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5/26/2010 2:28:49 PM Eastern Time

More Behind the Numbers than Meet's the Eyes
By Charles Payne, CEO & Principal Analyst

One thing has become abundantly clear; news will be scrutinized much more than It has been in the recent past. Headlines blare out the greatness of new home sales and durable goods orders. However, the market is tiptoeing its way higher, but not matching the sanguine feeling of those headlines. What's the deal? Why isn't the market taking the bait anymore? There have been periods over the past 52-weeks when disappointment couldn't be masked by headlines but stocks rallied any way. After looking at the data really closely, the number one takeaway is maybe the economy peaked in the first quarter for a variety of reasons, but most probably because government spending has run its course. The first quarter was the peak spending period for the Stimulus Plan, and the countdown to the conclusion of the first-time homebuyer tax break.

Stimulus Breakdown
http://www.washingtonpost.com/wp-yn/content/graphic/2009/02/01/GR2009020100154.html
http://www.recovery.gov/Transparency/RecipientReportedData/Pages/Landing.aspx
 
New Home Sales & Durable Goods

New home sales surged to an annual rate of 504,000 from 439,000 in March, coming in well ahead of consensus of 425,000. The 14.8% increase was substantially higher than the 3.4% expected, but a serious drop off from the 29.9% improvement in March. This is what's gnawing me about all of the data today…it feels like an inflection point is occurring. There is no doubt the conclusion of the first-time homebuyer tax credit played a major role in the surge in new home sales, but the year over year increase dipped from the previous month. Moreover, a very alarming trend is freefalling home prices. On one hand, it is good news because there is a natural level for home prices to find before unencumbered animal spirits can be unleashed. Government intervention delayed that process, but even with billions of dollars thrown at housing, prices continue to slide.

Then there is supply, which has come down to the point where one would assume sharp decreases would influence prices. However, that hasn't happened. In fact, median home prices have decreased to their lowest level since December 2003. The tragedy here is many folks that bought homes because of the tax credit are down on average $24,200 already, which completely offsets the $8,000 tax credit. First-time home buyers may begin feeling like suckers as they were 49% of all existing home sales last month, and 44% in March (investors were 15% and 19% respectively, repeat buyers the rest).

Trends in mortgage applications are clear, buyers are vanishing at a rapid pace (save for those paying in cash, which includes many foreign buyers) despite mortgage rates at 4.80%. The good news is we will find terra firma soon, but the bad news is it's not going to feel good.

When most people pick up their daily local newspaper tomorrow they will read how durable goods were up 2.9%, more than twice the expected increase of 1.3%. More than likely they will not read about the -1.0% reading excluding transportation, and they certainly will not see other worrisome trends suggesting a negative turn. Several key components declined sharply after huge upside moves in the preceding month. Non-defense durable goods excluding aircraft decreased 2.4% after posting an increase of 6.5% in March and an increase of 21.5% for the first quarter.

Summary

The market is on pins and needles, and rallies are hard to sustain. Then there is the Gulf oil spill, which is becoming an albatross on America's image. If the mud thing works there will be a sigh of relief reflected in the market. Then it will be back to Europe, U.S. debt (there could be another bailout tomorrow for union workers), and to a lesser extent North Korea and the NBA playoffs. Did anyone see that move from Goran Drajic against the Lakers last night…we may have to change his name to Goran Magic?

I would like to see a spike into the close, but am just not sure as there has already been substantial profit-taking in key names.

Long Idea: CATERPILLAR INC. (CAT) @ $60.98
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Trading Parameters
Entry Price	Entry Limit	Stop Loss	Trading Target	Target	Long-term Target	Options
$60.98	see comments	$55.00	N/A	$70	$75.00	N/A
Options Trade Parameters
Type	Option Symbol	Entry Price	Strike Price	Expiration Date
Call	CAT101120C00062500	$5.95	$62.50	11/20/2010

BACKGROUND: Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide. Its Machinery business engages in the design, manufacture, marketing, and sale of construction, mining, and forestry machinery, such as track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts. This business also involves in the design, manufacture, remanufacture, maintenance, and service of rail-related products, as well as offers logistics services. The company's Engines business designs, manufactures, markets, and sells engines for electric power generation systems, locomotives, marine, petroleum, construction, industrial, agricultural, and other applications; and related parts. This business also provides remanufacturing services for other companies. Its Financial Products business provides various financing alternatives to customers and dealers for the company's machinery and engines, solar gas turbines, and other equipment and marine vessels, as well as offers loans to customers and dealers. This business also provides various forms of insurance to customers and dealers to support the purchase and lease of its equipment. Caterpillar markets its products through d

SKINNY: Despite the weakness in Europe, the demand for heavy machinery is still strong. China's economy continues to grow at a breakneck pace, despite the government's attempts to slow growth. Combine that with more stimulus funds hitting the U.S. economy and the demand for Caterpillar's products are likely to remain strong. The company has beaten the Street's earnings per share estimates in each of the past four quarters, and earnings forecasts for the current quarter and full year having been steadily increasing over the past 90 days. The strength in the financials is also felt from this morning's durable goods numbers, which increased more than the Street was expecting. While the economy may not be overly robust, it has definitely passed the worst. We are looking for the stock to move to $68.00 and then break through its 52-week high at $70.00, ultimately moving to $75.00. Risk-averse investors should use $55.00 as a mental stop-loss.

Analyst Coverage
Robert W. Baird- Upgraded to OUTPERFORM	Avondale- Initiated OUTPERFORM	UBS- Upgraded to NEUTRAL