By David Silver

After yesterday's freefall into the close, the market is acting a little better today, and we are roughly where we were before the market started to fall apart at approximately 3 PM yesterday. The Dow slipped below the psychologically important 10,000 level, and has been struggling most of the morning to stay above that level. The Dow is outperforming the other indices, as the S&P 500 is flat and the Nasdaq is in the red as the jump in initial jobless claims, falling oil, and a strengthening greenback pressure parts of the market. eBay (EBAY) posted a 29% drop in profit and released disappointing guidance for its fourth quarter, and those results are pressuring the Nasdaq this afternoon. After yesterday's shaky session, this morning has shaped up to be a defensive rally in the Dow.

Yesterday, the President rolled out another plan to get loans to small businesses. I'm glad that it was a low key event because it was but a very small step in the right direction. The President said all the right things about the role of small business, and he could have said so much more since they are the backbone of our economy. Just think, I can't remember the last time the Challenger Gray survey reported big businesses hiring employees. That said, the latest offering from the Administration misses the point, and maybe that is on purpose. The SBA itself is such an antiquated agency and needs to revamp the way it goes about assessing risks and qualifications. Moreover, small banks are reluctant to do business with the government and TARP, which explains why none have taken the bait thus far.

On the topic of TARP, the most recent news on those giant too-big-to-fail banks that got your tax money is another heartbreaker. According to an article, the 22 biggest TARP recipients haven't increased their small business lending; instead they've cut their outstanding balances by $8.0 billion. Keep in mind that TARP banks spent $77.0 million on lobbyists and $37.0 million on federal campaign contributions last year, making the TARP payout a pretty good return on investment. I don't fret about lobbyists and such but I do fret about the lack of respect afforded small businesses and the fact so much money has been sprinkled elsewhere. We were promised trickle up economics, but that hasn't been the case at all...the exact opposite in fact.

Although the past several months have shown an improving sales environment for housing that has raised most of our hopes, recent data supports the idea that the housing market is still tipped precariously on the edge of re-disaster.

Make no mistake, similar to the cash for clunkers program in August, the housing market has been kept active with a cocktail of government programs. Like most others, we agree that the outlook has been getting better and some progress is being made, but there is still a lot of work to be done. And, even though I generally oppose spending taxpayer money, now is no time to pull the plug on the lifelines.

The market is fixated on the less than desirable housing-related reports out Tuesday morning. Such below-consensus readings on starts and permits are a shot across the bow for regulators to cut the smooth talk and extend the housing tax credit. Whether the tax credit has had a huge impact on overall housing demand in recent months is not very supported in the statistics (low mortgage rates arguably a bigger component). But, much could be said about bolstering market psychology, in this case that of homebuilders. Maybe it is time to expand the program to not just first time buyers making less than $75,000.

The recent rally in the price of crude oil is faltering Tuesday. The dollar actually started to rally in value versus a basket of other international currencies, and this is causing a shift out of the commodity asset class of which crude oil is included. Also causing some of the selling pressure Tuesday was the fact that it closed in on the $80 per barrel level. Oil and other commodities have an inverse relationship with the value of the dollar. As it stands, oil traders and investors have been taking their cue from the rally in the broader equities market and allocating more capital to the oil trade. The fact that the Dow Jones Industrial Average recently hit, and surpassed, the psychologically important 10,000 mark served as a source of encouragement to investors that the economy is on the mend. As such, the logic goes that this portends an eventual increase in activity which will ultimately lead to a ramp in the demand for energy.

It was really a low-key session considering all the moving parts from robust corporate earnings, financial regulation on the horizon, the plunging dollar, and constant state of flux that has become the U.S. consumer. It's a lot to soak in for anyone, but really difficult for investors that may have missed this rally. This is where pride becomes an insidious vermin eating away at decision making, once again paralyzing so many investors that have been voyeurs throughout this magic ride. Unfortunately, for them, the lack of pomp at once again crossing Dow 10,000 may abate their decision to continue to "sit this dance out." In the meantime, the stock market is always in a state of war, sellers think they know things buyers don't and vice versa and along the way, it's not good enough to have a decision but they must also impose their will.

This is the glorious war that is the stock market, where rules from the Marquis De Queensberry and Sun Tzu simply don't apply. The interesting thing is that the smoke from the carnage keeps many would-be players at bay, especially when the shorts have the upper hand. Right now, however, the bulls have the edge and the smoke should have come from the thundering herd of individual investors looking to get in the game. They simply haven't. According to Morningstar, individual investors have only put a net $14.5 billion into equity mutual funds this year while loading up on bond funds to the tune of $254.6 billion. According to the Investment Company Institute, American investors were dumping stock funds as fast as possible. Of course, we know now they should have been buying with the same resolve. Even though there have been net positive inflows since March the amounts are small indeed.

Last week Alcoa (AA) posted its earnings results and the market was pleased, but trepidation greeted investors this week as many continued to wonder how much longer the good news would last. How much longer can a stock market that seems completely detached from reality continue to rally? Well, one thing seemed clear to me coming into this so-called earnings season; it wasn't going to be enough to miss on the top line and manipulate a beat on the bottom line and be rewarded. Case in point, yesterday before the market opened there were a couple of companies that posted results that missed on the top line but beat on the bottom line. These household names saw their share prices hit hard:

• Dominoes Pizza (DPZ): -10.00%
• Johnson & Johnson (JNJ): -2.43%

It was pretty clear out the gate that the market would struggle as equity futures faded into the opening bell. There wasn't any panic per se, but tension in the air was thick enough to cut with a knife. The things that bugged me early on was the weakness in Chinese stocks and the inability of U.S. stocks to maintain momentum past 10:00 AM (the first 30-minutes of trading is often referred to as the "sucker's period" so it was a red flag that larger investors didn't step up to the plate). Professional investors are at a crossroad of sorts. Over the next couple of weeks they must decide to play along or hope their refusal to put money to work will pressure the market. Of course, the coolest customers out there have been buyers and who have become reluctant sellers, yesterday's lull notwithstanding. No matter what happens, even if the market does breakout this week, there isn't going to be mass hysteria.

The fact is that this trip through Dow 10,000, assuming it happens, doesn't have the economic backdrop of the other two trips beyond this now mythical number.

The market seems to be marking time as investors reload mentally and brace for the deluge of earnings reports out next week. Although Alcoa (AA) kicked off the earnings period last week, the only report out Friday came from India's Infosys (INFY). I'm actually a little surprised that the market was higher on Friday, at times even hinting at moving even higher.

The good news from the trade deficit report was that exports were at the high of the year, but it's clear that slack U.S. demand slowed imports. So, the number might be slightly better than a wash but it's mostly a non-event.

The White House says that there will be no second stimulus, but of course there will be much more. The latest stimulus plan that came in is a twist on the plan from the first iteration. Now, the unemployed in all states get extra weeks of benefits.

• The unemployed in states with 8.5% or higher unemployment will receive 20 extra weeks of benefits
• The unemployed in states with less than 8.5% unemployment will receive 14 extra weeks.

Plaid is in vogue this fall season. Military themed wares have also caught on, even showing up to a degree in Banana Republic (go figure!). Although there is a sense of fashion in the malls and in discounters (by extension of course), the September same-store sales results are not displaying an aura of differentiation. Retailers largely surpassed consensus comp estimates, and a select few managed to upwardly revised 3Q EPS guidance. For the likes of Aeropostale (ARO), Gymboree (GYMB), and Target (TGT) the merchandise is striking the proper chord with consumers (right price/must have) and operating expenses have been removed from the operating model.

All told, our retail sector coverage, comprised of specialty and discount, produced a -2.9% average comp for the combined August/September periods, which we feel is a truer indicator given the shift in the retail calendar for Labor Day. The number stacks up against a -0.7% comp in 2008 for the same periods; stripping out Wal-Mart (WMT) from last year as the company no longer repots monthly sales and comps did in fact improve y/y, slightly. Part of the trend reversal could be attributed, in our view, to fewer deep promotions (sales=volume + price; the latter is helping at the moment). Retailers have gotten very creative in their promotions, offering for example buy one get one 50.0% off which brings consumers into the stores while preserving margin dollars.

By David Silver

Wednesday after the closing bell, Alcoa (AA) started off earnings season with a bang, reporting a quarterly profit of $0.04 (consensus was a loss of $0.10 per share) and revenues of $4.62 billion that beat the Street’s expectations (consensus was $4.55 billion). CEO Klaus Kleinfeld announced that revenues fell 33% year over year but improved 9.0% sequentially. So much has changed since the third quarter of last year that year over year comparisons are really comparing apples to oranges. Since taking office back in May of 2008, Mr. Kleinfeld has slashed production, jobs, and capacity and has tried to concentrate more on the Company’s core businesses. During the quarter, the Company announced it ended a joint venture and received $276 million of cash, which helped give the Company a cash balance of $1.1 billion at quarter end.

It was one of those sessions where one couldn't really figure out if it was the calm before the storm or the calm after the storm. The part people couldn't figure out was the storm. Could the floodgates open and rain money into the market as the final quarter marks the last chance for professionals to get in the game? The rally has been beyond anyone's wildest imagination, and in fact many still think it's a figment of our imagination. I love it when they ask on television: "is this rally real or not?" That's like saying: "are you sitting in front of me now or are you daydreaming over a bowl of Fruit Loops with a trail of milk running down your chin contemplating if there will be any construction work if you get down to Home Depot in time." It seems that some people must sleep down there, after all. Plus, the guys doing jobs seem to dislike ex-accountants. But I digress...it's always real, the question is, however, is it justified. Well, on one hand, the answer to that question can still be kicked down the road although the educated hunch is the market is ahead of itself.

One thing that is interesting is how certain data points continue to move in one direction while stocks in those areas move in the opposite direction. Take yesterday's consumer credit report and the stocks of credit cards. Yesterday it was revealed that consumer credit declined again for the seventh consecutive month and 11 out of the past 13 months. The big hit came again in revolving credit (credit cards), although non-revolving credit (autos) edged lower, too. The Street modeled for a $10.0 billion decline; the actual number was a decline of $12.0 billion.

This is the day that we've been waiting for since the last round of corporate earnings and more so since last Friday when the jobs report was a dud. There are many earnings to sift through today so the session could feel like those final two hours after the conclusion of FOMC gatherings.

Obviously, investors are eager to get good news, and may even be wiling to dismiss those that come up short as long as there is a silver lining or two. Yes, I wrote a couple of times that this time would be different. Heck, I thought this time had to be different because it seems illogical that the market could rally indefinitely on so-so earnings results.

As we all know, millions of people have had their homes foreclosed in past couple of years. While this fact is certainly not new or breaking news by now, it is still alarming nonetheless. What we don’t hear too often, however, is where these people go after losing their homes. The picture of housing in America has changed for sure, and some of the differences we see now could become permanent.

Largely, there has been a trade-down effect, with homeowners downgrading to cheaper homes or apartments. It’s a trend that homebuilders have been keen to take advantage of. Builders KB Home (KBH) and Lennar (LEN) in particular have made drastic changes to the homes they build by reducing homes’ footprints, using cheaper construction materials, and offering fewer bells and whistles (aside from the occasional green energy upgrade).

Maybe it's a sign of things to come but the action yesterday was very compelling. I sense some panic buying as fence-sitters understand that they'll have to make a stand or probably spend the next leg higher crying in their milk...again.

The market is still range-bound but acts like all is forgiven or forgotten. That "sobering" jobs report last Friday, all those economic data releases that missed the mark, all the corporate insider selling, and the fact the market is up 505-points from the low of the year are all forgotten or forgiven.

Given its druthers, the market would rather move higher than lower, and that's important to note. It doesn't mean that an upside move is justified, but it does mean the market is sending a message. Thus far this year, not listening to that message has had dire consequences. Sure, at some point everything eventually changes but unless you are one of these guys that write white papers, or can be wrong for years and still eat, then fighting the trend to wait for the inevitable is a mistake. There is only room for a few doom and gloom guys to walk around with their chest pumped out even if they were a couple of years early. Your goal should be to walk around with your pockets pumped up. An old friend of mine famously told me (on more than one occasion) "my ego is in my wallet." (Of course, there is a place to take a stand even when money is involved, though there is no way an individual investor should become so invested with a stance they miss the boat.)

On that note, I came into yesterday's session tip-toeing around not based on market action, but based on some simple guy that believes a pullback is due. The market is mysterious, but that isn't the same as frightening. The bias is to the upside even though the market could pullback on a series of earnings disasters. Speaking of which, the report from Mosaic (MOS) looked like a classic disaster after the close. The company posted earnings of $0.23 per share on $1.46 billion in revenue; the Street was looking for $0.35 per share and $1.54 billion in revenue. Year over year profits were down 92.0% and revenue fell 66.0%. The stock barely nudged lower in the aftermarket in part to an overall feeling the bad news was going to come coupled with upbeat comments from company CEO Jim Prokopanko, who pointed out improvement in gross margin and improving fundamentals in phosphates.

I'm still surprised the market held up the way it did on Friday. I was tempted to write "pleasantly" surprised but I'm not sure to be honest. Of course I would love for the market to move up in a straight line, but that is unrealistic. I would love to not have to answer to why ideas are down even as the broad market is down. (Handholding is a critical component of our mission, but sometimes the fear expressed is as if companies are going out of business when it's just a pullback.)

But, the fact is that backing and filling is good for the market as it allows weak holdings to get out and more optimistic buyers to step in. Broad market pullbacks are also often the only way to get great stocks on sale.

When I was a kid, the Olympics were so much fun and so exciting. However, over the years it feels like the event has lost some of its luster. Save for special stories like Michael Phelps and occasional sensations like Usain Bolt it doesn't have the same thrill it once had, but maybe that's just me. The spectacle itself is great to watch, the opening and closing ceremonies.

But that's just it; watching the Olympics is different than hosting the Olympics which have become a routine financial wrecking ball. Now, the games seem more like coming out parties for nations that want to show the world they are relevant. It's a coming out party of sorts, and along those lines it makes more sense that Rio would get the games rather than the United States. Like a Sweet Sixteen or Bar Mitzvah it should be a joyous party that burns a hole in the pockets of the sponsors. I'm not sure we need to have another coming out party.

During August we had the cash for clunkers program, and many (yours truly included) expected to see a difficult month for the auto industry during September. What I didn't expect was all the company driven incentive programs (not dealership) that were instituted during the month.

General Motors has its new 60 day money back guarantee and Hyundai has its own little cash for clunkers program running. Ford (F) posted a stronger than expected result while General Motors and Chrysler were again weak, with sales dropping 45% and 42% respectively.

Market conditions have become choppier this past week as disappointing economic data, tough talk from Fed Chairman Ben Bernanke, and mixed signals from Fed governors serve as anchors.

While most economic data that has fallen short of the consensus measuring stick has pointed to expansion in the U.S. economy after a sharp contraction, the pace of recovery is now increasingly in debate. Mr. Market is shifting its sights to 2010, and by evidence of the trading action this week it does not like the lay of the land. The ballyhooed “V”-shaped economic recovery may conclude with a lower case “v”; in other words a strong, short snapback in economic growth from 2Q to 3Q.