Wall St. Rallies on Philly Fed Reading

By: Paul Kasriel | Thu, Mar 20, 2008
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"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 Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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