Dow Hits 12,000

To my utter disbelief, the Dow Jones Industrial Average hit it's highest level ever before dropping back under 12,000. Better than expected housing numbers and inflation readings in line with expectations are cited as the impetus. Once again, I have underestimated the resilliance of the US economy.

The CPI headline number was -.5% which is actually deflation, but of course this is almost entirely due to the drop in fuel prices. The core number was .2% leaving the year on year average at 2.9%. Although these numbers are in line with expectaions, the inflation risk remains. No one is pricing in a rate hike at this point, but projections for when the Fed might lower rates are now largely centered around Q2 in 2007.

Lower oil and gas prices will help fend off the inflation monster, but at 2.9% core y/y, the Fed is still walking a fine line. I'm sure Bernanke is breathing new sighs of relief with each drop in oil prices. Crude inventories came in above expectations as well sending gas futures even lower.

New housing starts came in a bit above consensus, but this is very significant as the numbers have been exceptionally bad all year. One dark cloud is that new housing permits came in lower than expected indicating that market is still in decline. If starts can hold here at about 1.7 million per year on average, then the soft landing theory could pan out.

One last thought: could there be an election correction? If the Democrats take one or both Houses in the election, could Wall Street panic?

I have a feeling we are going to find out.