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High terror alerts across the nation have likely negatively impacted our economy of late, but the numbers from January look pretty good.  TheU.S.consumer continues to support this economy to the amazement of many economists.  Retail Sales excluding autos rose 1.3% last month, according to the Commerce Department.  Building materials, higher gasoline prices, and higher prices on imported goods helped boost the index.  Retail sales represent 30% of the U.S.economy.  

 “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.” Charles Dickens’ Introduction to A Tale of Two Cities – 1859, comparingLondon andParis at the time of the French Revolution (1789-1799)

This week we mourn the deaths of seven national and international heroes while celebrating their high achievements with those of the space program.  We laud the program’s proud history of excellence during the cold war competition later adapting to the new world order to become a model of international cooperation. 

It was a big week for news as President Bush laid out his initiatives in his State of the Union message and the government released a number of important statistics on the health of the economy.  As of this morning the Dow is down 2.3% from Monday and was more volatile than usual.  During the last two weeks it has fallen 10.4% from its peak of 8869 to close at 7945 yesterday. 

We started the week with a report that housing starts in December increased 5% to a 1.835 million-unit annual rate, the highest since June 1986.  December building permits rose 8.2% to a 1.880 million unit annual rate.  The increases were larger than expected and provide strong evidence that the housing boom remains healthy and will likely remain so for months to come.  The boom continues to be fueled by historically low interest rates.  The average rate on a 30-year mortgage was 5.97% last week.  That was close to the 5.85% at the start of the month, which Freddie Mac, the No. 2 buyer of mortgages, said was the lowest since the 1960s.

As we head into earnings season, the top international news stories, mostly about Iraq, continue to steal the thunder from some pretty good company earnings.  By the end of today, 95 of the S&P 500 will have reported their earnings.  First Call reports that the number of reports beating expectations is well ahead of this time last year.  Granted, the comparisons are pretty easy, but hey, let’s enjoy a little good news.  Many of the major banks reported strong results this week.  Bank of America’s 4th Quarter net income rose 27% and beat average analysts’ estimates by $.06.  BB&T reported a 21% increase in earnings. 

We began the week with some surprisingly strong economic news.  As reported by the Institute for Supply Management,U.S.manufacturing increased in December by the largest amount since the last recovery from recession in June of 1991.  Manufacturing contributes about 15% to the nations’ economy.  Manufacturing and business in general have been slow to recover in this latest economic slowdown, but this latest ISM report showed much more strength than expected by economists.  Some economists are now raising their growth target for the economy from 1.5% in the first quarter to 2.5%, while others say the report probably overstates the amount of improvement. 

There is an axiom on Wall Street that says ‘as goes January, so goes the year.’  Yesterday certainly got January off to a good start.  The first trading day of the New Year saw the Dow rise by 3.2%, the S&P 500 by 3.3% and the NASDAQ by 3.7%.  Volume was heavier than the preceding week, but was still well below normal.  However, the buying volume was six times the selling volume; further proof that selling is on the decline. 

As war talk grows louder and likely dates of conflict crystallize, investors find it hard to focus on anything else.  The amazing thing is the prospect of it seems to carry new emotional impact daily.  Its rather compelling proof that markets can be just as emotional as the individuals who comprise them.  

Global and domestic conditions are playing into America’s long and strong suits – our economic system and our democratic ideals.  Productivity in the U.S. is rising faster than in any country in the world.  Innovation thrives here because of our broad diversity and because our free market system rewards innovation and risk-taking and because patents and copyrights protect profits for a sufficient time to reward the effort.  In a speech in 1859 Lincoln said:

Since reaching a five-year low on October 9th caused in large part by the threat of war with Iraq, the Dow has rallied almost 22% from those lows.  The NASDAQ has risen 32% as investors and short-coverers have snapped up depressed technology stocks.  What has changed?  The threat of war seems as great now as it did on early October?  Have stocks risen too far too fast?  The short answer is, quite possibly, but maybe just for the near-term.