Daily Insight

U.S. stocks, after spending most of the session in an usually tight range, slid in the final hour. Traders shook off a really weak jobless claims reading that points to another month of big payroll losses when the December jobs data is released.

We were pretty amazed activity hovered around the flat line for most of the day, particularly on that claims report, obviously it eventually hit sentiment.

Until the final-hour sell-off gains in energy, basic material and industrial stocks were offsetting financial-sector weakness; however, nothing save health insurers and a couple of energy names held up in the end.


Uncertainty over whether the government assistance to the Detroit Three will have the votes to pass the Senate may have also weighed on stocks today, largely because of the additional pressure a GM and Chrysler collapse would put on the labor market – Ford is in a better position; they’ve got liquidity to get them past the next six months at least. What strength.

I’m guessing fears that the government won’t provide some funding are likely overblown. Once January 20 rolls around checks to Detroit will rip off like there’s no tomorrow.

Market Activity for December 11, 2008

Economic Data

The Labor Department reported initial jobless claims jumped to the highest level since November1982, ending a two-week decline. We’ll continue to match 1982 levels as it will take a reading above 700k to make a new high. Claims jumped 58,000 to 573,000 in the week ended December 6.

The four-week moving average, a less volatile measure, rose 14,250 to 540,500, as the chart below shows.


The insured unemployment rate, the jobless rate for those eligible for benefits, rose to 0.1% to 3.2%, the highest since August 1992 – this figure tends to track the overall unemployment rate.

Continuing claims, those taking benefits for longer than one week, jumped 338,000 to 4.429 million – certainly some of this is due to the government extending the period of time one can continue to take benefits, although most is simply due to deteriorating labor market conditions.


It doesn’t take an expert to understand what all this says, the payroll survey is going to register its fourth-straight month of large declines when the December reading is released, possibly a reading over 500k as we saw in the November data.

The unemployment rate will probably hit 7%, unless the number of discouraged workers rises and keeps the figure artificially low. This is why the unemployment rate is a lagging indicator and generally does not peak until 6-12 month after a recession has ended. It takes these discouraged workers to feel better about the environment again before they re-enter the workforce by actually looking for a jobs. (The definition of a discouraged worker is one out of work and has not looked for employment in the past four weeks.)

This labor market data along with what we know about the overall economy means we need to pull the trigger and go with big bang tax rate cuts – across the board, slash rates on income, capital, corporate profits and repatriated income. Anything less signals a failure to understand what gets things going and does so with staying power.

Of course, the Fed must be reigned in too so they are not allowed to make terrible mistakes like the 2003-2005 decisions to keep rates too low for too long. Real interest rates were negative (fed funds lower than the rate of inflation) which means the Fed subsidized debt. When you do this you get more debt, and this is what led to the housing bubble that caused much of the current harm when it popped. It also encouraged the over-leverages stance of institutions that smashed the financial sector and later everything else.

We understand the likelihood of a tax-rate response is highly unlikely with the administration and Congress that is coming in January 20, but it doesn’t mean to forget the government policy that has the most power. Maybe when we get the next payroll report it will begin to wake people up. It’s a real shame the current administration has not even offered such a move, even if the votes do not appear to be there.

Then again, maybe I’m off base; possibly we’ll be able to spend out way out of this situation. If we do, it will be the first.

In another report the Labor Department reported import prices fell hard again in November, plunging 6.7% on a 26% tumble in petroleum prices. On a year-over-year basis import prices have declined 4.4%, what a round-tripper this has made.


Excluding petroleum, import prices fell 1.8% last month and are up 2.6% year-over-year.


While you can see most of the decline was due to the precipitous drop in energy prices, whether including or excluding energy prices fell faster than anticipated. This is going to augment the deflation argument. However, with monetary conditions as they are – the massive easing and liquidity pumped into the system – it makes a sustained deflationary event highly unlikely.

This is certainly a minority view right now, but we believe prices will begin to rise again 6-8 months in a way that will get everyone’s attention. The dollar will have a rough time advancing from here since what we’re getting as stimulus are plans to throw money at the problem – which will push import price alone higher. A more appropriate response would be to provide incentives to produce that would bring more goods to market that absorb these massive money injections. We shall see how it turns out.

Finally, the Commerce Department reported the trade deficit widened to $57.2 billion in October, which was a surprise – a narrowing was expected as import declines were estimated to be larger than the drop in exports. Imports ended up falling 1.3%, while exports fell 2.2%

The real trade gap widened to $46.4 from $42.0 billion in September. Real exports dropped 0.9%; real imports rose 2.8%.

By region, exports picked up a bit in Europe, after a big decline in September; exports to the Pacific Rim fell 0.8%. The biggest export declines came from Japan, down 2.8% for the month, and Asia NICs (Non-industrialized Countries), down a big 9.4%.

Interestingly, exports to South America and OPEC countries, which feel the effects of plunging energy prices as much as anywhere, kept activity upbeat, rising 20% and 36.8%, respectively.

The widening of the real (inflation-adjusted) trade gap means additional pressure will be put on the Q4 GDP report – it’s going to be a doozy. Good news is it shouldn’t take anyone paying attention by surprise when it posts a quite likely negative 6.0% reading – that’s at a real annual rate. If so, it will be the worst GDP reading since the -6.4% posted in Q1 1982.

It is stunning how drastically things change in mid-September and outside of a few areas, we have yet to see any bounce whatsoever.

Have a great day!


Brent Vondera, Senior Analyst