The session began lower by roughly 3.0% probably due to pre-market news that the Senate didn’t have the votes to pass the auto bailout.
It came down to Senate Republicans demanding the UAW become competitive with the industry from a perspective of compensation – a “jobs bank” that pays the laid off 95% of wages and zero premium requirement for retirees has total compensation costs among the Detroit Three 52% higher than the transplants, as they’re being called. Frankly, the deal the Senate was working out would have been beneficial to workers relative to the alternative, which is bankruptcy.
But then the President rode to the “rescue” as he commented the administration would find a way to use TARP funds to keep the D3 going for a few months. Stocks often think short-term on a day-to-day basis and bounced from the session’s lows on these comments.
Obviously, the best long-term strategy is to cut dealerships, payrolls, and plants (along with the “jobs bank” and a zero-premium health-care policy, which I believe will change anyway in 2010). The D3 no longer have 50% market share, but something closer to 18%; it’s about time they began to manage the business to reflect this reality. Still, President Bush likely does not want an additional flood of layoffs in his final month in office – one supposes this is why he’s stepping in.
Market Activity for December 12, 2008
Then we had the Bernard Madoff scandal, a Ponzi Scheme, (taking another bite out of confidence). This could have pressured stocks, but didn’t; maybe we’re onto a rally with additional staying power. The broad-market has bounced 18% from the November 20 low; it will be tough to extend this rally through the year but maybe this strength in the face of bad news is telling us something.
Economic Data
The Labor Department reported the producer price index (PPI) for November slid 2.2% for the month and was up 0.4% on a year-over-year basis – that’s a huge deceleration from the prior month, which had PPI up 5.2% YOY.
Core PPI, ex food and energy, rose 0.1% for the month and was up 4.2% year-over-year, down slightly from a reading of 4.4% in the prior month.
This core figure is showing that the plunge in inflation gauges over the past two months is largely due to the rapid decline in energy prices from their Fed-induced heights of July 2008. Oil prices in particular doubled in a 10-month time span, driving crude per barrel to $145. The slide from those heights has brought the inflation indices down with it but there are underlying factors that shows prices will rebound.
Take core intermediate goods for instance. These are goods, ex-fuel, used to make finished product. While these prices are lower, they remain somewhat elevated and sticky.
When banks begin to lend in a more normal way, all that liquidity the Fed has pumped into the system will flow through to the economy. This money will find an environment in which there are less goods out there as production has been cut – to much money chasing too few goods will cause inflation to rise again.
Further, when this combines with an infrastructure-based stimulus program, commodity prices will rebound, making an inflationary event inevitable in my view. Too bad I don’t know whether this will take six, 12 or 18 months to occur – it would certainly be helpful to know this, but it’s pretty much a done deal.
In a separate report, the Commerce Department stated retail sales fell for the fourth-straight month. For November overall sales were down 1.8%, which was less than the expected decline of 2.0%, but still a very significant decline. This follows a very large drop of 2.9% in October.
Certainly, consumer activity is going to remain weak for a while. We have a lot of people that lack the means to expand activity due to a weak labor market and mortgage interest-rate resets for those that chose a lower adjustable rate three years back. That said, the majority of consumers have the means, but have shut down in a spate of caution due to all of the news over the past three months. Surely, a 40% decline in stock prices is having a huge effect on sentiment.
That said when we exclude auto and gas-station sales, activity rose for the first time in three months – up 0.3% in November. This may be an indication retail sales are set to bounce. This is not to say we’ll see a multi-month rebound, but we should halt the four-month decline streak when the December number is released.
One of the factors behind the slump in retail sales has been the dramatic decline in gasoline prices. Gas-station receipts make up 9% of the overall figure, so when this component falls 14.7%, as it did in November, it accounted for 1.3% of the 1.8% drop -- 72% of the move.
Again, under normal circumstances this decline in pump prices would allow for increases in other segments. Things are not normal right now and we’re not trying to say activity will bounce back in a sustained way, but the rise in ex-auto, ex-gasoline retail sales is setting up for a nice month-over-month increase when the December data is released.
This Week
We’ve got a plethora of data out this week, beginning this morning with industrial production (November) and the NAHB (Nat Assc. Of Homebuilders) Housing Market Index.
Later in the week, we’ll get the Fed rate decision, housing starts, CPI, jobless claims (of course) and Philadelphia-area manufacturing.
Have a great day!
Brent Vondera, Senior Analyst
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