Manufacturing a Rally

"Analysts said the reports Thursday helped to calm fears growth was slowing sharply and implied the economy could soon pull out of a recent soft patch." This was a quote from a CNBC article reacting to the drop in unemployment claims and the narrowing of the trade deficit today. And its a statement that I find laughable. (1) The slowing growth of the US economy in the 2nd quarter of 2010 is a reality, not a fear. A double dip recession - as said previously - is not in the cards. (2) The "soft patch" of slower growth is not a blip on the radar. We just experienced a financial crises that challenged the entire monetary system of American and global commerce. Last time that truly happened = 1929. You don't just emerge from that like any other recession. You deleverage your way out. You recapitalize your way out. You slowly re-establish confidence and profitable lending standards. You restructure your future debt obligations. Oh, and you also wait for the number one equity builder for consumers (their homes values) to stabilize and bottom-out.

What can be taken away from today's reports are that trade may have been a bit extreme last quarter and thus the impact on GDP won't be quite so dramatic moving forward. Also, jobless claims are stable. Sure, today's report is a nice drop from the 504,000 of a few weeks back, but we've been in the 420-500,000 range for months on end now. That's stability - which is the pre-requisite to progress.

The question for the markets, in a short term perspective, becomes manufacturing reports due next week and the upcoming elections. If manufacturing continues to show minimal growth or, dare I say, improve, then the market should refrain from another trip to 1050. Moreover, Republican control of the House and/or, dare I say, Senate would likely provide a strong shot in the arm to the markets.

Again, short term plays. The market will produce returns but will also be haunted by stories about foreign debt issues and unemployment, which will continue into 2011. The wild card there is whether the market's momentum at the time those reports/stories emerge is bullish or bearish. If its bullish, then a rally could be thwarted. If its bearish, then we have a catalyst for fear, losses and "soft patches" - oh my.