Street Shrugs at Bernanke

Fed Chairman Ben Bernanke gave another speech today, and Wall Street simply shrugged, ending the day ever so slightly in the red.

The Dow Jones Industrial Average slipped 0.02% Thursday to close at 11,381.15, while the S&P 500 slipped 0.04% on the day to 1303.81. The Nasdaq Composite ended down 0.09% to close the day at 2183.75. The Treasury market continued to rally, as the 10-year note added 5/32 to yield a new five-month low, 4.73%

Bernanke did not reveal clues about future policy decisions, which only fueled Wall Street's growing belief that the Fed is done raising interest rates and the economy is not falling off the proverbial cliff. Indeed, some say things may not even be as bad in the much-maligned housing sector as many contend.

What Gentle Ben did say before a business leadership group in Greenville, S.C., supports his belief that the economy is headed for a soft landing with only modest inflation. Much like the traders on Wall Street, the Fed chief shrugged off a recent downward revision in productivity figures, saying the nation's workforce appears as industrious as ever.

"A case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time," he says, adding that he expects productivity to continue to rise at an average pace of 2.5%.

His comments about inflation similarly did nothing to alarm, as Bernanke reiterated his data-dependent stance when considering whether more rate hikes are needed.

"Estimates of long-term productivity growth are needed to determine the rate of output growth that the economy can sustain in the long run without generating inflationary pressures," says Bernanke.

Meanwhile, Thursday's benign inflation data only served to reinforce the notion that Bernanke and the Fed may have gotten things right. The Fed's preferred measure of inflation -- the personal consumption expenditures, or PCE, deflator -- grew by a mere 0.1% in July, lower than June's 0.2% jump.

Thursday's same-store sales reports for August were also friendly, showing that the consumer has not foregone back-to-school shopping despite weakness in the housing market. The report from the nation's retailers was consistent with news from the Commerce Department that personal consumption increased 0.8% in July, up from June's 0.4% increase -- the largest increase in spending since January.

Shares of retailers that reported strong sales, such as Wal-Mart ( WMT), Limited Brands ( LTD), Abercrombie & Fitch ( ANF) and Nordstrom ( JWN) registered gains ranging between 0.25% and 6.01% on the day.

Given the strong consumption and spending data, economists are starting to predict 3.5% growth for the third quarter, says James Paulsen, chief investment strategist at Wells Capital Management. And with second-quarter GDP recently revised upward a bit, says Paulsen, "there are enough things out there flying in the face of the idea that the economy is falling off the table."

The growing optimism about the economy has some saying the soft payroll reports from the past four months might have been an aberration. With all eyes focused on Friday's nonfarm payrolls report, there's a sense on Wall Street that the number of new jobs created in August may be stronger than the 125,000 estimate.

Better yet, some say there are signs the worst may be over for the housing sector, and the long-term impact on consumers may not be as great as many fear.

Mortgage refinancing has risen in five of the past six weeks. Paulsen says refinancing activity is at its highest level since the start of the year. Meanwhile, long-term mortgage rates haven't spiked.

Alexander Grace, a hedge fund consultant and trader, says the recent pessimistic comments from Toll Brothers officials about the state of the housing market often happen at the bottom of a cycle. Grace says CEO Robert Toll's remark that he doesn't yet see "a bottom'' forming in the housing market is the kind of talk that should be taken as a buy signal by savvy investors.

But actions speak louder than words. And Grace says a sure sign of capitulation in the homebuilding sector occurs when companies start taking writedowns on land they had hoped to develop -- a sign they are throwing in the towel. In fact, Comstock Homebuilders ( CHCI) did just that, and its shares gained 6.30% Thursday.

Even shares of Toll Brothers ( TOL) gained 0.57% Thursday, while the Philadelphia Housing Sector Index gained 0.86%. Toll Brothers competitors like Pulte Homes ( PHM) gained 1.5% on the day and D.R. Horton ( DHI) gained 0.55%.

Insiders are also buying in the space, which can be a bullish sign, says Jonathan Moreland, director of research at InsiderInsights.com. Four insiders at Comstock Homebuilders bought shares this month, he says. Toll Brothers' insider actions have also been bullish, says Moreland. Robert and Bruce Toll exercised options, but did not cash them out -- suggesting they believe the stock will go up.

He also notes heavy insider buying in mortgage REITs, such as American Home Mortgage Investment ( AHM) and NorthStar Realty Finance ( NRF), revealing a bet that consumers will continue to pay off their mortgages and that housing won't collapse completely.

Moreland says, "I'd be wary of shorting the sector at this point."

Still, the jury remains out. It may be this will all prove to be a sucker's rally. But the market will know more when desks are fully staffed next week.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.

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