It was a very good day, with green numbers almost everywhere you looked. On broad-based support, the market headed higher for the third straight session to a new high for the year. The S&P 500 saw its best single-session gain in nearly a month, and a gratifying number of prices move into new and higher territory, helped by several generally good economic reports, about which more in a moment. (This column might be showing up in extremely small type. If so, I don't know the cause, but I'll get it fixed.)


The financial sector did well, up 3.4%. Big movers were multiline insurers, up 5.9%; diversified banks, up 3.1%, and regional banks, up 4.9%.


Commodities were strong, helping the CRB Commodity Index rise almost 2%. Gold settled 1.4% higher at $1020.20 an ounce and silver, not to be outdone, climbed 2.5% to a new 12-month high of $17.43 per ounce. Oil prices jumped 2.2% and natural gas prices settled 12.2% higher at $3.77 per contract. Natural gas is now up more than 55% from the 7-year lows that were set earlier this month.


Maybe it's just me (and if it is, let me know), but I can't help noticing that the MACD isn't making higher highs to strongly confirm the new highs of the Dow. Or the S&P or the Nasdaq. Maybe it doesn't mean much when you're pretty surely exiting a recession, but it's worth keeping an eye on.



Helping the Nasdaq along, software pioneer Adobe (ADBE) announced Wednesday that it's acquiring marketing-software firm Omniture (OMTR). Adobe fell $2.25 or 6.3% — it's still at an 11-month high — but Omniture took off, gaining $4.55 or $26.2% to $21.88.


There was a seemingly strange drop in the weekly Mortgage Bankers' Association purchase index last week, which monitors mortgage applications. It fell a large 10.3% — but considering that a lot of people may not have been shopping during the Labor Day week, it doesn't look too horrifying. The refinance index also fell; it dropped 7.4% However, a look at the four-week average, useful when containing a short period, shows the purchase index down just 0.4% and the refinance index up 5.2%. Loan rates were mixed in the week with 30-year mortgages up 6 basis points to 5.08% and 15-year and 1-year adjustable rate mortgages down slightly. Despite this report, housing data have been showing real improvement.

We learned today from the Labor Department that consumer prices rose month-over-month in August on a spike in gasoline costs. Even so, the underlying trend shows very modest inflation, mercifully, as we crawl gasping, on all fours, out of recession. The Consumer Price Index (CPI) was up 0.4% percent last month after a flat July; that was still faintly above the 0.3% expectation. You may thank gasoline prices, which soared 9.1% after falling 0.8% the month before.

CONSUMER PRICE INDEX, all inclusive, for AUGUST:

Year over year, though, consumer prices fell 1.5% last month. They've been falling on an annual basis since March, although I'd like you to tell that to my local supermarket who is trying to charge me $1.89 for a head of Romaine lettuce. The consensus seems to be that we're in the part of the economic cycle where "inflation isn't an imminent concern." In the energy component, in addition to the gasoline jump, fuel oil spiked 6.2%, piped natural gas was up 0.4% and electricity actually fell 0.1%. Several factors kept the core rate down: The cash-for-clunkers tax credits helped push prices for new vehicles down by 1.3%, apparel slipped 0.1% and shelter costs were sluggish, notably rent (although see below). Prescription drugs and airline fares were up.

Okay, real quick, a fun refresher on the CPI (you can skip it, but there may be a quiz). You already know that the CPI measures inflation in consumer prices and is used by the Federal Reserve to modify economic policies; it's also used to adjust prices in other economic indicators and to re-evaluate government benefits. It includes the price changes of about 80,000 items purchased by urban households representing around 87% of the population. Sales taxes are included, income tax and prices of investments aren't. (Hmm.) Neither is the sales price of homes; instead, the CPI calculates the monthly equivalent of owning a home, which it derives from rents. (This is somewhat loony, since the CPI is likely to give an inaccurately low reading when home prices are high and rents are low, and an inaccurately high reading when home prices are low and rents are high.)

Two measures of inflation are reported: non-core, which includes everything, and core, which does not include food and energy costs. This is the one the Federal Reserve uses to adjust the Fed funds rate. Is that smart? Many no longer think so, if indeed they ever did. The Fed says it uses core CPI because food and energy are "too volatile" to accommodate the Fed's slow-acting Fed funds-rate adjustments and besides, to get a better gauge of the underlying inflation trend, you should cut those items out. Really? We all remember from Introduction to Statistics that you don't want to contaminate your data, so ignoring outlier results ("Hey, one guy scored 1,000!") is usually acceptable. But are food and energy truly outliers -- especially when they're on a consistent uptrend?

CORE CPI -- no food, no energy:

Some economists say that ignoring them could be understating the inflationary threat. Food and fuel are the very sectors where the ultimate results of a loose monetary policy will become the ugliest and most difficult to reverse.

Anyway, whether the recession, as Ben Bernanke said Tuesday, is "officially over" doesn't matter at all. It's going to feel like a very weak economy for a long time because so many people are still out of work, struggling with mortgage payments, or both. According to more than one analyst, Bernanke was slow to cut interest rates and now he's being too slow to raise them. This easy money is likely to lead to more dollar weakness, probably more gold strength, and right back into inflation.


Today's monthly industrial production report shows the manufacturing sector in recovery for two straight months. Industrial production posted a large gain in August, causing more recession-is-over hoopla, especially for manufacturing. Overall industrial production increased 0.8%, following an upwardly-revised 1% boost in July; it came in above expectations of a 0.7% increase.

And in fact, it was from more than rebuilding auto inventories after the cash-for-clunkers boost: Overall production excluding motor vehicles was still up a healthy 0.6% for August after rising 0.4% in July. The motor vehicle component managed to jump a monthly 5.5% in August after July's anomalous 20.1%, utilities rebounded 1.9% and mining output moved up 0.5%.

Year over year, industrial production was up at minus-10.7%, better than July's minus 12.4%. Also edging up from the depths is overall capacity utilization, which hints at more hiring in the future; in August it continued to rise from its recent historical low of 68.3% in June, hitting 69.6% last month and topping expectations.


In more pretty good news, the current account gap, our quarterly international trade balance in goods, service and one-way transfers, narrowed to $98.8 billion in the second quarter vs. the first quarter's revised $104.5 billion. The gap is now (a mere) 2.8% of GDP, down a sliver from the first quarter and the lowest percentage since 1991. A narrowing in the goods & services gap reflecting weakened domestic demand is responsible for the improvement.

I would be a lot happier to see it based on increased foreign demand but for now I'll take what I can get. When outside money is buying your goods and services — that's growth. Manufacturing a lot of your own producer and consumer goods and services — that's also growth. When those two activities stop, so does growth. Look at any country that has ever enjoyed a tremendous growth spurt, and has then stopped growing — start with the U.S. and Japan — and you'll see the correlation. I've held this formula up to the light and turned it every which way over and over again, and there's no denying it.


Anyway, on the related topic of Treasury International Capital, net long-term inflows of financial instruments into the U.S. were not sensational in July — $15.3 billion vs. a strong inflow in June of a revised $90.2 billion. Net foreign purchases of equities were strong; purchases of corporate bonds and agency debt fell. Net foreign purchases of Treasury notes and bonds were good, with old friends our China and Japan holding up their end. Total flows, including short-term securities, were minus-$97.5 billion compared to June's minus-$56.8 billion. What can you expect from a see-through greenback? I've included the 200-day moving average on this graph to show just how low the dollar has sunk:


The Energy Information Administration's weekly petroleum status report told of a big 4.7 million barrel drawdown in crude oil stocks last week. At the same time, demand for gasoline was up, showing a 3.5% year-over-year rate of increase. Refineries produced less gasoline in the week but more of other distillates; it may be 82 degrees in the shade but winter will soon be a'comin' in and heating oil supplies, and oil stocks, are set to climbing.

Oil jumped a full dollar to $71.50 in immediate reaction; October light crude closed around $72.40 on the New York Mercantile Exchange. Oil prices have held firm despite heavy supply (Speculation? You think?) The fall in supply and the rise in demand will surely shoot prices higher, despite Libya's announcement that it will boost oil production capacity from the current 1.8 million barrels per day to three million barrels per day by 2013. It's a drop in the world's oil bucket, Libya.


The market moved fairly steadily up almost from the open but the news that seemed to keep it happy was the 1:00 p.m. release of the Housing Market Index from the National Association of Home Builders. It's a fairly comprehensive survey which shows how Association members perceive present and expected sales of new homes and prospective new-home-buyer traffic.

September showed the third straight gain for the index -- up one point to 19 with strength in current single-family purchases. Traffic was up, too. The single-family component of the housing starts report, by the way, is on a five-month roll. Home builder stocks were strong, gappng up at the open and staying up; Lennar, for example:


So today's take-home is: We certainly seem from all reports to be coming out of the recession. Just maybe . . . the market is getting ahead of itself and is due for a pullback. Still worth buying on dips? Yes, with stops in place, as always. Commodities, metals, industrials, some tech, some financials often thrive in this part of the cycle.

You know, I couldn't tell you why, but every so often the party of the second part at my house goes through phases of absolutely maniacal online buying (in which he has a lot in common with his mother-in-law, who thinks he's the greatest thing since yogurt with fruit in it). Anyway, delivery times have been a major topic around here lately. Perhaps this touching graph will speak to you, too:

On tap tomorrow are housing starts and jobless claims, which could be movers, along with the EIA natural gas report and the Philadelphia Fed Survey.