Sometimes, good news works against you. We had a nice mixture of positive and negative data on Wednesday, causing the markets to move sideways for much of the session. Housing was a mix of good and bad news. Mortgage applications fell 2.1% for the week ending February 12^th after falling 1.2% the prior week. Essentially, extending the home-purchase program has lost its steam, and it is starting to show. Meanwhile, Housing Starts for January improved to 591,000 from an upwardly revised 575,000. This was better than the 580,000 anticipated, but still below the annual rate of home destruction, which is about 700,000. Therefore, the uptick is good news, and it really shouldn’t add anything to inventory. Permits slipped from 653,000 to 621,000, pretty much right on target with estimates. The news should be seen as a slight positive, offsetting the slight negatives on the applications. Import Prices rose 1.4% in January. That’s up 11.5% year-over-year, topping estimates for +1.0% and up 10.8% respectively. Much of the gain was related to energy prices, which can be dismissed because we know that prices backed off in February. We don’t mind seeing import prices rise if associated with an increase in demand, so well call it a small positive.

One of the key economic releases for the week was the January Industrial Production and Capacity Utilization figures. Industrials Production rose 0.9%, slightly better than the 0.7% anticipated. December was revised to a gain of 0.7% from 0.6%. Therefore, the month-over-month reading was very solid. Capacity Utilization was in line with estimates at 72.6%. The important part of these data is that production has increased, but inventories are flat, according to the Empire State Index on manufacturing. Therefore, the increase in economic activity is still being consumed and not just going to rebuild inventories. When we look out to the end of the quarter, this means GDP should be solid. Expectations are for the 1^st quarter GDP to come in at +3.1%, which is very possible with these numbers. Capacity Utilization is still far from placing strains on costs. That means corporate profits should also look quite positive come April. Even the recent data on wholesale and business inventories have indicated declines in December. That means we entered the quarter “lean and mean”.

The negative side of the equation is that the Dollar responded by taking back what it lost the previous day. We made the point that much of Tuesday’s strength, especially in the Basic Material and Energy sectors was directly related to the break in the Dollar Index. Seeing that Dollar weakness reversed and the index moving back up over 80 proved to be a headwind to the bulls all day. The Dollar was also buoyed by the better outlook from economically sensitive companies. Home Depot HD (+1.9%) rallied on the strongest housing starts data in six months. Dow component Caterpillar CAT (+0.5%) grabbed onto the coattails of Deere & Co. DE (+4.9%) after the company posted a 19% rise in quarterly profits to 57c. Expectations were for 21c. The CFO made the comment that they have taken controlling operating costs and asset discipline to a new level. This speaks to the “New Paradigm” we’ve written about in our daily and Global Outlook 2010 pieces. Companies got lazy and a little fat during the “leveraging up” period of the banks between 1994 and 2007. They were quick to cut costs and labor, and have since found out that they can be equally or more productive with far less. Companies won’t be ratcheting up their costs, even as demand improves slightly. Capacity Utilization at 72.6% means that there is no need to increase the size of factories. Staying “lean and mean” is the theme for 2010.

The FOMC released the minutes of their last meeting. The key words in the minutes were “over time”. It appears as though much of the most recent meeting was spent discussing how the Fed would move toward an “exit strategy”. We knew that there was some dissent. In fact, the minutes noted that “several” wanted the Fed to move toward asset sales, not just one individual. We did see rates tick higher on this discovery. It was apparent that the concern over moving too quickly would “damage the recovery” prevented the Fed from removing the language “exceptionally low rates for an extended period of time” from its official statement. I would take the minutes to be step one in letting the public know that the Fed has intention to remove itself from an accommodative stance to a neutral one in the next few meetings. It would likely start with the removal of the above language before altering rates. Therefore, we still have at least six weeks of these low rates, possibly more. What we saw was rates move aggressively higher, especially on the short end. We also saw the Dollar Index get stronger. Stocks held it together, balancing the negatives against prospects of a better economic recovery.

I will be out these next two days. We have several economic reports due out. The PPI and CPI really shouldn’t be too much of an issue. There are bigger fish to fry. Initial Jobless Claims finally broke back below 450,000 to 440,000 last week. Expectations are for the number to hold ground at 438,000. Back above 450,000 would be negative. The LEI for January, expected to rise 0.5%, should be overshadowed by the Philly Fed Index for February. That index is expected to rise to 17.0 from 15.2. Look at the component data. Are New Orders still positive? Are Inventories still negative? If so, the inventory rebuild cycle is being pushed out and production is only meeting new demand. That would be a positive. On Friday, the CPI would have to miss big to move the markets. We’ve seen solid action this week. I wouldn’t be surprised to see some bulls lock in a positive trade ahead of the weekend.