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JULY 2, 2010 12:20AM

Bad Economic Data Starts Third Quarter off on Bad Note

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NEW YORK - JULY 31:  Traders work on the floor...

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For the sixth trading session in a row, the Dow Jones Industrial Average fell.  This time, the culprit wasn't Greece, or Spain, or any country in Europe.  It was economic data.

We got worse than expected data on jobs, with initial unemployment claims jumping by 13,000 to 472,000.  Economists had forecast a drop to 455,000.  The Institute for Supply Management also reported that its manufacturing index, while still showing growth, dropped significantly to 56.2. That was way below the consensus estimate of 59.  And the number of contracts to purchase homes fell by 30 percent, more than double the consensus estimate and the worst drop since 2001.  Sales of autos, which had been on the rise, dropped by 10.8 percent in June, to 983,738.  That was below the consensus estimate but it was still 14.4 percent higher than sales from last June.

Put it all together, and it resulted in a drop in stock prices.  At one point, all of the major indices had fallen by more than one percent.  They bounced off the bottom to rally a bit, but they still finished the day in the redThe Dow Jones Industrial Average was off by 0.4 percent, to 9,733.  Only six of its 30 components were able to gain on the session, led by McDonald's.  The losers were led by one of our core holdings, General Electric, as well as Bank of America.  The S&P 500 lost 0.3 percent, closing at 1,027.  And the Nasdaq closed at 2,101, a 0.4 percent loss.

Some analysts say that the market is due for a bounce and the sell off is overdone.  Bloomberg calculated the PEG ratio using 2009 profits and 2012 income growth and at the lows of the session, this ratio for the S&P 500 was 0.78.  As the founder of Bespoke Investment Group said, "when you look at an individual stock at a PEG of one you're generally getting a good deal.  So if you're getting it at 0.78 you're buying the market at 20 percent cheaper than its growth rate and so that's a pretty compelling valuation."

The chief investment officer of Solaris Asset management concurred, calling the sell off we've seen over the past few days "somewhat extreme given valuations."  The economy is still recovering, he said, adding that "all signs point to a continuation of that, perhaps at a slightly slower pace."

Even though stocks may be inexpensive, many traders don't want to hold positions with the long weekend coming up.  As a senior technical strategist at Schaeffer's Investment Research said, "does anyone want to hold over a three-day weekend?"  Thus, those expecting the bounce off the bottom to continue tomorrow may be disappointed.

Longer term investors, however, are likely to find some compelling buys.  With the S&P 500 trading at a 20 percent discount to fair value as measured by the PEG ratio, now is a good time to look at stocks you'd like to own to see if they are relatively inexpensive.

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