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Midday Musings: Philly Fed Flashes a Go Signal

Its index hits its highest level since August 2000. This could bode well for manufacturing nationwide.

SAN FRANCISCO -- Somewhat lost in the shuffle of Thursday's snapback rally were some better-than-expected economic reports that have given the optimists hope, even as the averages resumed a downward trend this morning.

Most notably, the

Philadelphia Fed's index rose to 14.7 in January from a revised negative 12.6 in December. The January level is the first above zero since November 2000 and the highest since August 2000.

The mid-Atlantic region isn't as manufacturing-heavy as the one surveyed by the Chicago Fed, and it's certainly possible that January's jump could prove to be an anomaly. But the spike in the Philadelphia Fed's index has given some observers hope that manufacturing nationwide will soon follow suit.

Since 1995 there has been a 68% correlation between the Philadelphia Fed's index and the

manufacturing survey produced by the Institute for Supply Management (formerly the National Association of Purchasing Management), according to Ashraf Laidi, chief currency analyst at MG Financial Group.

Peaks and troughs in the two indices have occurred at a maximum of two months apart in that time frame, suggesting the January gain in the Philly Fed index "raises the probability of lifting the January ISM above the key 50 mark," Laidi commented.

The consensus estimate is for the ISM report to rise to 49.0 from 48.2 in December, but a climb above 50 -- considered the break-even point between expansion and contraction -- "would provide markets with

a credible reason to rally," according to Laidi.

The possibility of a recovery in the manufacturing sector -- which has suffered terribly in the current recession -- "reinforces the case for improved conditions in the medium term, and hence warrants further rallies in equities and the dollar," he concluded.

The dollar was holding steady at midday, unable to rally despite a stronger-than-expected reading on the University of Michigan's

consumer confidence index. The greenback was being restrained by weakness in U.S. equities, which proved resistant to better economic news and optimistic extrapolation thereof.

Goose & Gander

Last night, I included comments from Gimme Credit's Kathy Shanley about

J.P. Morgan Chase

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in a piece comparing that bank with

Citigroup

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.

Today, Shanley issued a report on Citigroup, so prudence dictates I report on that as well.

Concerns about exposure to

Enron

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and Argentina remain, but Shanley concluded "Citigroup's strengths are also much in evidence,

and we'd still be comfortable buying this credit."

That comment, it should be noted, comes from an independent bond analyst who admittedly "tend

s to hone in on the negatives."

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.