Last week offered mixed messages about whether an economic recovery is indeed underway. The unemployment figures were not as bad as feared, but July sales numbers were nothing to write home about, despite the wild popularity of the so-called cash-for-clunkers program.

The question is, where has consumer confidence (and consumer spending) been? Retail is a good place to look, and as it turns out, this week several shopping mall and strip mall favorites will be reporting earnings for the most recent quarter.

Ethan Allen (NYSE: ETH)'s share price is near a seven-year low. ETH closed at $29.45. ETH overall option implied volatility of 38 is near its 26-week average of 36 according to Track Data, suggesting non-directional risk.

La-Z-Boy (NYSE: LZB)'s share price is near a 16-year low. LZB closed at $6.68. LZB overall option implied volatility of 76 is above its 26-week average of 58 according to Track Data, suggesting larger risk.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Will Fed Chairman Bernanke base his interest-rate decision on 4% GDP growth in the second quarter, essentially looking through the rear view mirror, or on virtually every other data point that suggests the economy is slowing down?

Bernanke deserves plaudits for his handling of the economy, particularly halting rate increases knowing changes in Fed policy take time to impact the economy. Something Greenspan might not have done.

Bernanke's most important signal on where the economy could be is the 10-year bond that has crashed from 5.2% in late 2006 to 4.47% today. However, Ethan Allen Interiors Inc (NYSE: ETH) CEO Kathwari said yesterday at Goldman's retailer conference "our retail written sales on a comparable store basis were up modestly in June and July. This positive trend has continued in August." This is by no means a glowing review of the economy, but neither is it a sign of an economy in deep despair.

Meanwhile, the pending home sales index crashed 12.2% in July versus June, dropping to the lowest level since September 2001. Since the index tracks existing-home contract signings, not final sales, it is considered a leading indicator and suggests a big drop in home sales in August or September.

From all the evidence, the Fed should start dropping rates. With the drop in the discount having some calming effect, look for the Fed to start with a 25 basis point basis cut followed by two more to finish up the year.

MOST NOTEWORTHY: Four specialty retailers initiated at FTN Midwest were today's most noteworthy moves in the market:

• FTN Midwest initiated shares of Ethan Allen Interiors Inc (NYSE: ETH), Pier 1 Imports (NYSE: PIR) and Bed Bath & Beyond Inc (NASDAQ: BBBY) with Neutral ratings and Williams-Sonoma Inc (NYSE: WSM) with a Buy rating.

OTHER INITIATIONS:

• BMO Capital started Bronco Drilling Co (NASDAQ: BRNC), Pioneer Drilling Co (AMEX: PDC) and Union Drilling, IncNASDAQ: UDRL) with Outperform ratings.

• CIBC started Chemtura Corp (NYSE: CEM) with a Sector Underperformer rating and $11 target on valuation.

• C.E. Unterberg started Altus Pharmaceuticals Inc (NASDAQ: ALTU) with a Buy rating and $12 target, believing the company's efforts to develop the first juvenile formulation of a pancreatic enzyme will be a key growth driver.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Following our blog on the continued deterioration in the leading indicators for the economy, Ethan Allen Interiors Inc (NYSE: ETH), a very good indicator of economic activity, last night reduced its EPS estimate for this current quarter to 53c-56c, well below the expected 59c consensus.

Ethan Allen is one of the few companies that have positioned themselves to survive and possibly thrive when the Fed decides to fuel up the economy again. Management honesty in the way they evaluate their own performance translates into honestly on how they communicate to investors. Therefore, a good source for what is going on in the economy.

The furniture maker began warning of a slowdown very close to when the housing industry rolled over. It appeared the economy was moving along fine, but once again Ethan proved to be a good and correct data point on housing and subsequently the economy.

It is time to start using Ethan Allen as the indicator as to when the economy will bottom. If the stock does little to the downside today, it is most likely a sign the selling is done and the Fed will move to lower rates.