Daily Insight

U.S. stocks, as measured by the S&P 500, erased a 2.5% gain in a late-session move lower, ending a four-day streak that pushed the broad market nearly 12% above the 12-year low hit last Monday. Word was that an afternoon statement out of American Express regarding rising credit-card delinquency rates is what caused the sell-off. Possibly, a worse-than-expected industrial production reading also weighed on sentiment late in the day, although I think there were some glimmers of hope in that IP reading, which we’ll touch on below.

The S&P 500 had bounced 13% above its intra-day low of 666 – yeow! let’s stay away from that one – so we shouldn’t expect rallies of this nature to extent too long without a pullback. These pullbacks are good any way; we don’t want to get ahead of ourselves.

Over the next few days the market will be eagerly awaiting comments on mark-to-market accounting as FASB and the SEC are expected to at least modify the rule. We would suspect that a decision to suspend this accounting standard, with regard to assets that currently have no market, in favor of a cashflow-based accounting measure will engender an additional rally.

We also have a two-day FOMC meeting that begins today. We’ll see if our Fed will follow the Bank of England’s decision to buy government debt, or even issue their own. If they go down this road, it will pretty much cement the view that inflation is going to become an issue 12-18 months down the road – they will be printing money to engage in this policy. We shall see.

Utility, industrial and basic material shares led yesterday’s gainers. Financials, consumer discretionary and technology shares put pressure on the indices.

Market Activity for March 16, 2009

Small Business “Help”

Treasury Secretary Tim Geithner has begun urging banks “to go the extra mile” and offer small businesses loans, stated they (the banks) bear a “special responsibility” to assist in the recovery because of their role in the financial crisis.

Isn’t this the kind of thing that got us into trouble in the first place, a sort of social engineering pushed by government to provide credit to the areas in which they want it directed regardless of the consequences? Sounds a lot like the emphasis of the previous decade to offer low-cost housing loans regardless of the borrower’s ability to pay. If banks view it is beneficial to make loans to specific small businesses, they will do it, but they should not be forced by government officials to do so. Besides, at the same time they’ve got regulators demanding they raise capital, which means they won’t be making new loans.

It appears the administration understands the huge role small business plays in our economy; these are the largest U.S. job creators. However, they are going about it the wrong way. The government cannot demand, or direct, how resources are allocated -- nothing good ever comes of this. Rather, they should refrain from raising tax rates on income (600,000 small businesses will be affected by the administration’s own admission, via the increase in the top bracket) and slash the capital gains rate small businesses pay. This is how you offer help to small business and you allow the market to allocate resources. But then, government doesn’t grab more control this way now does it.

The Economy

Empire Manufacturing

The New York Federal Reserve Bank’s factory activity index, known as the Empire Manufacturing survey, came in weaker-than-expected falling to its lowest reading since the survey began in 2001 – not a lot of history here and this is not a great regional factory indicator either.

There is nothing in this report to suggest manufacturing activity has hit bottom, although below we’ll touch on how industrial production may be showing early signs of a rebound. The headline number on Empire is a general sentiment indicator, it is not a weighted average of the sub-indices like the nation-wide ISM survey. Put in ISM terms, according to RDQ Economics, we’re looking at 35.1, down from 40.2 in February.

On Thursday, we get a better regional manufacturing report in the Philly Fed survey – we’ll be looking to that report for evidence of a bottoming out process.


The sub-indices provide zero suggestion that New York factory activity will bounce in April. The shipments index plunged to -26.7 from -8.1 and new orders, as illustrated below, fell to -44.8 form -30.5 in February.


The employment index ticked up a bit, but remains extremely depressed.


Industrial Production

In a separate report, the Commerce Department stated industrial production declined meaningfully in February (the fourth-straight month of substantial contraction). The reading was slightly worse-than-expected. We noted yesterday that the market would likely have a tough time adding to last week’s rally on a bad reading from this figure – which may have been true to some extent -- but it looks like weather played havoc last month as a decline in utility activity accounted for half of the decline.


Auto production rebounded by 10.2% last month as holiday-related plant idling (which extends into January) came to a close. More importantly, consumer goods, construction supply and business equipment production all declined at the smallest levels in several months. The auto production bounce may prove to be a transitory event as auto sales remains subdued. However, the reduction in the rate of decline for the previously mentioned segments of the report should be viewed as a positive.

So with the possibility of warmer weather playing havoc and the easing with regard to degree of decline in the above mentioned areas, these may be an early sign things are bottoming. We’ll know over the next couple of months.

Have a great day and a great St. Pat’s!


Brent Vondera, Senior Analyst