We've had false signals before, but the Institute for Supply Management's purchasing managers index jumped sharply to 52.9 in August, the first time since January of 2008 it has been above 50. Readings above that benchmark indicate that the economy is expanding, so recovery may finally be at hand.
Great, but something's rattling
The Cash for Clunkers program gets partial credit for boosting the index. J.D. Power & Associates expects monthly auto sales to cross the 1 million mark in August for the first time in the past 12 months, and Ford (NYSE:F) is revving production to replenish depleted dealer lots. Yet Toyota (NASDAQ:TM) is shutting a factory for the first time in its history, and the clunkers program may have stolen sales from future periods.
... and the roof still leaks
Analysts think Hovnanian will beat last year's earnings when it reports quarterly earnings tomorrow, but that's not exactly a high hurdle. Homebuilders significantly marked down overpriced inventory last year, so this year's results almost have to be better. Yet Toll Brothers (NYSE:TOL) still had big losses this quarter, even as luxury homebuyers moved back onto the block.
... and duct tape holds it together
The market's rally has been fueled by low quality stocks. American International Group (NYSE:AIG), Citigroup (NYSE:C), Freddie Mac (NYSE:FRE), and Fannie Mae (NYSE:FNM) are all substantially owned by the government, but the big gains they've posted aren't supported by their underlying businesses. And as much as we all might want Ford to win, there's little reason to think it will repeat its multibagger performance over the next six months.
Foolish white warning flag
Sure, the economy is mending, but with the next repair station still miles ahead, I wouldn't hitch a ride with this jalopy. Do you agree this engine is ready to seize? Let me know in the comments section below.
