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Farrell: Are Economic Chariots Here?

I think I remember an old spiritual song with the line "Good news, the chariots a'coming!" I might be wrong about the song, but I always liked the thought the chariots would come and take us away to the Promised Land (yeah, right!). The market reacted Friday to the housing report like the chariots indeed have arrived and nothing but good times are ahead.

On the surface it was a wonderful report: Sales jumped 7.2% from the prior month to 5.24 million, which is a 2-year high. This was the fourth month in a row of gains, and that hasn't happened for five years.

So it would appear that all is good.

But 30% of sales were to first-time home buyers who are being assisted by the federal $8,000 tax credit, and they tend to buy cheap. 31% of sales were foreclosures, which tend to be at rock-bottom prices. And inventories of unsold homes are still at 9.4 months, compared to the

What's Next?
What's Next?

usual 5 or so months. It is also guesstimated that there might be 1 to 1.5 million of additional homes that could come on the market if prices were to improve.

So while the report was good news, the chariots are not backing up to the front door yet.

There was also good news out of Europe last week. The Eurozone Purchasing Manager's Index rose to 49.5 in August from 45.7, the highest level since last May. "Business expectations" rose to a lofty 66.5. Germany and France both saw the manufacturing index and the service index rise substantially.

This is all good news, but you have to wonder how much is stimulus-induced.

When government stimulus is taken away, will there be enough natural demand to continue the economic surge? Probably more worrisome than Europe would be China, where officials last week—quoted in Bloomberg—continued to proclaim that their GDP will grow in excess of an 8% annual rate for the 3rd quarter.

That's great on the surface, but, again, the economy seems propelled by government spending. That can only go on for so long.

Maybe the governments of the world didn't make such terrible decisions in bailing out some of the financial institutions. It was reported last Friday the Swiss government made over $1 billion on their UBS investment in just 8 months. Coincidentally, UBS research figures that the U.S. government is up $10 billion-plus on the billions of Citi shares that they have so far converted. Since the government owns 34% of Citibank, it might make sense for them to figure an exit strategy in the not-too-distant future.

The government Cash for Clunkers program also seems to have been a big success.

At last count, 457,000 vehicles had been scrapped and $1.9 billion in rebates have been allotted, even if not yet paid. Showroom traffic is up a solid 25% versus last year, after being off 25% for most of this year. The consultant R.L. Polk estimates that 175,000 vehicle sales have been pulled forward from 2010, which would imply there was some natural pent-up demand that has been met. The Wall Street Journal speculated that the seasonally adjusted annual rate of vehicle sales could be as high as 14 million for the month of August.

The S&P 500 is now up 55% from its March low. On Friday the energy, materials, and industrials sectors led a very strong market. If that's the only day you looked at, you'd surmise that the economy is recovering with these stocks leading the way.

But 55% in a very short period of time screams out for a correction, and the Ides of September—historically a difficult month for the stock market—await us.

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