The economy had every reason to show a downtick in February. On a macro level, the issues with Greece, and by extension the rest of Europe, continued to intensify. Greece may be saying that their austerity program won’t require the help of Germany or the EU, but the measures being taken will likely crush any hope for an economic recovery. If this is the trial fix for the PIIGS, it certainly doesn’t bode well for growth overseas.  There was more talk that China is looking at measures to cool its rapid growth, potentially even letting the currency float a little higher. The huge earthquake off of Chile and the extensive damage will cause that one emerging nation to see growth hopes abandoned. Add Hillary getting shown the door down in Brazil and global growth prospects simply aren’t what they were two months ago. We’ve seen money flow out of these investment areas and flow back into the US. This has helped lift a broad spectrum of investments, as a flight to safety move. Even those which typically move inversely to one another, moved up in unison. For example, the Dollar Index is holding above 80, but crude pushed back up over 80 and other commodities have also done very well over the past month or more. Rates are staying down, despite the significant debt being financed through Treasury auctions. Stocks are rising, which is impressive for late February and early March. It isn’t just blue chips. In fact, both the Russell 2000 and the broad Breadth Index have made new highs ahead of the major indices. This is excellent technical action. The one negative is volume, which has been extremely light, especially on the NYSE.

Domestically, the focus has been on bad weather. The impact has hurt businesses and housing for the past few months, but was intensely bad in late January and early February. That led to downsized expectations for the economic data. Those expectations were born out in the housing data. New Home Sales (-11.2%), Existing Home Sales (-7.2%), Mortgage Applications (-8.5%), and the Home Price Index (-1.6%) clearly indicated weather impacted sales, but also probably reflected the aftermath of a government stimulus inspired rebound in sales back in October/November. The stage was set for downsizing expectations, but the surprises were all on the upside last week. The ISM Manufacturing Index did dip to 56.5 from 58.4, but the internal data revealed something we’ve been seeing for months and something that portends a strong earnings quarter. Production was up, New Orders were up, Employment improved, and Inventories were down. In other words, companies were still struggling to get product out the door to meet the needs by end-users to restock shelves. However, in an effort to stay “lean and mean”, the increased production has left inventories in the red. I constantly hear in the press that inventories have significantly contributed to growth. It is crucial to recognize that inventories are still negative, not positive. However, since GDP is an “annualized” figure, it is adjusted for the prior quarters. Q4 added 3.88% to the 5.9% GDP. Q3 added 0.69%. Q2 subtracted 1.42% and Q1 lost 2.36%. Q4 in 2008 was down 0.64%. What we saw in Q4 2009 was that the inventory number was “less bad”, requiring a revision to the annualized number that added back to GDP. However, the actual level of goods in inventory was down! Inventories fell $20.4 billion in Q4. That was much better than the -$156.5 billion in Q3, -$176.8 billion in Q2 and -$126 billion in Q1. Plain and simple, inventories were down, not up in Q4. In addition, if you look at the manufacturing data, the inventory number is still below 50, suggesting further negative numbers through the first two months of Q1. It is true that we are moving up toward parity at 50, so the number will be smaller, but the revision to the trailing 12 months will still contribute to GDP. However, we have not rebuilt the inventories of 2009. Think about the actual numbers. Inventories fell $480 billion in 2009. There’s a long way to go before the need fades and that will help the US manufacturing sector from being stung badly by another wave of economic weakness.

Two areas of the economy that should have been intensely impacted by the bad weather were retailers and jobs. It seemed obvious, and the estimates reflected that pessimism. Throughout the week, expectations had been dropping. A rebound in consumption from January was still expected of consumers, but the mall traffic during the storms was nonexistent. The surprise was in the “teen retailing” component. Apparently, they are not afraid of the cold. Sales in selective retailers were downright robust. That means the demand to restock the shelves is still helping feed manufacturers. That “surprise” came a day before the Employment Report. Expectations had been -35,000, but were expanded to -68,000 by Friday morning, with a whisper that it could hit -100,000. For once, economists would have been right if they had stuck to their original estimate. The lost jobs were just 36,000. January and December combined were revised up by 35,000 jobs. The estimate for “weather impacted” jobs total 290,000, according to a survey by the Labor Department. There were far fewer census workers hired than anticipated, only 15,000. It doesn’t automatically follow that March will gain back all those weather-related jobs that were lost, but there is probably some pent up demand, and that will boost expectations for job growth over the next few months.

This week’s economic calendar is very quiet. Weekly claims will be somewhat interesting and then Retail Sales for February could keep hopes alive that the economy is stronger than people give it credit. Technically, the strong wave of buy interest from money flowing into the US has thwarted several attempts to start a “test” phase. That’s good news. Sometimes timing is more important than price. The closer we get to the end of March, the closer we will be to solid and potentially surprising earnings. That is that catalyst we expect to carry the market higher. If we start from a higher level than we were anticipating, so be it. The bulls are looking for any weakness to buy. We would like to see more volume, especially as the S & P attacks the old high at 1150.