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March 20, 2008

Wall St. Rallies on Philly Fed Reading
by Paul Kasriel

"NEW YORK, March 20 (Reuters) - U.S. stocks jumped on Thursday, pushing the Dow briefly up more than 1 percent, as a reading on factory activity in the mid-Atlantic region fell by less than analysts' had forecast, improving views on the U.S. economic outlook."

Tell me. On what basis did "analysts" have to predict what the Philly Fed March factory activity headline would be? For that matter, on what basis do "analysts" have for predicting what weekly initial jobless claims will be. At the end of each week "analysts" are sent forms to fill out as to what their forecasts are for economic reports to be released in the next week. For many of these economic reports there is no way to accurately predict the data based on fundamentals - seasonal variation, perhaps, but not underlying economic fundamentals. Similarly, in this current environment, how can an equity analyst accurately predict the earnings of an investment bank when it does not know how that bank is valuing its Level 3 assets? So an investment bank reports that its earnings are down 50% and its stock rallies because "analysts," on the basis of very little, had predicted that its earning would fall by 70%.

The chart below shows the behavior of the headline index for the Philly Fed region's factory activity. Notice that the headline was in deep negative territory, but rising, as we entered the 2001 recession. The March reading of the headline, at minus 17.4, is lower than where it was during most months of the last recession. Yes, indeed, the Dow should rally on this because "analysts" had predicted that the headline would be worse than it turned out. What nonsense!

Chart 1

Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
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