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Farrell: Looking Ahead to the End of 2011

Wishing and hoping; Thinking and praying; planning and dreaming your good luck will start; That won't win over being smart. Dusty Springfield (sort of) 1964.

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images
Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.

But if you wanted to wish and hope for the second half of the year, some of the things that would be good to see follow (and thanks Jason DeSena Trennert of Strategas for the idea).

Initial unemployment claims below 400,000 on a sustained basis would be my number one wish. We have now had 12 weeks in a row of above 400,000 and without a clear improvement in this number, we will not see better jobs numbers out of the monthly government data.

We do get the Department of Labor's statistics for job creation for last month this Friday, and the consensus is for 90,000 new jobs.

We need more than that to accommodate new entrants into the work force. More than 8 million additional workers lost jobs during the past recession to give an order of magnitude of what is needed.

It would be great if we saw loan demand grow. Nice if we saw it from large banks but nicer if it came from small and medium size banks. Small and medium-size businesses account for more than half of new jobs.

Credit standards have returned more towards normal, but loan demand is modest at best. Likewise, it would be necessary for money supply to continue to grow at its current 5-percent pace or better. Money is created via the loan process so there needs be evidence it is happening.

Corelogic, a home pricing service among other things , reported last week that house prices in May were up ever so slightly from the month before. But what caught everyone's eye were home prices in May (ex foreclosure sales) versus a year ago were down just .4 percent.

Prices in April versus one year ago were down .8 percent. The sequential improvement in year over year pricing might—note the word 'might'—indicate a turn.

Also, shadow inventory, homes 90 days past due on the mortgage or worse, improved slightly, and said Corelogic, the number of homes in negative equity (the mortgage is more than the price the house would command) seems to have leveled off. We would wish and hope these spot improvements would turn into a trend and that mortgage applications for purchase would turn up.

The two popular measures of consumer confidence are the University of Michigan survey and the Conference Board's monthly survey. Both are down and both stink. They are well off the long term average and well below the recessionary levels often seen, and we are not in a recession. It seems many, if not most consumers, think we are still in recession. The country's 9-percent unemployment has a lot to do with that attitude.

You might think we should hope for lower oil prices, but oddly we should root for stable to slightly up prices. With the IEA and the U.S. dumping some oil on the market it would make sense prices would go down. Certainly that is the political hope of the administration. But if prices stabilized or rose (not too much please) it could indicate renewed demand and growing economic activity. Hopefully, copper would as well.

The news recently has been decidedly mixed. In the U.S., the ISM manufacturing survey was much better than expected as was the Chicago PMI. Both should calm fears of a double-dip recession.

But overseas, the news was not as good. China's manufacturing PMI (and manufacturing in the U.S. is only about 10 percent of the economy, but well more than half of China's) was barely positive at 50.1. The UK PMI hit a multi-year low. Germany's fell to 54.6, still a good number, but a 17-month low. The Euro composite was 53.6 but without Germany and France, it would have been negative.

We have, then, a mixed bag. Bull markets always climb a wall of worry. There is enough to worry about, but I don't think we have a new bull market. I was more or less correct in the direction of the market and overstayed my welcome by trying to squeeze out a few more points on the downside.

My main worry is that estimates for both GDP and earnings are too high. I think second-quarter earnings, which start with Alcoa on July 11 will be good . But I think guidance will be cautious, and I expect estimates to come down. Stocks struggle when estimates are lowered.

But since I am always more or less fully invested, last week was a treat. Thrilled to be wrong on the last 2 percent of the market! I continue to like staples, health care, utilities and tech. I would downplay industrial stocks, commodity cyclicals and materials.

I know some very good guys are suggesting those. But that's what makes a market. A belated Happy 4th of July and God Bless America.

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