Like it’s 1999

Well, maybe not 1999 (we like the facile and sophomoric Prince reference, so please indulge us). But the market’s gains seem to have hit hyperdrive this month. For the first time since the rally started in March 52 week highs exceeded 300 today. That number is not excessive. If anything we are shocked it has taken this long to achieve.

Why does the market party? Let us count the ways.

The “green shoots” the market anticipated in March and started seeing during the spring have turned into a nascent recovery. Positive economic signals are everywhere. As we discussed in our last column the negative news has been “baked into the cake,” previously factored into the market and therefore now ignored. And the market is rallying on every positive shred of good economic news that is released.

On Tuesday September 1st the market appeared to embark on a correction, suffering ugly price action with a close at the lows on all the major indices on a considerable increase in volume.

But also on that day the ISM Manufacturing Index posted a reading of 52.9. That marked yet another in a string of increases, but most importantly crossed the 50 threshold dividing contraction from expansion thus confirming manufacturing’s return to growth.

The market came to it senses, went no lower the following session and took flight on September 3rd, taking sustenance from further positive news along the way.

To wit:

Last week in this column we pointed out that, protectionist objections aside, the rising trade deficit that was released on the 10th is a sign of a worldwide economic revival.

Today the government released Industrial Production results for August and the news was stellar, with production coming in better than expected and July’s numbers revised significantly higher. We have often argued that pork barrel stimulus is a waste, more a political stunt than an economic tonic. Sure enough today’s report shows that the economy is recovering on its own as industrial production rose across the board, not just in the steroid induced auto sector off the “Cash for Clunkers” program.

Also today came good news on the consumer inflation front. Simply stated, there isn’t any. While Tuesday’s producer numbers ran hotter than expected they had been in a protracted decline. And in any event producer numbers have a poor history of seeping into consumer prices. The liquidity provided by the Fed is succeeding in stanching deflationary pressures while inflation is kept at bay for now.

Also on Tuesday came fine news on the retail sales front. Even allowing for the Cash for Clunkers program they increased by 1.1%. While a sales tax holiday accounted for the robustness of the gains the salient point is that consumers are willing to spend if given the proper incentive.

And why shouldn’t they be? Although the August Employment Report showed yet a further increase in the unemployment rate and gave no signs of imminent improvement, statistics indicate that those who have jobs, and they number more than 90% of the work force, have over the last quarter enjoyed a slightly expanding work week (the significance of which we discussed previously) and month over month wage gains. This is yet another portent of a “better than expected” holiday season.

And where is the party occurring? We were quite surprised by today’s results.

Aside from our gold investments our portfolio is heavily tilted toward “leading stocks” in the software, medical, Internet and technology sectors. While we had a very profitable day we are used to seeing our basket of stocks outperform and they didn’t today. A look at the sectors that really motored is instructive because it uniquely reflects the forces behind the current market.

The four top performing sectors in our database, all scoring about 3% and higher, were Real Estate, Banking, Metals & Mining and Materials & Construction.

Banking has been the clear leader since the March bottom. And well it should be. Even those institutions with toxic balance sheets should be able to earn their way to health with Fed policy that is essentially designed to loan banks money for free on which they can then make incredibly wide spreads.

Real Estate and Materials & Construction are flying on the liquidity available in the system. Heretofore loans may have been hard to obtain but the market is telling us that difficulty won’t continue into the future. It’s also telling us that the horrid Commercial Real Estate market, which is forecasted to get much worse, may well have a happier ending.

While we have launched gold and gold mining trades on our companion blog we have also opined in this space that we are uncertain as to the success of a “gold as a harbinger of inflation” paradigm. With the price of gold rather constant when quoted in other major currencies for the moment its price expansion seems more attributable to a weakening dollar than inflation pressures. With the administration and the Fed apparently not eager to bolster the greenback this trend could well gain steam and become the leading story of 2009’s fourth quarter.