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Farrell: What's the Latest News?

When the market is "thin" (light volume, few players), any piece of news can sway the direction of stocks. That's one of the reasons we have seen the crazy volatility lately. Another is the presence of a lot of electronic/algorithmic trading. The "algo" boys don't care about up or down. They care about catching very short-term trends. If things tilt up they buy. If things tilt down they sell. On Tuesday we got some welcome news that tilted things up.

BHP Billiton (I liked the old name, Broken Hill Proprietary, a lot more: sounds ruggedly Australian) bid a zillion dollars for Potash (POT-rated Hold by Soleil/Gulley Associates). Potash said they needed a zillion plus, which is the right answer, so the game has begun. Other companies in the potash business went up accordingly, and the market celebrated with good cheer. Big hostile takeover bids tend to do that.

Europe has very recently caused indigestion, so successful bond offerings in Ireland and Spain helped improve the mood. Word came from Japan that they were thinking of a new round of stimulus, and some pointed to this as well. If Japan does inject more stimulus it will be as successful as the many, many stimulus programs they have tried for 15 years. That is, it will fall flat. I can't believe anyone would treat this as news even worth reporting, but when you're looking for straws in the wind, anything will do. There was also a story (unconfirmed) that the Fed will launch a $1 trillion Quantitative Easing program soon. I wouldn't put any faith into that rumor, but the market seemed to like it. Buying a trillion of something would force rates down a bit more, but they are already low. Growing loan demand needs availability of money, but it also needs demand for money and as we have written before, the level of uncertainty is such that I don't think demand will be revived overnight.

"Maybe the market just needed to go up since it hasn't in a while." -CIO at Soleil Securites, Vince Farrell

Industrial production for July surprised with a reading of +1.1%. The 9.9% surge in auto production for the month is probably not sustainable, but even without that, industrial production would have been up 0.6%, which is OK. Not great, but enough to allay fears of deflation for the moment. Industrial production is up at a 6.5% annual rate the last six months.

Capacity utilization moved up to 74.8%, and Brian Wesbury of First Trust Advisors figures that capacity utilization is up 5.7% from a year ago. Again, not bad. Core producer prices (ex food and energy, which is what the boys and girls in Washington like to look at) rose 0.3% in July. The annual rate of core PPI inflation is 1.5%, a 10-month high. The annual rate of headline PPI inflation is back up to 4.2%, but for a bunch of generally accepted reasons (e.g., temporary drop in energy prices this time last year), this will recede quickly. Thus the core rate is the one to watch and at 1.5% puts some room between what is and the theoretical threat of deflation.

Housing starts still stink at 546,000. They were 630,000 before the tax credit expired in April. Building permits dropped from 583,000 last month to 565,000, not a helpful sign. Housing activity is moribund at best.

Before the market opened on Tuesday a report from a major firm made its way around the Street detailing that firm's equity trading head's reasoning for why stocks should be bought. This fellow said the market's equity risk premium was almost the highest it has been for 30 years, with the depths of March 2009 the only exception. But at 5.6% it is still almost to the absolute bottom of 5.95%. With all the talk about a sluggish recovery and the threat of deflation, the economic bar has been set very low, and the news could even start to look good. Healthcare, financial reform and tax policy have created uncertainty, and the winds of change may well blow through Washington this election season. Investors are risk-averse and have more than normal cash, and, last, the Fed is in the wings with a quantitative easing program that would be like the Lone Ranger coming to the rescue (my clever analogy, not his). I don't think a QE spree would help things but I seem to be in the minority.

Or maybe the market just needed to go up since it hasn't in a while. We have been guessing a trading range would be in place and with the S&P closing on Tuesday at 1092 we find ourselves right in what most people think is the middle of the expected range.

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