysis found that there were 137 areas where houses were overvalued by at least 14 percent.  The most overvalued market?  It's not what you'd expect.  You'd figure it would be some place like Las Vegas, but it actually was Merced, California.  Here, the average house was overvalued by an incredible 63 percent.  To put that in perspective, for every one dollar of value, a person was paying $1.63.  So, a $500,000 home was actually only worth $306,748.

As you know, during the housing bubble, prices surged because of what's known as the "greater fool" theory.  Individuals buying houses thought that the price would only go up and that someone would pay an even more inflated price for that house.  Eventually, though, there were no more fools and the bubble popped.

As a result of the popping of the bubble and the subsequent recession, housing prices plunged.  By the end of 2009, the analysis of the economists showed that housing prices in the United States as a whole were 8.9 percent undervalued.

But just like an investor in undervalued stocks, someone who wants to buy a house they feel is undervalued will need to be patient.  For a stock investor, they need to wait until the market realizes that a stock they bought at a discount is actually undervalued.  And someone buying an undervalued house will have to wait until the economy turns around.

With the combination of high unemployment, tight credit, and a looming shadow inventory of foreclosed and other distressed homes, prices will be held in check.  Those who don't have jobs can't buy houses, and may lose theirs.  Credit is no longer available to many, thus shrinking the market further.  And the shadow inventory of distressed homes will also keep prices in check.

Still, housing prices will likely start to stabilize soon.  That will be good for the economy.  While nobody is predicting a return to the boom days, which were simply not sustainable, even a slow, steady pace of increased prices is better than the plunge in prices we've seen over the past few years.

Investors in housing need to temper their expectations.  During the last bubble, the dot com bubble, we saw the Nasdaq soar to above 5,000.  Ten years later, the Nasdaq is still more than 50 percent below that level.

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As you know, companies taking TARP money from the government were required to submit their compensation plans to pay czar Kenneth Feinberg.  Many of the companies who could scrambled to pay back the money so that they could be free of the restrictions that Feinberg imposed on them.  They claimed that if their top employees were subject to pay restrictions, they would leave for greener pastures.

Some of the companies protesting Feinberg's restrictions included Bank of America and AIG.  According to the Financial Times, others have complained privately and some government officials agree that pay restrictions have been disruptive and caused some employees to leave.

Feinberg reviewed the pay at seven companies who received "extraordinary assistance" from the government.  He ordered pay cuts for many executives, with the average compensation being cut in half.  In the companies where Feinberg ordered paycuts, 39 left the company before these took place in October.  Since then, another 18 have left.

Feinberg says that this shows the criticism of the pay restrictions and the claims that they'd cause a brain drain of top employees was incorrect.  The vast majority of executives staying "undercut the argument that I have heard all along that if you don't pay more and give more salaries and higher salaries, people will leave.  They are not leaving, and I am comforted by that fact."

One executive whose company is subject to Feinberg's jurisdiction, while not contradicting Feinberg's claims, said "iIt's a little early to declare victory."

Still, executives who want to be free of the compensation restrictions imposed by Feinberg need to keep the results of a recent poll in mind.  What group of people is looked at with the same low approval rates as Congress?  Corporate executives, who are viewed with disapproval by the same two thirds majority that views Congress that way.

A majority (56 percent) of people surveyed by Bloomberg said that they would favor government action to limit the compensation of those who they view as causing the financial crisis or to ban these people from working in the financial industry.

You can watch an interview of Feinberg here.

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After the passage of health care legislation by the House last night, we speculated that traders would dump health care stocks in a panic and we would have the opportunity to buy them on the dip.  We cited money managers such as BlackRock's Bob Doll who said that health care stocks were cheap.  We expected that the sentiment of people like republican congressman Paul Broun from Georgia, who said that health care reform would "destroy America," would be the prevailing one among traders.

We were wrong -- completely and utterly wrong.

As the headline in the Wall Street Journal said, health care ETFs gained on the passage of the reform bill.  Apparently, investors like Doll weren't the only ones who felt that while there would be pressure on margins, the addition of 32 million additional customers will yield higher profits.  ETFs focusing on pharmaceutical stocks were up, with gains among major ETFs in this sector ranging from 1.4 to 1.8 percent on the day.  And biotech ETFs also gained, although the gains were smaller.  Those were up by around 0.8 percent.  Hospitals, who will gain because they will see fewer patients who do not have insurance, increased by 1.6 percent.

The only segment of the health insurance industry that didn't participate in the gains was the insurance industry.  These stocks were down by about 0.1 percent.  Here, investors are concerned that while they will get more customers, these customers will not be the kinds of clients they want.  Also, their ability to shed unprofitable customers will be lost and that is a concern as well.

Still, though, traders agreed that health care stocks will for the most part benefit from the reforms that passed yesterday.  And their initial reaction casts a lot of doubt on the contention of those who claim it will destroy America.

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Every week brings us new data that helps us paint a picture of what's happening in the economy.  This week is no different.  We get a day off, as Monday is likely going to be a day full of panic trading driven by the passage of the health care bill.  Health care stocks are likely to get pounded as traders act as if no health care company will ever make money again and dump their shares.  Opportunistic investors should take a cue from BlackRock's Bob Doll and buy shares on the dip.

On Tuesday, we will get news on the sector of the economy that dragged us into the worst recession since the Great Depression, the housing sector.  Data on existing home sales will be released at 10:00 AM.  The consensus estimate is for five million sales, with estimate ranging from 4.8 million to 5.2 million.

Wednesday will kick off the day with the release of durable goods orders from the Census Bureau at 8:30 AM.  The consensus estimate here is for a gain of one percent, with estimates ranging from -1.5 percent to 2.0 percent.  Speaking of the Census Bureau, this is a good time to remind you to send in your census form.  It's required by law and it helps the government save a lot of money if you do it.  Then at 10:00 AM, we get more data on the housing market, as new home sales data will come out.  Here, economists expect to see 315,000 sales, with a low estimate of 290,000 and a high estimate of 330,000.

At 8:30 AM on Thursday, we'll get the weekly release of initial unemployment claims from the Labor Department.  Expectations range from 445,000 claims to 460,000 claims, with the consensus coming in at 450,000.  That would be a drop of 7,000 claims from last week.  This will give us more insight into what kind of job growth we can expect to see.  Without job growth, it's difficult to see how the economy can grow rapidly.  People without jobs don't spend, and without consumer spending, any recovery is going to be lukewarm at best. 

The picture of where the economy was in the fourth quarter of last year will be finalized at 8:30 AM on Friday, when the Commerce Department releases its final fourth quarter GDP data.  The revised data came in showing a gain of 5.9 percent in GDP, and that is what analysts expect to see.  Estimates range from 5.7 to 6.0 percent.  The day will also give us some data on where we can expect the economy to go, as consumer sentiment data comes out at 9:55 AM.  Here, estimates range from 72.5, which would be unchanged from the last report, to 75.0.  The consensus estimate is for a slight gain to 73.0.

As you can see, every day after Monday will bring us market moving data.  However, even though no data will be released on Monday, it's likely the markets will move in a big way on Monday, as investors react with panic to the passage of health care reform.

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The conventional wisdom is that health care reform passing Congress would be bad news for stocks in the health care sector.  Drug companies, health insurance companies, and other medical services providers would get hurt by health care reform, according to the conventional wisdom.  But as we have demonstrated before, the conventional wisdom may be conventional, but it's not always wise.

The rationale behind the "sell health care stocks if health care reform passes" is simple.  The people who think this way believe that health care reform will destroy profits for companies in the health care field.  Gone will be the 39 percent increases in rates by companies like Anthem Blue Cross, a subsidiary of Wellpoint.  The prohibition on the government using its bulk buying power to negotiate better deals on drugs from pharmaceutical companies like Pfizer will also be gone.

So, naturally, the conventional wisdom is that stock prices will fall and companies like Wellpoint and Pfizer will be doomed.

What this analysis fails to consider is that while these companies will give up some pricing power, they also will get access to 32 million more customers.  According to its website, UnitedHealthGroup has 70 million customers.  So, the number of people who will need -- by law -- insurance will increase tremendously.  Getting access to these people is well worth, in our view, the downside.  So Wellpoint will no longer be able to increase premiums by 40 percent, a huge mistake from a public relations perspective and a way to lose customers.  They'll benefit by having access to a huge new client base.

So will drug manufacturers.  Right now, without insurance, many people simply can't afford the drugs they could use to improve their health.  Margins will be cut somewhat, as bulk prices are negotiated.  But getting access to 32 million more people who can use your product will make up for that.

That is the thinking behind the very successful investor who leads BlackRock, Bob Doll.  The passage of health care legislation would remove uncertainty and expand coverage, Doll said.  He added "there could be some outperformance coming" and called many health care companies "very cheap relative to the overall market."  Health care companies, Doll said, will benefit from the aging population in the United States as well as increases in the number of people with insurance.

"The country will spend more money on health care, and that's a good thing for the revenues of these companies.  We are aging as a population and trying to increase our standard of living, and a recipe for that is more money for health care," Doll said. 

Instead of panicking like many will do if the health care reform legislation that's up for a vote does pass, smart investors should take a cue from people like Doll.  Increasing revenues due to an aging population as well as higher coverage levels are a winner for the health care sector.  They will have to give up some pricing power in order to get access to more customers, but that often happens anyway as large buyers of services always get a discount.

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A day after the Fed said that it would keep interest rates low for an "extended period," data came out that bolstered its ability to do so.  The Fed has used the "extended period" language for around a year now.  Inflation watchers have been keeping track of inflationary pressures to see if the Fed could maintain its stance.  As you know, the Fed has a dual mandate to ensure that inflation is kept in check and to make sure the economy grows.

The consumer price index which came out on Thursday showed that the Fed can focus on the growth part of its mandate without having to worry about the inflation part for now.  The Bureau of Labor Statistics (BLS) released its consumer price index (CPI) report, and it showed that the CPI was unchanged in February.  Over the past 12 months, the CPI has increased by 2.1 percent.  According to the BLS, the flat CPI was due to "a decline in the energy index being offset by slight increases in the indexes for food and for all items less food and energy. Within the latter group, declines in the indexes for apparel and household furnishings and operations were more than offset by continuing increases in the indexes for medical care and used cars and trucks."

Excluding the volatile food and energy portions of the index, the CPI increased by 0.1 percent in February.  The increase here was driven by medical services, up by 0.5 percent.  Both used and new vehicles increased in price as well, up by 0.7 percent and 0.1 percent respectively.  These increases were partially offset by a drop in apparel prices, airline fares, household furnishings, and recreation.

The low rate of increase in both the CPI and the core CPI supports the Fed's view that the economy isn't growing quickly enough to fuel inflation.  In the release announcing the Fed's decision to keep interest rates at record lows, they said inflation will remain "subdued for some time."

Traders took the good news on the inflation front as well as good news on initial unemployment claims and the Philadelphia Fed's better than expected report on economic conditions in its area and pushed stocks higher.  The Dow was up for the eighth day in a row, climbing 0.4 percent to 10,779.  The S&P 500, however, fell fractionally, down to 1,166.  And the Nasdaq ended up on the plus side of the ledger, up by about 0.1 percent to 2,391.

We've had a week of good economic news, and the markets have reacted as would be expected.  However, the good news needs to be kept in perspective.  One of the reasons why inflation is tame and the Fed can keep rates low is because of the slow pace of job creation.  Without jobs being created -- and 8.4 million jobs were lost since the recession began in December 2007 -- there won't be too much money chasing too few goods, which is what causes inflation.

Still the ability for the Fed to keep interest rates low to spur growth is key to any recovery.  And with inflation in check, that's what we have right now.

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A sure sign that the markets are recovering is our portfolio.  So far this year, all of the major indices are up, and that means that naturally, our portfolio has grown in size as well.  Many people would look at that as proof that the markets are trending up, and it's definitely that.

But the big sign that things are recovering is our options positions.  As you know, we sell covered calls in order to increase our returns.  We sell out of the money options, expecting that they'll expire worthless.  And the odds are in our favor.  After all, around two thirds of all options expire worthless.

What then, does it tell us when many of the covered calls we sold are in the money?  And it's not just in one sector.  It's in several.  And keep in mind that we sold these options less than a month ago!

For Intel, which we purchased after it reported blowout earnings, increased its revenue, and boosted its margins yet dropped, we sold the March $21 call.  The stock was trading at around $20.75 at the time, so we figured that we might get our stock called away, but the odds were good that we might lose a quarter or so in the worst case.  Well, as things developed, that view was wrong.  Intel stock closed at $22.24 yesterday, so it's very likely we'll have our position called away.  Still, we'll gain about five percent on our investment in a couple of months.  That's a return we'll take.

We'll try to retain our position in Intel, however, by possibly selling a April call at a higher strike price and using the proceeds to close our options position.  That may not work, but it's something we'll try to do.

AT&T is something that we purchased in order to collect dividends and increase our returns by selling calls.  Again, we sold out of the money calls, and less than one month later, we'll be looking at that position going away.  We'll take it, though, because we'll get more than the dividend and capital gains we expected for a year in a month.  AT&T, as you'll recall, is part of our do it yourself income fund.

Finally, Ford, which we said we'd take out for a test drive back in November, has been a big winner for us.  We bought the stock before we wrote about it, and our effective price was around $7.75.  When we wrote about Ford, it was trading at around $8.25 a share.  Yesterday, it closed at $14.10.  That means our call options for the stock, which we sold at $13 and $14, are likely to be called away.  Keep in mind we sold these about a month ago.  At the time, the stock was trading at $11.21 a share.  That means the stock has appreciated by 25.8 percent in less than a month!

Unfortunately, we are going to leave some money on the table after our positions are called away.  We may buy back our options in some cases, but since we tend to be fully invested, that may not be possible.  If that's the case, we'll find new positions to stake out.  When you get a stock that pops by five, ten, 20, or even 25 percent in a month, you likely will leave some money on the table if you sell options.  But that's not something that's likely to happen so selling covered calls will be a strategy we intend to continue using.

As you know, one of the tools we use to increase gains beyond a passive buy and hold strategy is the technique called buying dividends.  Here, we buy a stock that's about to go ex-dividend and hold it long enough to get that dividend.  We then goose our returns a little more by selling covered calls against that stock.

This week, a company called Vector Group is going to go ex-dividend.  The stock, which is trading at around $15.50, will pay out a dividend of $0.40.  The ex-date is March 17, 2010, which is Wednesday.  That will give us a yield of 2.6 percent.

We will add to our returns by selling a April $20 call, which is trading at $0.20.  That will give us an additional 1.3 percent on our trade.  Our total return will be 3.9 percent, and we'll hold the position for about five weeks.

That works out to an annualized return of 40.3 percent, which we will gladly take.

By taking a well known technique -- buying dividends -- and adding a twist to it, we enable ourselves to increase our returns beyond what can be typically expected.  With most analysts predicting muted investing returns for the next decade or so, this is critical.

After a relatively light week of economic data, the upcoming week will have plenty of data for investors to digest.  The week starts off with data on manufacturing and housing.  First up on Monday is the Empire State manufacturing survey.  That report, which will be released at 8;30 AM, will provide some insight into the state of manufacturing in the area covered by the New York Fed.  Then at 9:15, we'll get data on industrial production.  The combination of these two reports will give investors something to think about until 1:00 PM, when the housing index is released.  Thus, by mid-afternoon on Monday, traders will have data on two sectors that have taken a pounding in the recession.

More housing data will be released on Tuesday, when housing starts are released at 8:30 AM.  After traders digest this data, they'll have to consider what to think of the Fed's open market committee announcement, which will come out at 2:00 PM.  While nobody expects the Fed to raise interest rates, investors will be looking to see if the Fed keeps language about maintaining low interest rates for "an extended period."

Wednesday brings us the release of the producer price index at 8:30 AM.  Even if the Fed keeps the "extended period" language in its announcement, if the PPI increases more than expected, investors will start to worry about inflation.  And if inflation is on the horizon, then the Fed will have to face a difficult choice on whether to raise interest rates to head off inflation or to keep interest rates low to help the economy grow.

Thursday will give us our weekly look at initial unemployment claims at 8:30 AM.  Jobs are a major concern, and until employers start to add to payrolls instead of shrinking them, the economy cannot grow rapidly.  In addition, we'll find out whether inflation has reared its ugly head in the consumer sector, as the consumer price index will be released at 8:30 AM as well.  We will also get data on where the economy is heading, as the leading indicators index will be released at 10:00 AM.  The Philadelphia Fed survey will be released at the same time, providing us with more clues on what's happening in the area covered by the Philadelphia Fed.

By the end of the week, traders will have additional data on inflation, manufacturing, jobs, housing, and the direction of the economy.  That is critical data in order to determine what trades are the best ones to make.

As noted in our previous post, during a week light on economic data, Friday morning saw the release of three reports in a 90 minute period.  And if the economy were a baseball player, then the day would have been a pretty good one.  But while a .333 batting average is something that will get a baseball player to the all star game and will help them earn a fat contract, when it comes to economic data, one out of three won't cut it.  In a song by Meatloaf, the chorus includes the line "two out of three ain't bad."  Well, in this case, two out of three were bad.

The day's economic new started off on a high note, with retail sales coming in much better than expected.  At 8:30 AM, the Commerce Department released February's retail sales numbers.  Retail sales increased 0.3 percent in February from the prior month, and they were up by 3.9 percent from February 2009.  Excluding the volatile autos sector, retail sales were up by 0.8 percent from January and 4.2 percent from February 2009.

Sales increased in ten of the 13 retail sectors, led by the 3.7 percent increase in electronics and appliance stores.  Two sectors, motor vehicles and parts and health and personal care stores, showed a decrease.  They were down by 2.0 percent and 0.7 percent respectively.  Nonstore retailers were flat.

The consensus estimate for retail sales was for a drop of 0.2 percent, with estimates ranging from a decline of one percent to a gain of 0.9 percent.  And sales excluding autos was expected to remain flat.  The actual results not only beat the consensus, but was higher than all estimates.  They were called "pretty impressive" by the global chief economist at MF Global in New York, who added the data "adds to evidence that the recovery is gathering pace."

Furthermore, the chief economist at FTN Financial in New York added, the retail sales data provides investors with "a good reason to feel more confident that payrolls fell in February only because of the snowstorm."  If he is correct, then jobs growth will cause retail sales to improve further as the year progresses.

But a dose of reality was administered just 85 minutes later, at 9:55 AM.  That's when the University of Michigan Consumer Sentiment Index was released.  The index showed a drop from 74.4 in January to 73.6.  Here again, though, the data was mixed.  The current conditions index increased from 81.1 to 81.8.  But the consumer expectations index, which measures what consumers expect to happen, decreased by 1.7 points to 68.4.

Estimates for the index ranged from 71 to 78, with the consensus estimate at 74.  The worse than expected results, according to the University of Michigan official responsible for the index, was due to a low rate of consumers expecting their financial condition to improve in the near future.  An economist at Moody's Economy.com concurred, saying that "until we get the jobs necessary to lower the unemployment rate," consumer sentiment will remain low.

Finally, five minutes later, business inventories came in worse than expected as well.  The consensus estimate was for inventories to increase by 0.2 percent.  However, business inventories actually remained flat.

Business inventories are important, because inventories tend to increase in good economic times and they tend to decrease during bad economic times.  During the recession, businesses cut their orders and let their inventories wind down, since there weren't as many purchasers for their products.  But with inventories flat in January, it is likely that businesses have ended allowing their inventories to dwindle.  They'll soon have to start restocking, especially in light of the positive retail sales figures.

All in all, the trend, except for consumer sentiment, is in the right direction.  The data continues to show an economy that's improving, although at a slow rate.

The week that closes on Friday has been light on economic data, and the final three reports will all be out by 10:00 AM.  The reaction to this data will determine whether or not equities can continue the rally which has brought the S&P 500 to its highest level since October 2008.  On Thursday, the S&P 500 climbed by 0.4 percent to 1,150.  The Dow was up by 0.4 percent as well, rallying to 10,612.  And the Nasdaq climbed by the same 0.4 percent to 2,368.

In order for that rally to continue, it's likely that data on retail sales, consumer sentiment, and business inventories will have to meet or exceed expectations.  Data that disappoints is likely to end the three day winning streak for stocks.

First up is retail sales, with the report on February's retail sales coming out at 8:30 AM.  As you know, consumer spending is two thirds of the economy, and retail sales account for a large portion of consumer spending.  In January, consumer spending was up by 0.5 percent, and spending excluding the volatile auto sector was up by 0.6 percent.  Analysts expect things to be much more subdued this month, with the consensus estimate according to Econoday expecting a drop of 0.2 percent in retail sales.  Excluding autos, the consensus estimate is expected to be flat.  Estimates range from -0.8 percent to 0.3 percent for the retail sales figure and -0.6 percent to 0.5 percent for the figure excluding autos.

Expect retailers to rally on data that beats expectations, and expect them to fall if the numbers come in below expectations.  One potential way to trade this report is to use the S&P 500 Retail SPDR, which has the symbol XRT.  If you're an investor with a longer term outlook and retailers drop, you can buy on a dip.  Only do this, however, if you feel that retailers will recover during the time period where you're willing to hold the investment.

Up next, at 9:55 AM, will come the University of Michigan's Consumer Sentiment Index.  This fell in February, dropping by 0.8 points to 73.6.  The consensus estimate is for the index to climb to 74.0, with estimates ranging from 72.0 to 75.0.  This index will give traders more information on what the consumer is thinking.  Coming only an hour and a half after retail sales data, the consumer sentiment index could either confirm the retail sales number or it could make the picture more cloudy.

Finally, just five minutes after the consumer sentiment index is released, we'll get data on business inventories.  As you know, much of the boost in GDP last quarter was due to the increase in inventories.  Inventories tend to rise during good economic times and fall during difficult ones, as companies see less demand for their products and keep less stock on hand.  Increasing inventories is a sign that businesses are more optimistic about future conditions and feel that their customers will buy more of their products.

The consensus estimate is for inventories to increase by 0.2 percent, with estimates ranging from no change in inventories to an increase of 0.6 percent.  The last report showed that inventories slipped by 0.2 percent in December, which surprised traders and served as a warning that businesses were not as optimistic about economic conditions as some thought.

On a week where the amount of economic data released was relatively low, the week closes out strong with three important releases.  The retail sales and consumer sentiment index will give investors clues on what's happening now in the economy.  And the inventory data will provide clues on what might happen next.

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While there's no question the economy is beginning to recover from the worst recession since the Great Depression, with GDP increasing by six percent in the fourth quarter, data released today shows that the recovery is far from a strong one.

The Department of Labor reported that initial unemployment claims declined by 6,000 to 462,000.  The four week moving average came in at 475,500, which was an increase of 5,000 from the previous week's figure.  Continuing claims increased by 37,000 to 4.558 million, and the four week moving average here was unchanged at 4.581 million.

Eight states reported a decrease of more than 1,000 claims, with Pennsylvania's drop of 4,772 leading the way.  On the down side, four states reported claims increased by more than 1,000, with California's increase of 16,112 claims the highest.

Analysts had expected initial claims to decrease slightly more than they did, with the consensus estimate for a drop to 460,000.  Estimates ranged from 440,000 to 480,000

Not surprisingly, the less than stellar job market translates into higher foreclosures.  Many people live paycheck to paycheck and when they lose their jobs, they can't pay their mortgages.  That was shown by a report from RealtyTrac, which said that foreclosures increased by six percent in February from the year ago period.

While the increase in foreclosures was the slowest rate of increase in four years, it's still an increase and some of it may be due to delays in processing claims due to the severe winter weather that hit much of the country in February.  And RealtyTrac's CEO said that the data doesn't show that fewer homeowners are at risk.  Instead, he said, foreclosure prevention programs, legislation, and processing delays may be capping the number of monthly foreclosures.

Not surprisingly, the worst markets for foreclosures were the ones who saw the biggest run up in the bubble.  Las Vegas was the worst market, where one in 90 properties is in foreclosure.  That helped put Nevada at the head of the list of states with high foreclosure rates, with one in 102 homes suffering that fate.  Arizona and Florida were next, with one in 163 homes in foreclosure.

There is likely not going to be a positive trend in foreclosures as long as the jobs market remains tough.  The latest data shows that while the pace of layoffs is slowing, the economy is still isn't creating jobs.  In order for that to happen, according to the global chief economist at MF Global, initial "claims will likely have to resume a downward trend if payrolls are to improve."

However, things are moving in that direction.  According to the director of worldwide recruiting for Accenture, there is "a very broad uplift globally" in demand for Accenture's services.  He added that demand is heading "right back to the pre-recession levels."

Still, until we see payrolls expand, it's hard to see how the economy can grow strongly.  And as long as unemployment remains high, foreclosures are going to remain high as well.  The trend may be towards a slower rate of foreclosures, but the trend still is up.

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One of the pillars of conventional wisdom when it comes to sports is that spending more equals more wins.  If that were the case, then the New York Yankees, also known as the Yankee$, would have a lot more than two World Series rings in the past decade.  So obviously, there is more to it than spending a lot of money.  One of the reasons that this doesn't work as well now is that it is usually the older players who command the most money.  They are the ones with the track records and histories to justify the big salaries.  But they often are the ones who have past their primes, and who won't deliver as much as they have due to their skills declining as they age.

But that's baseball.  The NFL has a hard salary cap, and it has a floor.  So, the question is, in a more level playing field, does spending money equal success on the field?

Surprisingly, the answer is no.  The top five spending teams in the NFL and their payrolls are:

• New York Giants, $138.4 million
• Houston Texans, $128.3 million
• Miami Dolphins, $126.9 million
• New Orleans Saints, $121.6 million
• Chicago Bears, $120.7 million

Of these teams, only the Super Bowl winning Saints made the playoffs.

The bottom five teams as far as payrolls go are:

• Kansas City Chiefs, $81.8 million
• Tampa Bay Buccaneers, $84.6 million
• Seattle Seahawks, $89.1 million
• Dallas Cowboys, $90.3 million
• Cincinnati Bengals, $93.8 million

On this list were the division winning Cowboys and Bengals.

So it's clear that in a more level playing field, spending does not equal winning.

That brings us to another question.  Which team gets the most bang for its buck?  In order to determine this, what we did is break down the cost per win among NFL teams.  The leaders here are:

• Indianapolis Colts, $7.4 million per win
• San Diego Chargers, $7.5 million per win
• Dallas Cowboys, $8.2 million per win
• Minnesota Vikings, $8.3 million per win
• New Orleans Saints, $9.4 million per win

Now we're seeing a pattern here.  The teams that spent their money wisely, and who spent the least per win all made the playoffs.

On the other hand, the teams that squandered their money and paid the most per win?  Not a playoff team among them.  They are:

• St. Louis Rams, $99.7 million per win
• Detroit Lions, $50.0 million per win
• Tampa Bay Buccaneers, $28.2 million per win
• Washington Redskins, $25.0 million per win
• Oakland Raiders, $22.3 million per win

The key to winning in the NFL appears to be spending wisely.  This is likely due to the salary cap and floor.  General managers in the NFL have to balance their needs with the cost of filling those needs.  And everyone has a budget.  It's not like MLB, where teams like the Red Sox and Yankees can just outspend teams like the Twins and Devil Rays.

Want a league where everyone has a shot at winning?  Implement a hard cap like the NFL has, and make general managers spend their money wisely.  That will put a premium on intelligent decisions on players, and it will help alleviate competitive imbalances that exist in MLB.

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While larger businesses are starting to show optimism and some of them have resumed hiring, small businesses remain pessimistic.  The National Federation of Independent Business released its small business optimism index for the month of February, and it showed a drop of 1.3 points to 88.0.

Seeking to place blame, the chief economist for the NFIB blamed the "Washington DC agenda" for the negative sentiment among small businesses.  First, someone's got to define what that agenda is.  Second, what is it about, say, restricting large banks from prop trading that will affect small businesses?  If they were affected by the rule, then they wouldn't be a small business, would they?

It is disappointing to see what should be an economic data release tainted by political rants from the organization releasing the data.  Regulation is something that the NFIB rails against even though most regulations exempt its members, and the organization is seizing on this negative survey to push its agenda.  Nevertheless, there is useful information in the report.

While optimism has dipped among small businesses, they look like they plan to resume hiring.  Employment per firm dropped by 0.13 workers, which is way down from the 0.5 workers per firm average since the recession began.  Looking forward, 13 percent of small businesses plan to increase their payrolls, while eight percent plan to cut payrolls.  The number of businesses planning to hire more workers increased by three points, while the number of businesses looking to cut them decreased by two percent.  Thus, even in the negative survey, there's some good news.

Despite the ranting against the "Washington DC agenda" from the NFIB, the real reason for pessimism among small businesses is decreasing sales.  Companies reporting higher sales dropped by two points to 15 percent, while companies reporting lower sales was unchanged at 46 percent.  That is the real reason for pessimism among small businesses.  It is hard to be optimistic when you see sales falling. 

One of of the main pillars of conventional wisdom is that small businesses drive economy.  That thinking needs to be examined thoroughly.  It is clear that larger employers are the ones who are resuming hiring at a far faster rate than small businesses.  Maybe it's the large employers that drive hiring, and small businesses just follow along.

Small businesses and family farms are, in the opinion of this writer, often given a spot on a pedastal that they simply don't deserve.  And this comes from an individual who is the sole proprietor of a small business.  Who, incidentally, will never join the NFIB because they're so full of crap.

This is something to ponder on a day where there's little economic data to drive the markets.

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Many people have criticized hedge funds and private equity funds for profiting from the big run up in various equities during the time when the bubble was inflating while buying credit default swaps to profit when the bubble burst.  While that may be the case, sometimes, investors have a chance to trade a hedge fund stock to profit.

That is the case with Blackstone Group.  The company will pay a dividend of $0.30 soon, with the ex-dividend date falling on March 11, 2010.  As you know, that means investors need to hold the shares by the day before the ex-dividend date in order to receive the dividend.

The stock is trading at a shade under $15 right now, and it is yielding 8.1 percent.  That means that if you buy the stock and hold it until the ex-dividend date, you will receive income of a little more than two percent.  You'll receive that income for holding the stock for just four days, and you can profit more from any capital gains that occur.  Or, if the share price goes down -- and the shares fluctuated by $0.48 on Friday so that's possible -- you just hold on until you break even.  Even if that takes a month, you earn a little more than 24 percent on an annualized basis on your trade.

To boost your earnings, you can sell call options.  The $15 March call for Blackstone is trading for $0.19, which means you book that additional income and goose your returns even more.  That will increase your earnings to 3.3 percent, and you'll receive that for holding on to your shares for two weeks until the options expire.  That's an annualized return of 85 percent, something you should be happy to take.

Many people hate hedge funds, saying that they make money unfairly and don't play by the same rules small investors do.  While that may be true, sometimes, you can play the same game as they do, and profit from it.

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Multiple reports released by the Department of Labor over the past two days showed that the freeze in the labor market is starting to thaw.  First, on Thursday, initial unemployment claims declined by 29,000 to 469,000.  The four week moving average also decreased, dropping to 470,750 from last week's revised 474,250.  The number of continuing claims also fell, dropping by 134,000 to 4.5 million.  The four week moving average dropped as well, declining by 29,250 to 4.576 million.  This was the lowest number of continuing claims since January 2009.

There were 12 states which saw claims drop by more than 1,000, with California's 12,000 decrease in claims topping the list.  On the downside, seven states, led by New Jersey's 4,879 claims, saw more than 1,000 additional initial claims.

Economists had estimated that there would be 470,000 initial claims, with estimates ranging from 440,000 to 515,000 claims, so the actual number was pretty much right on with the consensus.  The head of economics for Bank of America Merrill Lynch Global Research said that the initial claims numbers indicate that hiring will resume soon.  However, he cautioned that the job market remains in limbo, "where it is not clear if job growth has started yet."  When companies resume hiring, the hiring will likely be "broad based" because companies "overreacted and fired a lot of people, more than they needed to, with the news of the recession."

Adding to the positive news on the jobs front was the release of the Department of Labor's employment situation report on Friday.  The report showed that the unemployment rate remained steady at 9.7 percent.  Employers shed 36.000 jobs in February, a rate that the Department of Labor called "little changed."

Job cuts were spread equally between private sector employers and the government, with each shedding 18,000 jobs.  The construction, transportation, and information sectors were the ones losing the most jobs.  On the plus side, temporary help and health care showed the most growth.  And in a case where a minimal gain was actually a positive, the manufacturing sector showed a very small increase in jobs, following a gain in that sector during January.

It's also important to note that this report was affected by the severe winter storms that paralyzed much of the mid-Atlantic for days.  The report, according to the Department of Labor, used data from the week of February 12.  Thus, it is possible that the storms affected the report.

Economists said that it is likely that the report would have showed a gain in jobs for the first time in years if it wasn't for the severe winter weather.  There's a good chance we're at the turning point for unemployment," said an economics professor at the University of Chicago.  The report showed that the decline in the unemployment rate since October was real, and the "decline was not a statistical anomaly," he added.

The report also showed that some companies are starting to back up their words with actions.  According to human resources consulting company Towers Watson, 92 percent of all employers said they would add to their payrolls in 2010.  While they said they'd do it more slowly than in the past, the employment situation report shows this may be happening.

And in a sign that the growth in jobs is not coming at the expense of productivity, another report from the Department of Labor showed that productivity jumped in the fourth quarter of 2009 by 6.9 percent.  There was a gain in output of 7.6 percent that was partially offset by an increase in hours worked of 0.6 percent.

Inflationary pressures from employees are likely to be kept in check, as unit labor costs fell by 5.9 percent in the fourth quarter of 2009.  This came as a result of productivity increasing by more than compensation.  When compared year over year, unit labor costs declined by 4.7 percent, which was the largest decline since the government started keeping records in 1948.

Productivity was forecast to increase by 6.3 percent according to the consensus estimate.  The estimate for unit labor costs was for a decrease of 4.5 percent.  Estimates for productivity gains ranged from 5.7 to 7.1 percent.

Economists called the gains in productivity unsustainable.  The chief economist at Woodley Park Research in Washington said employers "experienced rising output level without increasing employment to a degree that can't persist."  And a senior economist at PNC Financial in Pittsburgh said "productivity gains will not be sustained because companies are operating at a bare minimum in terms of employment and they will need to start increasing employment to increase output and capture additional revenue."

The combination of the good news on the jobs and productivity front caused a rally in stocks.  For the week, the Dow was up by 2.3 percent to 10,566.  The S&P 500 gained 3.1 percent and closed at 1,139.  And the Nasdaq increased by 3.9 percent to close at 2,326.

In an economic recovery, the last thing to recover is typically the labor market.  This is because companies do not start to hire until they are sure things are improving.  With consumer spending accounting for two thirds of the economy, until consumers think their jobs are secure, they don't really start to open their wallets.  And so, the slow recovery process takes place.

However, the better than expected news on initial claims, payroll losses, unemployment, and productivity bode well for an improved job market.  That is when we'll see the economy start to grow at a better pace.  Still, with 8.4 million jobs lost since the beginning of the recession, even a strong recovery will require years to replace the lost jobs.

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• U.S. Treasury's Krueger Says Job Market Still Faces 'Stresses' (businessweek.com)
• Outlook Brightens for Jobless (online.wsj.com)

Investors looking at economic data for signs that the economy is improving received some today.  The ADP national employment survey for February showed that 20,000 jobs were lost in the private sector, which was the smallest decline in private sector payrolls since they started shrinking in February 2008.  ADP reported that private sector service jobs increased by 17,000, which was the second monthly increase in a row.  However, as in the previous month, this increase in service sector jobs was not enough to overcome the loss of jobs in the goods producing sector.  This segment of the economy suffered a loss of 37,000.  Even there, though, there was good news, as manufacturing added 3,000 jobs.  This was the first increase in manufacturing jobs since January 2008.

Both large and small businesses cut their payrolls.  Large businesses, with more than 500 workers, slashed 10,000 jobs.  Small businesses, defined as those with less than 50 workers, cut 18,000 employees from their payrolls.  However, medium businesses, which are those with between 50 and 499 workers, added 8,000 employees.  This was the first increase in payrolls among medium sized employers since January 2008.

While companies continue to be hesitant to add employees due to the slow pace of recovery in the economy, the ADP report is a sign that the jobs market is improving.  The chairman of Macroeconomic Advisers, which produces the report with ADP, said "this report really is pretty encouraging."  He added that he expects payrolls to start to show growth in the next month or two.  And an economist with Stone & McCarthy Research said the data shows "the labor market is very much on the mend."

The Institute for Supply Management's non-manufacturing index (NMI) was also positive, coming in at 53.  That was 2.5 percentage points higher than January's 50.5.  Figures above 50 indicate growth.  The index was higher than the consensus estimate of 51.  Estimates for the NMI ranged from 48.5 to 52.9.  Slightly more than half of the sectors in the survey showed improvement, with nine indicating growth, and eight indicating contraction.

The chief economist at Woodley Park Research said that the index indicates "a broadening of the economic recovery."  He added the data "are encouraging, to say the least."

Finally, the Fed's Beige Book, which sums up economic conditions in each of the Fed's 12 districts, showed growth in the economy as well.  According to the Fed, "economic conditions continued to expand...but in most cases, the increases were modest."  There were nine districts that reported gains.  In the Atlanta and St. Louis districts, economic conditions were described as "mixed."  And in the Richmond district, which was pounded with two huge snowstorms, reported that economic conditions "slackened or remained soft across most sectors."

A former Fed researcher who is now an economist at JPMorgan Chase said that the report increases the chance that the Fed will reiterate its intent to keep interest rates low for "an extended period."  While the report indicated that the economy is showing growth, the growth "was described in pretty restrained terms."

The response of traders to this data was restrained.  The major indices didn't move much today.  The Dow dropped by 0.1 percent, falling to 10,397.  The S&P 500 was essentially flat as was the Nasdaq.  The S&P 500 ended the day at 1,119 and the Nasdaq closed at 2,281.

The reaction of traders may hve been the right one, as the data shows more of the same conditions we've seen so far in this economic recovery.  While the economy is growing, it's not a smooth recovery, and it's certainly not a strong one.  And jobs, like in past economic cycles, are going to be slow to recover.  However, with consumer credit constrained, without jobs recovering, consumption can't.  And that means the economy is likely to grow slowly.

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• U.S. layoffs fall in February (cbc.ca)
• Experts Talk Beige Book, ISM Services, ADP Payrolls (businessweek.com)
• Expanding activity, contracting employment (economist.com)

Those of you who have been regular readers may recall that one of our trades that didn't work out was our trade for Novatel Wireless.  While Novatel had a new product, the MiFi, which was a big hit, lower than expected sales of the product caused the stock tp plunge.  We said we'd hold on to our position, however, because we believed the product would eventually pay off and we'd be rewarded.

We still think there's a lot of gain to be made in Novatel, but we're going to close our position in that stock in order to make some money in the meantime.

Frontier Communications is a telecommunications company that's headquartered in Stamford, Connecticut.  It's got the normal telecom offerings, such as a combination of television, internet, and phone service.

And it's also got a fat dividend.  The yield on the stock is 12.8 percent.

Frontier isn't a company that we'd invest in, but it's a company we're more than happy to trade.  The company goes ex-dividend on March 5, so that means we need to hold shares of the stock by no later than March 4.  We expect the stock to trade up on that day, as people seek to get the dividend.

So we closed out our position in Novatel and we'll use the proceeds to buy Frontier.  The stock closed at $7.66 on March 2.  The dividend will be $0.25, so just collecting the dividend would give us a 3.3 yield in a few days.  But we'll goose our returns by selling a $5 call that expires on March 19, 2010.  That option is trading for $2.60.  So that means we'll get a total return on our trade of $2.85 on a stock that goes for $7.66.  That's a gain of 37.2 percent in 15 days, for an annualized return of 905 percent.

These trading opportunites are very rare, and they need to be taken advantage of when we find them.  So we'll close our position in Novatel, and move into this position.  We will use the proceeds to make up for some of our losses in Novatel.

The problem too many people make when investing is that they fail to act on opportunities like this one.  They are not easy to find but they are definitely worth looking for.

In a report that the International Council of Shopping Centers and Goldman Sachs said not to read too much into, same store sales dropped by 0.8 percent in the week of February 27.  In a year to year comparison, this figure increased by 0.7 percent.  Highlighting the way that data can fluctuate in the month of February for retailers, the ICSC is still calling for two percent growth for the full month of February.  Another thing to keep in mind is that much of the Northeast was slammed by a big snowstorm last week, which obviously kept shoppers out of stores.

Still, even if the ICSC figures -- which measure weekly sales at major chain retailers -- do show that projected two percent increase, it still shows that the consumer isn't really opening up his wallet.  Spending in the early part of 2009, which came right on the heels of the near collapse of the financial system, was hardly robust.  And a gain of two percent off those low figures is not something to get excited about.

While one week's data shouldn't be used to extrapolate too far, when combined with the drop in consumer confidence, housing sales, and increase in jobless claims we saw last week, it's clear that of anemic retail sales is still in place.

That should get investors to think about whether they should take profits on retailers who have had big run ups.  Most investors who put their money into the stocks of retailers in the past year or two have big gains.  It may be time to take those gains or at the very least, use options to protect against losses.

We will get more economic data today, with auto sales being reported.  It will be interesting to see whether Toyota's competitors can take advantage of its problems to gain market share.

The trend of mixed news for investors continued today, as the Commerce Department reported that consumer spending increased by 0.5 percent in January, while personal income increased 0.1 percent.  Much of the disappointing results in personal income was due to a decline in dividend and interest income, which offset a better than expected increase in wages and salaries.  Naturally, since spending increased more rapidly than incomes, that meant that the savings rate declined.  Savings fell to 3.3 percent from December's 4.2 percent.

The increase in consumer spending came in better than the consensus estimate of 0.4 percent, with estimates ranging from an increase of 0.2 percent to an increase of 0.6 percent.  Economists had expected personal incomes to grow by 0.4 percent, thus expecting expenditures and income to increase at the same rate.

The increase in consumer spending was the fourth straight increase and the increase in personal income was the sixth consecutive increase.

Analysts said that the increase in spending was a good sign, especially given the challenges consumers face with unemployment still running high.  "It's a good start," said the chief financial economist for IHS Global Insight, who correctly forecast the consumer spending number.  However, he cautioned against reading too much into the results, saying "consumption is not going to be the driver" for the economy.

Retailers concurred, saying that while they expect to see increased revenues this year, they do not expect a robust recovery in consumer spending due to concerns over jobs and the housing market.  As the CEO of Home Depot said, "we recognize that we have more work to do as a company and that the economy is not out of the woods yet, particularly in our market, so we're not projecting robust growth."

Still, the growth in consumer spending is good news.  While it's difficult to see how spending can grow strongly given constrained credit as well as concerns over housing and jobs, there needs to be at least mediocre growth in order for the economy to do well.