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Yesterday's strong rally in stocks is being credited to a favorable Empire State Manufacturing Survey. This survey is administered by the Federal Reserve Bank of New York. Not surprisingly, investors reacted primarily to the headline, which does indeed suggest that things are getting better. Keep in mind, however, that the survey covers business conditions in just one state. Furthermore, the results are derived by surveying only 200 top executives at New York manufacturing companies; of which only about 100 actually responded.

That so many investors would pay this much attention to a rather esoteric report seems a bit odd. At least for today anyway, investors chose to buy stocks due to how 100 executives responded to this one question: "What is your evaluation of the level of general business activity?" The New York Fed was not looking for a well thought out essay. Instead, it was a multiple choice question with only three possible answers: Decrease, No Change, and Increase. The Fed then creates an index from the answers. Investors apparently got excited because the index was somewhat higher than it was a month ago, which suggests a positive trend.

The survey does contain other questions as well, but stocks surged primarily because of how 100 executives answered that lead question. Of course, the value of the index could have been quite different if just one or two executives responded in a different manner, or if some of the 100 who skipped the survey had actually responded. Which brings up another question, why didn't those executives respond? Was it because business conditions were so good that they were simply too busy? Or was it because business conditions were so bad that they were too disillusioned?

The survey also asked about the number of employees and about the average employee workweek. The results from the 100 executives who responded suggest that manufacturing companies added employees, but at a slower pace than they did a month ago, and that employees are working longer hours. The survey results also indicate that the executives are optimistic about future business conditions (i.e., six months from now), but not as optimistic as they were a month ago.

Overall, the survey does not really tell us much that we did not already know. Results are better than they were a year ago, but not that different than they were a month ago. Nonetheless, investors seized on the report as an excuse to buy stocks. However, the real reason they started buying was because they were convinced stocks were oversold. As I've argued before, there will be many days on which stocks rally strongly, yet the overall trend is still unfavorable. A somewhat upbeat manufacturing report is certainly nice to see, but we still have to deal with much larger problems in the economy, including huge amounts of sovereign debt, stubbornly high unemployment, a still sick housing market, and a general lack of demand for goods and services. (Except, of course, when demand is being fueled by generous government subsidies!)