The Bad News Shows No Sign of Abating

This morning, the Census Bureau announced that advance retail & food services sales for January rose by 0.3%, far outpacing the consensus call for a 0.3% decline. Excluding motor vehicles and parts dealers sales (“ex-autos”), the gain was 0.3%, also better than the 0.2% increase that was expected. Bullish equity traders and TV pundits pounced on the news.

However, if you look at the longer-term trend, today’s data offers no cause for comfort in terms of how the beleaguered U.S. consumer is doing. Year-on-year, retail sales (ex-autos) recently hit a four-month low of 4.9%; if annual inflation of 4.1% is taken into account (based on the most recent CPI data, which most analysts believe is understated), the yearly sales gain is marginal, at best.

But even that series makes the retail picture look far better than it really is. When you subtract out gasoline station sales, which have undoubtedly been boosted by rising prices for fuel, the year-on-year change is 2.6%, the lowest since April 2003. Indeed, gasoline station sales as a percentage of retail sales (ex-auto) recently hit a record high of 13.1% versus a median rate of 9.8% since January 1992.

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Various news reports confirm that the world of Frankenstein finance has been reeling in the wake of the bursting credit bubble, and that some formerly active markets have more-or-less shut down. Data from the Securities Industry and Financial Markets Association (SIFMA), an industry trade group, paints a clear image of the extent of the recent turnaround.

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Although many investors and analysts remain focused on the deteriorating prospects of low-rated borrowers and securities, there are growing signs that the market expects the malaise to spread far and wide. For example, an index of investment grade borrowers published by Markit Group Limited shows that expectations about corporate creditworthiness have taken a dramatic turn for the worse in recent weeks.

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Finally, many equity bulls seem to think that all the market needs to keep moving higher following the sharp correction that took place in recent months is an accommodative Federal Reserve. Based on the following graph, which charts the relationship between the fed funds target rate and the S&P 500 index, they might want to reconsider.

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Today's Market

Stocks finished stronger, aided by ostensibly buoyant retail sales data, strength in the technology sector following upbeat comments from Applied Materials about new orders for equipment to make flat screens, and buying of energy shares.

At the close, the Dow Jones Industrial Average rose 178.83, or 1.5%, to 12,552.24. The S&P 500 Index gained 18.35, or 1.4%, to 1,367.21. The Nasdaq Composite Index tacked on 53.89 points, or 2.3%, to 2,373.93.

Gold futures ended slightly lower, while April platinum rose nearly $80 in early trading to break above the $2,000 level for the first time before settling at $1,983.70, up $61.90. The U.S. Dollar index drifted a tad higher, while ten-year Treasury bond yields rose 4 basis points to 3.70%.

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