Technology shares took a lot of the damage, but energy stocks endured the biggest hit as oil prices slid – so much for those worries over Russia and the Middle East. Traditional safe-havens, health-care, utilities and consumer staples were the relative winners yesterday, but even these shares traded lower.
While the press focused on the Intel, Thomas Hoenig and employment report news as the reasons for the sell-off, those realities are not unexpected as a stock market that is down 42% from the peak suggests. Market participants know full-well that the fourth quarter was a disaster; the worst quarter in at least 26 years.
In terms of the Hoenig speech, the Fed member stated a recovery may not emerge until the third quarter. Now I know the NBER (the arbiter of business cycle peaks and troughs) officially announced the recession began in December 2007, but come on most know it truly began in September 2008. What? Is the press acting as if this is some revelation? There’s little doubt economic growth will remain depressed in the first half of 2009; the KC Fed Bank president’s comments on this topic are in line with overall expectations
Stocks were destined to give back some of the rally that had brought us 24% above the November 20 low, such rallies rarely occur without some sort of pullback; the Intel and Hoenig news just offered a more concrete reason to explain the declines.
Market Activity for January 7, 2009
That said, Hoenig did warn against trying to mitigate what naturally needs to occur in the economy by making too many attempts at mollifying recessionary effects. By trying too much (pumping massive amounts of liquidity into the system that will cause inflation to rage if not taken back properly) or implementing plans that have a history of doing more harm than good in the long run (such as public works programs, and the way it crowds out private sector activity) we put future stability and growth at risk.
Indeed, he has a concerning point there. As we discussed in yesterday’s letter, there is not free lunch, every action has its cost. In terms of the market, however, it is not necessarily focused on these risks right now as getting things up and running is the primary agenda.
We too were concerned about the deterioration that resulted back in October/November, but some of the most troubling issues – the growing risk of runs on banks and a total shutdown of credit -- are no longer a major concern. But make no mistake, from where I sit, these were very real concerns and we were staring down the abyss at the beginning of the fourth quarter. Now that those risks have eased, however, the government needs to lay off a bit and allow things to run their course.
Crude-Oil
Oil futures prices plunged 12% yesterday after the weekly Energy Department report showed supplies of crude and gasoline rose more than expected.
Inventories of crude rose 6.68 million to 325.4 million barrels in the week ended January 2 – supplies were forecast to increase just 800,000 barrels. While the jump was large, supplies are in line with the five-year average.
Gasoline inventories jumped by triple the amount expected, yet stockpiles are only hitting the May levels.
On the demand side, activity actually increased last week and is just 1.4% below the May level, according to the American Petroleum Institute. It appears to me that the price of oil and its derivatives are artificially low, just as they were artificially high back in July.
Gasoline demand is a mere 1% below the 200-day moving average; for all we’ve heard about demand destruction (one of the favorite new phrases of our beloved press corps) activity isn’t terribly depressed.
The Housing Market
The Mortgage Bankers Association announced its mortgage applications index fell 8.2% for the week ended January 2 after no change in the previous week and a huge 48% bounce the week ended December 19.
On the table below the Market Index represents total mortgage applications.
While the overall index declined due to a 12.3% drop in refinancing activity, the purchase side of the index rose 7.3%, marking the third week of increase -- much lower mortgage rates has begun to fuel sales, let’s hope the trend holds.
Employment Reports
The Challenger Job Cuts report showed layoff announcements nearly quadrupled in December from a year earlier. The declines were driven by job cut announcements in the East, which means the financial sector led the overall figure higher.
Firing plans jumped 275% to 166,348 last month, according to the nation’s premier outplacement firm Challenger, Gray & Christmas. The firm expects the job-cutting to continue through the first-half of 2009.
In yet another jobs report, the ADP Employment Change survey estimated that December job losses will approach 700,000 – the official Labor Department report is released on Friday and a loss of 500,000 jobs is expected.
We’ll note ADP isn’t the most reliable indication of what actually occurs, which is strange considering they’re a major payroll-service firm. ADP has made methodological revisions to their survey in an attempt to more closely fit the employment data, so we’ll see if it is more accurate this go around. In any event, it does offer a good indication that the official job losses for December will be a large number, which is corroborated by the initial jobless claims figures and the ISM surveys that have printed very weak employment readings.
Friday’s jobs report is going to be ugly, and we’re thinking the number will be worse than expected, possibly approaching 600,000.
Monthly job losses of 500,000 or more are rare and one has to go back to the deep recessions of 1957-58 and 1973-74 to see such declines. That said we need to provide some context, especially since no one else seems to be doing so. The job market is obviously much larger than it was in 1974, and nearly triple the size of the 1958 economy.
Back in 1958, a decline off 500,000, which occurred in February of that year, accounted for 9% of all payroll positions. Back in December 1974, when payrolls declined 602,000 it accounted for 7.5% of total payroll positions.
Today, there are 137 million payroll positions, so a decline of 600,000 accounts for just 4.3% of the job market. To hit the degree of job losses in those past periods, adjusting for job growth, we’d have to see a monthly job loss of more than one million. While the current levels of job losses are harsh – I’m not trying to downplay it – we need to keep things in perspective.
Just out, the Bank of England has cut their key interest rate (the bank rate, which is their version of our fed funds rate) by 50 basis points. The bank rate now sits at the lowest level on record at 1.50%.
Have a great day!
Brent Vondera, Senior Analyst
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