First, while the data is seasonally adjusted, the weather was much worse this year than last, and that might have had an effect, especially when looking at the regional breakdown. Starts were down by 9.6% in the Northeast on the month, but up 6.5% year over year in the region, while they were down 15.5% in the South for the month and off 12.4% year over year there. The big blizzard mostly affected the East Coast, both above and below the Mason-Dixon line.

Starts in the Midwest rose by 10.6% on the month and were up 11.8% year over year. Yes, snow did fall in the Midwest, but not as much as in the Northeast, and people in Chicago are much more used to dealing with snow than are people in Atlanta. The West was not affected by the blizzards, and there starts rose by 7.9% for the month and are up 21.3% year over year.

Then again, given the state of the economy -- and especially the housing market -- a year ago, being up from those levels is nothing to brag about...

The next caveat to taking a "too bearish" reading from this report is that the January numbers were revised sharply higher. Starts in January were originally reported as a 591,000 annual rate, so from where we thought we were, the decline was just 3.3%.

Also, single-family starts are holding up much better than the overall starts; most of the weakness was in the very volatile apartment and condo segment. Starts of buildings with five or more units plunged by 43.1% to a seasonally adjusted annual rate of just 58,000. That rate is 71.6% below the year-ago level. Single family starts were down just 0.6% on the month to a rate of 499,000, and are up 39.8% from the extremely depressed level of a year ago.

Building Permits Point Forward

Looking forward, the best indicator of future housing starts is usually Building Permits, which declined to a seasonally adjusted annual rate of 612,000, a decline of 1.6% on the month and up 11.3% from a year ago. The January level of permits was revised slightly higher from 621,000 to 622,000.

There, too, the weakness was mostly in the apartment and condo area, where permits were down 10.1% on the month and are down 41.4% year over year. Single-family permits were down just 0.2% on the month to a seasonally adjusted average of 503.000, and are up 32.0% from a year ago.

Regionally, the Midwest was the strongest, with an 11.7% monthly rise and up 23.5% year over year. The Northeast was unchanged on the month and up a slight 2.8% from a year ago. Permits in the West were down 2,1% on the month but are 38.6% above last year's levels.

The all-important South region -- which typically represents more than half of all housing activity in the country -- suffered a 5.8% decline on the month and is just 0.3% above the depressed levels of a year ago. Getting a building permit is a nice indoor activity, and is not very weather-sensitive, unlike actually putting a shovel in the ground.

Do We Really Want Housing Starts to Increase?

Finally, there is the more existential question of if we really want to see housing starts increase. We still have a massive inventory of houses, both new and used. This is especially true if one considers the shadow inventory of people who are far behind on their mortgages, or houses that are already in the foreclosure pipeline but not yet listed for sale. Until we get the inventories under control, each new house built simply adds to the problem.

The U.S. is decidedly not suffering from a shortage of homes, at least not with the current rate of household formation. Household formation is greatly influenced by the number of jobs out there. If a 24-year-old college grad does not have a job, he will move back home with mom and dad instead of getting his own place. People without jobs will tend to double up with friends and family.

However, historically residential investment -- the biggest part of which is new home construction -- has been the locomotive that helps pull the economy out of recessions. This can be seen in the graph below (from http://www.calculatedriskblog.com/). Note how both total housing starts (blue line) and single family starts (red line) rise sharply after each recession (with the bottom often coming during the recession, making starts an important leading indicator of the economy).

Building a house can employ a lot of people. After the 2001 recession, job creation really did not get underway until August 2003, and the bulk of job creation in that expansion happened over the next three years. By August of 2006, the economy had added 6.430 million jobs, of which 965,000 -- or 15.0% -- were in Construction.

At the start of the period, construction jobs were just 5.2% of all jobs in the country, and by August 2007, they had climbed to 5.7%. While the overall economy continued to gain jobs until November 2007, August 2006 was the peak for construction jobs. Since then, the construction industry has lost 2.170 million jobs, while the economy as a whole as 6.826 million fewer jobs than in August of 2006.

In other words, construction alone is responsible for 31.8% of all jobs lost since that time. In the process, Construction has fallen back to being just 4.3% of all jobs in the country. Those numbers do not count the auxiliary jobs that are created by housing construction. The carpenter working for D.R. Horton (DHI) is counted, but not the guy in the factory making faucets at Masco (MAS) or the gal making kitchen cabinets at Fortune Brands (FO).

A Classic "Chicken & Egg" Situation

Thus we are caught in a classic "chicken and the egg" dilemma. Demand for houses will not pick up and cure the inventory overhang until household formation picks up. Household formation will not pick up until the job market comes back.

Historically, construction has provided a disproportionate number of jobs coming out of recessions (and losses a disproportionate share going into them). Construction jobs are also either semi-skilled, or have very specific skills. Those skills do not necessarily transfer over well to other types of employment.

Non-residential construction is not going to be the answer, at least not in the private sector. The nation is just as overloaded with excess strip malls, office buildings and hotels as it is with houses, at least for the current level of demand. If we get more jobs that might change, as more workers will mean more cubicles to fill. Right now though, there is a lot of empty office space around and rents have generally been falling.

Bad commercial real estate is probably a bigger thereat right now to the banks than are bad residential mortgages. This is particularly true for the small and mid-sized banks that were largely locked out of the housing boom and instead focused on commercial real estate (not all small banks did, but lots are extremely exposed relative to their capital levels).

The Bigger Picture

In the long term, a lower level of housing starts is probably a good thing. Building things that you don’t need, and which do not produce a return on investment, is not the path to a stronger economy over the long term.

However, in terms of the current rate of GDP growth, weak residential investment is a big drag. After 14 straight quarters of subtracting from overall economic growth, in the last half of 2009 residential investment finally started to pull its own weight and helped the economy. That help may be in the process of petering out.

At this point, housing start numbers are extremely low. If we could just recover to the level of starts that was associated with the worst levels of prior bad recessions, we would see very big percentage increases. If we got back to the average of the worst single months for single family starts of the recessions of 1970, 73-74, 1980, 1982 and 1991 (i.e. every recession since the 1960’s except the 2001 recession, where housing did not decline significantly) then we would see a 21.1% increase from current levels.

The size of the population has expanded significantly over the last 45 years, and with more people one would think that we need more places for them to live. We do, but we built too many from 2002 though 2007. In effect, the demand for houses was pulled forward by the housing bubble.

It will be possible to generate pretty healthy percentage gains in housing starts without going to very heroic levels of housing starts, unless you call the worst month of the 1982-83 recession a good level of housing activity. However we are not going to go back to the sorts of levels of housing activity and residential investment that we saw just a few years ago. The low level of residential investment is going to be a principal reason that this economic recovery is going to be very anemic.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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Labor Market Close to a Turnaround

The economic picture continues to brighten. The long anticipated turnaround in the U.S. labor market is drawing near. Friday's better-than-expected payroll numbers showed that while we still lost more jobs, the economy has come a long way and is closer to positive job creations.

The bad East Coast weather during February couldn't completely hide the improving trends in the labor market. Not only did we lose fewer-than-expected jobs, but the net effect of revisions to prior months was on the positive side. In essence, payrolls have been essentially flat for the first two months of 2010. Temporary hirings have remained on pace with recent trends, which would be expected at this stage of the recovery.

On balance, it appears that absent the weather impact we would have had positive payroll numbers. But that is only a temporary setback, expected to be reversed next month. We remain comfortable with our initial outlook that the labor market is on the cusp of a turnaround, moving from monthly job losses to positive job creation in the coming months.

Near-term Economic Picture Less Foggy

Other favorable news about the health of the U.S. economy continued that trend:

• The record increase in productivity numbers also indicates a positive outlook for the labor market. The fourth-quarter 2009 productivity numbers were recently revised upwards to 6.9% from 6.2%. For the full year, productivity increased by 3.8%, the highest rate in seven years. Productivity at this rate is unsustainable and is indicative that sooner or later employers will need to hire more workers to keep production rolling.

• The Institute for Supply Management's (ISM) non-manufacturing index, or services index, increased more than expected to 53% in February from 50.5% in January. A reading of over 50 indicates that the services sector of the economy, which accounts for over 6X more jobs than the manufacturing sector, is expanding. This index has ten sub-indexes; one dealing with employment. The employment index has been under 50 for over two years now, but it increased a greater-than-expected 4 points to 48.6%. This indicates that while the services sector is still shedding jobs, it is doing so at a much slower rate.

• Earlier, we had found that the ISM manufacturing index for February had pulled back to 56.5% from January's 58.4%. While the pullback was most likely weather related, the more significant nugget in that report pertained to its employment sub index, which showed a 2.8% increase.

• We saw evidence that writing off the U.S. consumer may not be the smartest thing in the world. Consumer spending in January increased at a greater-than-expected rate; the fourth straight monthly increase.

We will take these positives about the U.S. economy and the associated improvement in sentiment, but do not expect the trend to last much longer. The macro backdrop for the market continues to be dominated by issues and concerns that will keep it in check.

Portfolio Update

We added three stocks to the Focus List and deleted one each from the Focus List and Growth & Income Portfolios. There were also changes to the Timely Buys list.

We added Parexel International (PRXL) and Veeco Instruments (VECO) to the Focus List and Olin Corp. (OLN) to the Growth & Income portfolio.

Parexel is a $1.3 billion market-cap consulting firm focused on the pharmaceutical industry. The company offers a robust earnings growth outlook and appears to have nice momentum. Veeco is a high-tech manufacturer with good earnings prospects and solid valuation. Olin Corp., a manufacturer of commodity chemicals, offers a good blend of cyclical leverage and a juicy dividend of over 4%.

From the Focus List, we deleted Rehabcare Group (RHB) following the company's weaker-than-expected quarterly results. We take a negative earnings surprise very seriously as it is typically indicative of a larger fundamental issue with the company. We do, however, like this space in the healthcare sector given its leverage to favorable secular demographic trends.

We deleted NutriSystem (NTRI) from the Growth & Income portfolio following its lackluster January sales numbers. The company had reported solid results for the fourth quarter, but having weak January numbers isn't a good sign for a weight loss company. Our thinking was that if they can't have good numbers in January, with those New Year resolutions still fresh in consumers' minds, what would they be doing later on in the year?

Zacks Investment Research

• Total SA (NYSE ADR: TOT) will pay up to $2.25 billion for a 25% stake in Chesapeake Energy Corp.'s (NYSE: CHK) assets in the Barnett Shale natural gas field in North Texas, Total said yesterday (Monday). Total will pay $800 million for the stake, and up to $1.45 billion for as long as six years by funding 60% of Chesapeake's costs in the field. The Barnett Shale field is the biggest producer of natural gas in the United States and accounted for 52% of Chesapeake's third-quarter output.

The Dow Jones industrial average, which rose as high as 9931.82 points in the morning, gained 20 points to close at 9885.80.  The broad S&P 500 index rose 4.70 points, or 0.44%, to close at 1,076.19 and the tech-heavy Nasdaq ended the day little changed.  Bond markets were closed for the Columbus Day holiday.  On the New York Stock Exchange, 16 stocks were higher in price for every 14 that fell.

Eight of the ten S&P500 sectors finished higher in yesterday's session. Oil and gas shares led the gainers, adding 1.2% following a 2.1% rise in crude prices to $73.55, its highest since August 24.  DJIA components Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) rose 1.3% and 1.2%, respectively.

Meanwhile, equity prices appear to be taking into consideration upside surprises in last quarter's numbers.  The National Association for Business Economics' survey of its members showed majority believed the recovery has begun, but concerns remain over federal debt and rising unemployment.  Nevertheless, the greenback’s decline is expected to help results of multinational firms with significant overseas exposure.

Also, news emerging from the geopolitical front appears to be less motivating as the head of Homeland Security noted Al-Qaeda members likely within US borders and North Korea reportedly shot off five missiles off its east coast; the reports said the country is preparing to fire more.  Although stocks have had their steepest rally in more than 70 years, doubts remain over an exit strategy from simulative policies amid increasing unemployment levels and housing worries.

Black & Decker (NYSE:BDK) jumped 7.6% Monday after the company's raised its third quarter earnings guidance to 91 cents a share from 35- 45 cents a share on better-than-expected sales, operating margins and tax rate. UBS (NYSE:UBS) downgraded SanDisk (NASDAQ:SNDK) shares to "sell" from "neutral," on concerns of peaking chip demand leaving little scope for price increases.  Ford (NYSE:F) shares jumped 7% after the automaker reported that European sales jumped 12% on strong sales of its subcompact models Ka and Fiesta. Google (NASDAQ:GOOG) shares rose 1.5% after Goldman Sachs (NYSE:GS) raised its price and earnings target, saying the firm will benefit from next year's recovery in online activity.

Financial shares continued their upward run, adding 0.7%.  A number of banks report their earnings in the coming sessions, including JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C).  According to analyst Dick Bove, large-cap banks are expected to perform well, helped by strong trading activity, but Bove noted regional banks could be under pressure due to commercial real estate losses. 

Meanwhile, shares of Deutsche Bank (NYSE:DB) fell 1.6% yesterday after the company’s CEO Ackermann’s comments raised concerns of a capital raising.  This morning influential analyst Meredith Whitney took a cautious stance on Goldman Sachs (NYSE:GS) and lowered her rating on the bank to "neutral" from "buy" with a $186 price target. 

Today's list of releases includes quarterly earnings reports from companies such as Altera (NASDAQ:ALTR), CSX (NYSE:CSX), Intel (NASDAQ:INTC), and Johnson & Johnson (NYSE:JNJ).

We maintain a Neutral recommendation on the shares of Wells Fargo.

The acquisition of 21,800 net acres includes 28 wells currently producing 24 million cubic feet equivalent per day (MMcfe/d), as well as associated natural gas and water gathering facilities. Tulsa, Oklahoma-based Williams already holds about 190,000 acres in the Piceance Basin.

The latest acquisition may contain an estimated 795 billion cubic feet equivalent of net reserves (Bcfe), of which approximately 150 Bcfe are proved reserves. Williams plans to finance the $258 million transaction, along with $15 million in projected 2009 development costs and $50 million of the 2010 development costs, with available cash.

The additional acreage contiguous to its existing operations in the area further strengthens Williams’ industry-leading Piceance position. The deal is part of the company’s development efforts that have resulted in robust natural gas production in this region over the last few years.

In a separate development, Williams announced plans to form a joint venture with Dominion Resources Inc. (D), a major natural gas producer, to build a new pipeline. It will transport up to 1 billion cubic feet per day (Bcf/d) of natural gas produced in the Rockies and Appalachian basins to growing markets in the Eastern and Mid-Atlantic regions.

The pipeline, to be named as the Keystone Connector, would run from the terminus of Kinder Morgan Energy Partners’ (KMP) Rockies Express pipeline in eastern Ohio to Williams' Transco Station 195 in southeastern Pennsylvania.

The companies are planning to bring the 240-mile pipeline into service by 2013. The Keystone Connector will offer producers year-round access to the growing East Coast markets and will provide customers increased domestic supply alternatives. We currently rate Williams shares as Neutral.

Prospects that Barack Obama will become the next U.S. president continued on Tuesday to provide a surge for exchange-traded funds focused on solar energy.

"There are a lot of factors going on in markets right now, but we think there's good evidence that at least with solar ETFs, a lot of this is coming from an Obama bounce," said Christian Magoon, president of Claymore Securities.

He was speaking as the day's session along Wall Street was finishing and right before many polling centers were opening on the East Coast. Later in the night, of course, results were expected in the race between Obama and Sen. John McCain.

The Bush administration has focused more on oil- and transportation-related issues, noted Magoon. "But this presidential campaign has really brought more attention to solar energy. And Jim Cramer led off his television show on Monday making a solar ETF one of his first post-election trades," said Magoon.

The popular CNBC stock trader picked The Claymore/MAC Global Solar Energy ETF (NYSEArca: TAN) as one of his top choices for the new year. It was up more than 10% in the final hour of trading. That came after TAN jumped better than 15% the day before. In the past five trading days, the ETF has gained 48%-plus, according to Morningstar data.

That signals a complete turnaround for TAN, which launched in April. In the past three months, the fund had returned -48.32% through Monday.

The Market Vectors Solar Energy ETF (AMEX: KWT) has gotten an even bigger bounce. The fund, which also launched in April, has soared—though by somewhat less. In the past five trading days, it's up 45%; on Monday alone it gained 11.66%.

Obama is considered more solar-friendly than Republican candidate John McCain in some circles. But analysts along Wall Street have been putting out notes lately warning that such views, whether accurate or not, aren't enough fuel to support such a big run-up in stock prices.

Many market observers are warning that after a so-called "Obama Bounce," the sector could be due for a considerable slowdown.

But it certainly has served to raise the profile again of alternative energy ETFs. Niche funds such as TAN and KWT are getting an extra kick as their underlying benchmarks, both of which use different methodologies for screening out pure-plays from large conglomerates.

But the solar energy market is a small market, and these are very focused ETFs, holding less than 30 companies each in a typical reporting period. (See related article here.)

Magoon also pointed out that no matter who wins the White House race, "both candidates have been talking about solar and alternative energies a lot."

"A new administration is likely to raise the profile for solar ETFs as a whole, whether it's Obama or McCain," he said. "So we're seeing this election as a positive no matter who wins."