U.S stocks rallied on better-than-expected earnings out of Mastercard and word that Goldman Sachs and Morgan Stanley will repay their TARP money – that executive compensation cap had some affect on these two – which helped to turn around financials after starting the session lower.
There seems to be a bit of a reflation trade occurring too as basic materials and energy shares have gained nice ground over the past three sessions – this is a really good sign, let’s hope it has legs.
Also helping stocks rally was a retail sales report that showed a decline in January same-store sales was not as bad as expected. Sales at retail stores open for at least a year fell 1.6% last month -- a 2.2% drop was expected. Apparel, department and luxury sales remain in the dirt, but discounters and wholesales clubs helped to ease the decline.
Market Activity for February 5, 2009
Economic Data
The Labor Department reported initial jobless claims breached the 600K mark for the first time in 26 years as claims rose 35,000 to 626,000 in the week ended January 31.
The four-week average jumped 39,000 to 582,300, the highest reading since December 1982.
Continuing claims rose 20,000 to 4.788 million – a new high. Everyone knows the labor market remains very weak and we should expect this reading to make new highs over the next couple of months as workers have a rough time finding new jobs.
Putting this into perspective however, as we’ve mentioned for the past month, when you adjust for the rise in payroll positions continuing claims would have to hit 7.5 million to match the peaks hit in 1974 and 1982. So while this is a rough situation, it is not nearly as bad as those past periods when adjusting for the rise in employment.
In a separate report, Labor reported worker productivity rose 3.2% in the fourth quarter, twice as much as expected. Over the past four quarters, nonfarm productivity has risen 2.7% -- a pick-up from the 2.2% reported in the third quarter.
Normally, an increase above 2% is considered good and anything above 2.5% is stellar. But the rise last quarter was largely due to rapid losses in employment (60% of last year’s job losses took place in the final three months) rather than gains in output. Worker productivity is measured by taking output per hour over hours worked. Hours worked fell 8.4% in the fourth quarter, outpacing the 5.5% decline in output (this decline in output was the largest since 1982). Thus, productivity is largely reflecting substantial weakness in the labor market than anything else.
The report mentioned an interesting point on real hourly wages. Hourly pay, adjusted for inflation, surged 15.6% at an annual rate in Q4 – this is the largest increase since records began in 1947 and is the result from the massive decline in energy prices. While consumers are in the process of rebuilding cash savings and dealing with a tough job market for now, this rise in real wages will drive activity a few months out. We think there’s a good chance the consumer spending figures will begin to show some life by late spring.
Our Choice
We need a confidence boost and by slashing tax rates on income, capital and corporate profits (thereby increasing disposable income, stock-price and profit growth) we can get things going in a much quicker way than all of the goofy Keynesian ideas floating through Congress combined. In addition, a move toward a tax-rate response will result in higher capital gains, corporate income and individual tax receipts to the Treasury.
In case you’re not following, lowering the tax rate on capital will boost after-tax return expectations and thus bring some excitement back to stocks as investors are willing to accept risk again and see a future environment that is much more certain. The cut in the corporate income tax – currently the second-highest among OECD members – will boost profits, which will drive stock multiples lower, offer increased return potential, jumpstart business spending and lead to more hiring several months down the road. The cut among all income tax brackets will immediately raise disposable (after-tax) income and help restore consumer confidence. All of these improvements will spark economic growth and within two years result in a massive rise in tax receipts.
The current proposals being bandied about will only leave us with more permanent government programs and increased deficits. At which point, the tendency will be to increase tax rates, which will extend the economic malaise. On top of that, the proposal that came out of the House last week risks sparking trade wars, which we’re seeing develop under the surface.
As I mentioned a few months ago, this is a “time for choosing,” borrowing the phrase from Reagan’s well-known 1964 speech. Well, in November, whether voters understood it or not, we chose a move toward a Western European-type system. You can see it in the House bill: a huge increase to Medicaid; granting part-time workers jobless benefits; government payment of 65% of COBRA premiums, adding adults to the S-CHIP program. Only 12% of that bill was focused on infrastructure spending, 60% of which would not be spent until 2010 and 2011. This is not stimulus – just the opposite in fact as a move towards increased dependency reduces longer-term growth rates and increases joblessness -- and if the Senate gives us anything similar today, it must be rejected. The choices made today will have an effect for years to come; there are two sides to change.
Jobs Report
This morning we get the January employment report, and by the looks of the indicators it’s going to be another very bad one. The expectation is for payroll positions to decline by 525,000, which would mark the third-straight month of losses in the 500k handle. Our feel is we’ll get something in the 400k range due to quirks in the seasonal adjustment – less workers than usual were hired for the holiday shopping season in December, so less were there to fire in January.
I think we’re still months away from a turning point, but if Congress doesn’t screw things up too badly we should see the degree of labor market weakness begin to ease three-four months out. We have seen outsized monthly jobs losses for five months now and this trend will not naturally extend for much longer. However, if Washington makes the wrong decisions and scares business, 400,000-500,000 monthly jobs losses could continue for some time and we will eventually see a double-digit unemployment rate – but it will take large mistakes to get us there. This economy is too dynamic for that to occur on its own.
Have a great weekend!
Brent Vondera, Senior Analyst
There seems to be a bit of a reflation trade occurring too as basic materials and energy shares have gained nice ground over the past three sessions – this is a really good sign, let’s hope it has legs.
Also helping stocks rally was a retail sales report that showed a decline in January same-store sales was not as bad as expected. Sales at retail stores open for at least a year fell 1.6% last month -- a 2.2% drop was expected. Apparel, department and luxury sales remain in the dirt, but discounters and wholesales clubs helped to ease the decline.
Market Activity for February 5, 2009
Economic Data
The Labor Department reported initial jobless claims breached the 600K mark for the first time in 26 years as claims rose 35,000 to 626,000 in the week ended January 31.
The four-week average jumped 39,000 to 582,300, the highest reading since December 1982.
Continuing claims rose 20,000 to 4.788 million – a new high. Everyone knows the labor market remains very weak and we should expect this reading to make new highs over the next couple of months as workers have a rough time finding new jobs.
Putting this into perspective however, as we’ve mentioned for the past month, when you adjust for the rise in payroll positions continuing claims would have to hit 7.5 million to match the peaks hit in 1974 and 1982. So while this is a rough situation, it is not nearly as bad as those past periods when adjusting for the rise in employment.
In a separate report, Labor reported worker productivity rose 3.2% in the fourth quarter, twice as much as expected. Over the past four quarters, nonfarm productivity has risen 2.7% -- a pick-up from the 2.2% reported in the third quarter.
Normally, an increase above 2% is considered good and anything above 2.5% is stellar. But the rise last quarter was largely due to rapid losses in employment (60% of last year’s job losses took place in the final three months) rather than gains in output. Worker productivity is measured by taking output per hour over hours worked. Hours worked fell 8.4% in the fourth quarter, outpacing the 5.5% decline in output (this decline in output was the largest since 1982). Thus, productivity is largely reflecting substantial weakness in the labor market than anything else.
The report mentioned an interesting point on real hourly wages. Hourly pay, adjusted for inflation, surged 15.6% at an annual rate in Q4 – this is the largest increase since records began in 1947 and is the result from the massive decline in energy prices. While consumers are in the process of rebuilding cash savings and dealing with a tough job market for now, this rise in real wages will drive activity a few months out. We think there’s a good chance the consumer spending figures will begin to show some life by late spring.
Our Choice
We need a confidence boost and by slashing tax rates on income, capital and corporate profits (thereby increasing disposable income, stock-price and profit growth) we can get things going in a much quicker way than all of the goofy Keynesian ideas floating through Congress combined. In addition, a move toward a tax-rate response will result in higher capital gains, corporate income and individual tax receipts to the Treasury.
In case you’re not following, lowering the tax rate on capital will boost after-tax return expectations and thus bring some excitement back to stocks as investors are willing to accept risk again and see a future environment that is much more certain. The cut in the corporate income tax – currently the second-highest among OECD members – will boost profits, which will drive stock multiples lower, offer increased return potential, jumpstart business spending and lead to more hiring several months down the road. The cut among all income tax brackets will immediately raise disposable (after-tax) income and help restore consumer confidence. All of these improvements will spark economic growth and within two years result in a massive rise in tax receipts.
The current proposals being bandied about will only leave us with more permanent government programs and increased deficits. At which point, the tendency will be to increase tax rates, which will extend the economic malaise. On top of that, the proposal that came out of the House last week risks sparking trade wars, which we’re seeing develop under the surface.
As I mentioned a few months ago, this is a “time for choosing,” borrowing the phrase from Reagan’s well-known 1964 speech. Well, in November, whether voters understood it or not, we chose a move toward a Western European-type system. You can see it in the House bill: a huge increase to Medicaid; granting part-time workers jobless benefits; government payment of 65% of COBRA premiums, adding adults to the S-CHIP program. Only 12% of that bill was focused on infrastructure spending, 60% of which would not be spent until 2010 and 2011. This is not stimulus – just the opposite in fact as a move towards increased dependency reduces longer-term growth rates and increases joblessness -- and if the Senate gives us anything similar today, it must be rejected. The choices made today will have an effect for years to come; there are two sides to change.
Jobs Report
This morning we get the January employment report, and by the looks of the indicators it’s going to be another very bad one. The expectation is for payroll positions to decline by 525,000, which would mark the third-straight month of losses in the 500k handle. Our feel is we’ll get something in the 400k range due to quirks in the seasonal adjustment – less workers than usual were hired for the holiday shopping season in December, so less were there to fire in January.
I think we’re still months away from a turning point, but if Congress doesn’t screw things up too badly we should see the degree of labor market weakness begin to ease three-four months out. We have seen outsized monthly jobs losses for five months now and this trend will not naturally extend for much longer. However, if Washington makes the wrong decisions and scares business, 400,000-500,000 monthly jobs losses could continue for some time and we will eventually see a double-digit unemployment rate – but it will take large mistakes to get us there. This economy is too dynamic for that to occur on its own.
Have a great weekend!
Brent Vondera, Senior Analyst
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