Farrell: 'Step up Ben'

There's not much economic news this week. Leading Economic Indicators will be reported Monday and if it's a gain (which it should be) it will be the third gain in a row. That would be good. Thursday will see existing home sales reported and they should come in at an annual rate of about 5 million. Thursday the Treasury will announce next week's bond auctions and you can expect 2 year notes and 5 and 7 year bonds totaling over $100 billion dollars.

But the big news of the week (beside the continued stream of earnings reports) will be Uncle Ben's testimony Tuesday at the House and Wednesday at the Senate about U.S. economic conditions. This used to be called the Humphrey-Hawkins testimony.

The markets will be looking for indications if the Fed is going to expand its quantitative easing program. Markets will also be hoping for some guidance on what tools the Fed will use when the time comes to reverse that easing.

But by far the most important element of Ben's appearance will be his performance itself. He will be treated roughly both days, especially on the Fed's role in the Bank of America takeover of Merrill Lynch. A strong performance will increase the chances of Bernanke being reappointed next January. If he were to falter, Larry Summers and Sheila Bair, the CIT slayer, will be licking their chops.

Other than Ben, our favorite economist, Soleil's Lyle Gramley, feels one of the best indicators of economic activity is single family housing permits. They were up 5.9% last month, and up 14% total since January.

Housing starts were up 3.6% last month to 582,000, which to us indicates the end of the housing debacle is in sight. But two things to keep in mind. 582,000 starts are still only about 25% of the 2005 peak. And whereas housing was about 6% of the total economy in 2005, it's now probably about 2.5%. Also, as we have been saying for some time, an upward move in new housing starts is not that helpful while there is such an excess supply of existing homes for sale.

A couple of big banks reported earnings last week, and Soleil's Carole Berger, saw optimistic body language from Bank of America. But she feels since the TARP has yet to be repaid the stock will probably trade around it's tangible book value of $11.88.

Citi implied a plateauing in consumer losses. "When losses level off, banks stop provisioning excess reserves" and earnings per share can rise, says Carole.

About 11% of companies have reported second quarter results so far, and 70% of those have beaten analysts expectations. That sounds better than it really is, since about 60% of companies usually surpass estimates. But several bell weathers, including IBM , JP Morgan , and Intel , were relatively optimistic about the future. But a lot of the profit gains came from cost cutting rather than from revenue growth.

Trading volume continues to be unusually light, so I continue to doubt the sustainability of the market's rally.