U.S. stocks rallied as General Electric stated losing the top credit rating from S&P (cut from AAA to AA+ yesterday) won’t hurt business – and many were relieved the rating cut wasn’t worse – and Bank of America CEO Ken Lewis made positive comments about the current quarter. The statement from B of A followed equally positive comments from Citigroup and JP Morgan in the two preceding days.
The rallies of the past three sessions (actually two of the three as Wednesday’s activity was essentially flat) have pushed the broad market higher by 9.5% -- these are exactly the powerful moves we’ve mentioned occur in these bear markets. Since this one has been an especially damaging stock-market contraction – the second-worst of the past 100 years in fact – so the swings to the upside are going to be big as a result. The S&P 500 blew through 742, what technicians were calling the new resistance, so we’ll test their view here that the market can move onto 800 simply because the index has surpassed that level.
Financials led the market higher again yesterday on those optimistic statements from Ken Lewis. No doubt banks are benefiting from a nicely positive yield curve and massive deposit growth as investors hide out in short-term CDs – this is an ultra low cost of funds for the banks. Still, we have unemployment rising and the income gains of late have been fueled by government transfer payments (not a sustainable income trigger). In addition, we also still have credit-card delinquencies and defaults that have yet to fully play out. This is one reason why bank losses lag the direction of the economy and while we want to believe the sector’s issues have turned the corner, reality just doesn’t match up with that idea.
Health-care, industrial and information technology shares also performed well. Health-care got a boost from increased merger and acquisition activity within the sector; industrials and technology stocks traded higher as traders think more about the global infrastructure spending that is coming down the pike – even if the U.S. stimulus plan is way too focused on entitlement spending and not nearly enough in areas that offer a productivity return to this spending.
Market Activity for March 12, 2009
We had a number of economic releases yesterday, so let’s get to them.
Retail Sales
The latest Commerce Department’s look at retail sales appear to show the consumer is making a comeback, as retail sales excluding autos posted it second-straight month of increase in February (up 0.7%) – the January reading was revised significantly higher to show a 1.6% rise, previously estimated at +0.9%.
However, don’t call it a comeback just yet as the latest income report showed the gains came from government transfer payments – the compensation and wage and salary figures were down. This does not suggest the spending of the past two months is sustainability. We have been watching for cash savings to reach 5% as an indication consumers are feeling better about spending. Indeed, we achieved that level of cash savings in January. However, since the income gain of late came solely from government transfer payments this does not give the consumer a sense of income permanence, to refer to Friedman’s Permanent Income Hypothesis, and thus I’m skeptical that we have seen a true trend here.
In terms of the numbers specifically, the total retail sales figure fell 0.1% in February and excluding auto sales, the figure rose 0.7% -- both of those figures beat expectations. Excluding gasoline, building materials and autos (what’s known as core retail sales, and the figure that flows directly to the personal consumption component within the GDP report) retail sales posted a nice 0.5% gain. This followed a 1.7% increase in January, so we’ll get some help from the consumer side this quarter – good thing too because the business spending side of things has been abysmal and inventory liquidation will be significant.
Regarding segment, there were solid gains in electronics (up 1.2%), clothing (up a strong 2.8%) and general merchandise (up 1.3%). Gasoline station receipts jumped 3.4% (likely a price-related increase). Retail sales excluding gasoline alone fell 0.4%.
Business Inventories
The Commerce Department reported business inventories fell 1.1% in January (huge lag to this data, but it’s important nonetheless), and slightly larger-than-expected. A massive drop in auto inventories continues to be the largest drag on the figure. Motor vehicle stockpiles have dropped 31% at an annual rate over the past three months.
Business sales fell 1.0%, marking the sixth-straight month of decline, but the degree of decline is a major improvement as October-December saw sales contract 3.4%-5.7% -- huge monthly moves.
The inventory-to-sales ratio held steady at 1.43 (that months’ worth of supply at the current sales pace).
Overall, while the sales data may be improving, we’ll need another month to confirm the rate of decline as eased, non-petroleum inventory contraction picked up this quarter. As mentioned above, this will be a big drag on Q1 GDP.
Jobless Claims
The Labor Department reported initial jobless claims rose 9,000 to 654,000 in the week ended March 7. The four-week average, a less volatile measure, rose 6,750 to 650,000 – the seventh-straight week of increase.
Continuing claims jumped 193,000 to 5.317 million in the week ended February 28. The insured unemployment rate rose to 4.0% from 3.8% -- the highest level since June 1983 when the overall unemployment rate hit 10.1%.
This jobless claims data, along with the ISM figures, are the best coincident (real-time) indicators we have and they both suggest the economy has yet to bottom. This recent claims data illustrates we’re in for another 600,000-plus loss in payroll positions for March – this week’s claims data (reported next week) will be important because it corresponds to the employment week for which they calculate the estimate for the March jobs report.
This data is also a major reason I’m skeptical regarding the sustainability of the bounce in retail sales. As long-time readers know, I am usually much more optimistic than this, in fact countering a media that is generally unjustifiably pessimistic. However, we just don’t see signs of a rebound yet – jobless claims will have to begin a move toward 500K and ISM manufacturing will have to trend toward the low 40s (ISM service toward mid-40s); as signs the economy is turning the corner. We’ll also need credit spreads to tighten, and while they have come in from the wides we saw a couple of months back they have widened just a bit of late.
Have a great weekend!
Brent Vondera, Senior Analyst
The rallies of the past three sessions (actually two of the three as Wednesday’s activity was essentially flat) have pushed the broad market higher by 9.5% -- these are exactly the powerful moves we’ve mentioned occur in these bear markets. Since this one has been an especially damaging stock-market contraction – the second-worst of the past 100 years in fact – so the swings to the upside are going to be big as a result. The S&P 500 blew through 742, what technicians were calling the new resistance, so we’ll test their view here that the market can move onto 800 simply because the index has surpassed that level.
Financials led the market higher again yesterday on those optimistic statements from Ken Lewis. No doubt banks are benefiting from a nicely positive yield curve and massive deposit growth as investors hide out in short-term CDs – this is an ultra low cost of funds for the banks. Still, we have unemployment rising and the income gains of late have been fueled by government transfer payments (not a sustainable income trigger). In addition, we also still have credit-card delinquencies and defaults that have yet to fully play out. This is one reason why bank losses lag the direction of the economy and while we want to believe the sector’s issues have turned the corner, reality just doesn’t match up with that idea.
Health-care, industrial and information technology shares also performed well. Health-care got a boost from increased merger and acquisition activity within the sector; industrials and technology stocks traded higher as traders think more about the global infrastructure spending that is coming down the pike – even if the U.S. stimulus plan is way too focused on entitlement spending and not nearly enough in areas that offer a productivity return to this spending.
Market Activity for March 12, 2009
We had a number of economic releases yesterday, so let’s get to them.
Retail Sales
The latest Commerce Department’s look at retail sales appear to show the consumer is making a comeback, as retail sales excluding autos posted it second-straight month of increase in February (up 0.7%) – the January reading was revised significantly higher to show a 1.6% rise, previously estimated at +0.9%.
However, don’t call it a comeback just yet as the latest income report showed the gains came from government transfer payments – the compensation and wage and salary figures were down. This does not suggest the spending of the past two months is sustainability. We have been watching for cash savings to reach 5% as an indication consumers are feeling better about spending. Indeed, we achieved that level of cash savings in January. However, since the income gain of late came solely from government transfer payments this does not give the consumer a sense of income permanence, to refer to Friedman’s Permanent Income Hypothesis, and thus I’m skeptical that we have seen a true trend here.
In terms of the numbers specifically, the total retail sales figure fell 0.1% in February and excluding auto sales, the figure rose 0.7% -- both of those figures beat expectations. Excluding gasoline, building materials and autos (what’s known as core retail sales, and the figure that flows directly to the personal consumption component within the GDP report) retail sales posted a nice 0.5% gain. This followed a 1.7% increase in January, so we’ll get some help from the consumer side this quarter – good thing too because the business spending side of things has been abysmal and inventory liquidation will be significant.
Regarding segment, there were solid gains in electronics (up 1.2%), clothing (up a strong 2.8%) and general merchandise (up 1.3%). Gasoline station receipts jumped 3.4% (likely a price-related increase). Retail sales excluding gasoline alone fell 0.4%.
Business Inventories
The Commerce Department reported business inventories fell 1.1% in January (huge lag to this data, but it’s important nonetheless), and slightly larger-than-expected. A massive drop in auto inventories continues to be the largest drag on the figure. Motor vehicle stockpiles have dropped 31% at an annual rate over the past three months.
Business sales fell 1.0%, marking the sixth-straight month of decline, but the degree of decline is a major improvement as October-December saw sales contract 3.4%-5.7% -- huge monthly moves.
The inventory-to-sales ratio held steady at 1.43 (that months’ worth of supply at the current sales pace).
Overall, while the sales data may be improving, we’ll need another month to confirm the rate of decline as eased, non-petroleum inventory contraction picked up this quarter. As mentioned above, this will be a big drag on Q1 GDP.
Jobless Claims
The Labor Department reported initial jobless claims rose 9,000 to 654,000 in the week ended March 7. The four-week average, a less volatile measure, rose 6,750 to 650,000 – the seventh-straight week of increase.
Continuing claims jumped 193,000 to 5.317 million in the week ended February 28. The insured unemployment rate rose to 4.0% from 3.8% -- the highest level since June 1983 when the overall unemployment rate hit 10.1%.
This jobless claims data, along with the ISM figures, are the best coincident (real-time) indicators we have and they both suggest the economy has yet to bottom. This recent claims data illustrates we’re in for another 600,000-plus loss in payroll positions for March – this week’s claims data (reported next week) will be important because it corresponds to the employment week for which they calculate the estimate for the March jobs report.
This data is also a major reason I’m skeptical regarding the sustainability of the bounce in retail sales. As long-time readers know, I am usually much more optimistic than this, in fact countering a media that is generally unjustifiably pessimistic. However, we just don’t see signs of a rebound yet – jobless claims will have to begin a move toward 500K and ISM manufacturing will have to trend toward the low 40s (ISM service toward mid-40s); as signs the economy is turning the corner. We’ll also need credit spreads to tighten, and while they have come in from the wides we saw a couple of months back they have widened just a bit of late.
Have a great weekend!
Brent Vondera, Senior Analyst
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