Farrell: When Good News Is Better Than Expected

Wednesday was a nutty day.

The scheduled economic news was better than expected following the recent trend of news reports. Durable goods orders are notoriously volatile (an order for a bazillion dollar Boeing plane can move the needle big) but were up better than had been anticipated. New home sales are still in the basement but maybe at least on the steps leading out of the storm cellar. Mortgage applications were up smartly which figured with all the recent Fed actions designed to bring interest rates down.

Recently, retail sales were a bit better and existing home sales managed to surprise as well. Ken Lewis, CEO of Bank of America, talked about paying the TARP money back after he said confidently that BAC would pass the governments stress test. Goldman Sachs also is reported to want to pay the TARP money back. Remember, even though it looks like the idiotic 90% tax is dead, there is still a provision that greatly limits pay for higher ranked officials of TARP recipients. The affected firms are furious since this was a retroactive mandate and many of them didn't want the TARP money to begin with. Is this any way to run a country?

Then, during the day, there was a serious misrepresentation of a Geithner statement that alleged he was throwing the dollar under the China Town bus (famous in NY for the cheapest fare to Washington.) The Brits had a bond auction that a lot of people didn't show up for and our five year Treasury auction suffered as a result.

The early better economic news was forgotten and the market sold off sharply. But it didn't crack and by the end of the day was nicely in the positive camp. When markets don't go down on bad news, that itself is the good news. Volume was too light for us to be convinced this is the start of something big, and we need the VIX index- a measure of fear and volatility- to move decisively below 40 (42.25 close.) But the S&P at 813 is nicely above its 50 day moving average that is in the low 790's. We continue to believe we are in a bottoming process that will take some time yet. Bottoms usually take a year to fully form and during that time you can have wonderful rallies but you need to have multiple tests of the lows to prove you have indeed found the bottom.

But the rally phases are indeed wonderful.