Farrell: Is the Bear Bottom Behind Us?

I think we are in a bear market but I think/hope we saw the lows of this downturn in July. Most low points get tested at some time or another and I worry the July low needs to undergo such a test. But a point Sir Larry Kudlow drew out of me last night on Kudlow and Co. is that I do feel better about things.

The further away and the higher we get from the lows of July make the likelihood of revisiting those levels less likely.The strength in financial stocks is also encouraging (but that could be a passing phase motivated by short covering.) I also saw some real positives in yesterday's GDP report. The 3.3% reported gain would have been a mere .3% advance were it not for the 3.1% contribution from export trade. Some want to dismiss this as a one time benefit as the dollar has strengthened recently. My view is the dollar was so undervalued that we will have an export wind from a currency prospective for some time to come. Weakening overseas economies will have a far greater impact on our trade balance than the currency and overseas clearly is weakening, but not disappearing. I expect less of a gain from exports, but a gain none the less. (See video)

The other positive in yesterday's report involves inventories. There was a drawdown of 1.4% in the level of inventories. Had inventories been neutral the GDP would have been 3.3 plus 1.4 or 4.7% (did I add that right?). The "inventory to sales ratio" is at a record low so, since things usually revert to the norm, I expect inventories to be rebuilt to more normal levels over the next couple of quarters which will add to GDP.

Commercial and Industrial loans (C&I loans) have been growing but most feel this could be companies simply drawing down previously negotiated credit lines and not indicative of productive demand for new loans. The report on issuance of commercial paper is then doubly interesting. Tony Crescenzi of Miller Tabak pulled the numbers apart and discovered that commercial paper grew $69 billion the last three weeks, which is the fastest three week growth spurt since May,2006. Commercial paper must be used for "transaction purposes" so this works its way into the economy quickly.

Credit spreads are still punishingly wide. The difference between the 10 year Treasury and the average 30-year fixed rate mortgage is 2.6% and it historically has been 1.6%. This spread needs to narrow, but that doesn't take away from the glimmer of better news we have seen the past couple of days.

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