THE BULL CASE

With this mornings GDP release, a revision to 2.9% from 2.5% for 2nd quarter growth, the bulls have strengthened their case. Nothing stops the resilient U.S. economy from chugging along at it's potential of about 3 %, and along with it, corporate profits and stocks.

A weaker housing market, well it's only 6-7% of the economy anyway. Weaker year over year auto sales, well we are really a service oriented economy now anyway. The industrial side has shriveled to about 15% and autos are a fraction of that. Higher interest rates, the Fed has paused and the interest rate cycle has peaked, and bond yields are falling. In addition, that bugaboo, oil prices, have also peaked and are falling, now below $70, adding support to consumer spending.

A potential Democratic victory, taking the House and Senate, well that's too far away to worry about. Inflation worries, the Fed has told us it will moderate as the year progresses, not to worry. A soft landing is in the cards, haven't you heard. That's why the market as acted so well even in the face of bad news, and the latest GDP proves it.

In addition, we have valuations at levels not seen in years, robust corporate share buybacks, and M&A activity being propelled by bigger and bigger pools of private equity. WMT sales were at the high end of forecasts, last months retail sales were better than expected and auto sales were over 17 million units.

Technically, we are breaking out to new highs, and sentiment as a contrary indicator is as bearish as we've seen in sometime, close to where we have seen big rallies in the past.

So if I were a bull I'd say, put that in your pipe and smoke it.

THE BEGINNING OF THE END

Could this be the end of another Fed is done rally? This Fed is done rally has been a little different from the rest. If you recall the initial spike after the Fed announcement was transitory. They did pause, but their words did not indicate that they would stay paused. It was not until the release of the PPI and CPI which were weaker and gave credence to the idea that they would stay paused that the market really took flight.

Why might then this be the beginning of the end? Well, one reason is that volume has been pretty tepid throughout this rally. Secondly, the consumer confidence figures released by the University of Michigan were weak again, around the levels of the last recession. Finally, the Ford production cuts to levels not seen since the 80's are pretty ominous.

In the short run, liquidity and sentiment rule. In the long run sales,production,inflation i.e. fundamentals determine sentiment. Homes are not selling, autos are not selling, inventories are piling up. The growth rate of retail sales are slowing. When Ford says they are going to cut production 20% for the rest of the year, it is not a transitory event. Just like high oil prices it will have slow but grinding effect on the economy.

How about this. The rally was propelled by a CPI a tenth of one percent lower than expected. A large drop in car prices was a big factor. Ford cut it's price on the Expedition SUV $4,000. It cut prices because sales for SUV's are falling off a cliff. Have we got the cart before the horse?