U.S. stocks failed to close higher on the final session of the second-best quarter in a decade as an unexpected drop in Chicago PMI (factory activity for the region) killed early-session excitement. The reading came in well-below expectations and would have resulted in a significant sell-off in most situations, but not in this market environment.
The broad market vacillated wildly (at least relative to how chilled out volatility has become). Stocks rallied at the open, then retreated 1.6% following that Chicago PMI reading, bounced back to the flat line with just an hour left, slid again and looked headed for session lows, only to rally again in the final minutes – wasn’t enough to get back to the opening price though . This activity was like watching a buy-on-the-dips strategy all packed into one session – the scamper from mutual fund managers to window dress for quarter-end reports went right to the last minute.
The market was also buoyed by Federal Reserve Vice Chairman Kohn’s comments that dispelled opinions from a number of FOMC/Fed members over the past week suggesting the central bank will have to reverse policy in an aggressive manner and possibly sooner than many expect. Kohn explained that the Fed will hold its Keynesian models close to its chest, meaning they are very unlikely to raise rates while the unemployment rate remains elevated. (If the Fed couldn’t raise rates in early 2004 when the unemployment rate moved below 6%, it seems quite difficult to belief they’ll reverse policy when the jobless rate sits in the 8-10% range.) Kohn reminded everyone that the facts on the ground is the FOMC statement, and that statement explains that the Fed will keep fed funds at exceptionally low levels for an extended period. This was the beat down statement to the various Fed officials who have recently stated otherwise. This may be the most confused and conflicted FOMC/Fed in at least 30 years. I’m not an expert on this history, but I know a few things and don’t think this view is a stretch.
The market loves very low interest rates. Despite the fact that the Fed appears to be in disarray, traders only care about the here and now, and for now Fed policy will continue to support the market until a major economic data release, lack of final demand keeps corporate revenues in the tank, or geopolitical development scares the market into correction mode.
For the quarter, the S&P 500 and Dow Average both jumped 14.9%. The NASDAQ Composite gained 15.6%. Mid cap stocks, as measured by the S&P 400 climbed 19.5% and small caps, as measured by the Russell 2000, were up 18.8%.
By sector, financial, commodity-related basic material and industrial shares were the top performers during the third quarter. Financials led the way, for a second straight quarter now, as the index that tracks these shares surged 25%. This group was by far the most beaten down during the height of the credit crisis and still has another 158% to climb back to 2007 highs. Both basic material and industrial shares jumped 21% for the quarter. Industrials still have 61% to go to get back to the high. Basic materials need to jump 50% to climb back to the all-time high.
The laggards for the quarter were utilities (up 5.2%) and telecoms (up 4.2%).
Volume was strong, a rarity for the past three months, as 1.7 billion shares traded on the Big Board – that’s 30% above the six-month average.
Market Activity for September 30, 2009
Energy Report
The Energy Department’s weekly report showed gasoline stockpiles unexpectedly fell 1.66 million barrels last week, a rise of 1 million barrels was expected. While crude inventories didn’t only rise, but rose more than expected – up 2.8 million barrels, a rise of 2 million was expected -- oil prices still rallied 5% to close at $70.25/barrel (retreated to $66 over the previous few sessions) as the decline in gasoline inventories supported the view that oil demand will rise to replenish refined product.
Mortgage Applications
The Mortgage Bankers Association’ s index of application activity fell 2.8% in the week ended September 25, following a strong 12.8% rise in the prior week. Applications to purchase a home fell 6.2% after a 5.6% increase in the week ended September 18 and refinancing activity was essentially flat – down 0.8% -- after a 17.4% surge in the prior week.
The fixed-rate 30-year mortgage remained in the sub-5.00% sweet spot, yet applications to purchase a home couldn’t string back-to-back gains. Is this a sign that sales were pushed forward due to the tax credit – those who applied for a mortgage in the week of September 25 are cutting it close to the meet the closing date deadline of November 30 to capture that credit. Even if the tax credit is extended, and I certainly wouldn’t bet against it, it won’t be a continuous extension and sales will show some weakness again as a result.
ADP Employment Report
The preliminary employment report out of business outsourcing solutions firm ADP had payrolls decreasing 254,000 for September – the expectation was for this reading to come in at -200K, which is roughly the same estimate for the official jobs report that will be released on Friday.
If this number is accurate in predicting the official reading, which was not the case for August but ADP had been accurate in the previous few months, it means we continue to show improvement from the outsized monthly job losses of a few months back. Still, a number above 200K in payroll declines is elevated from a historical perspective. The job losses remain above the average of the 1981-82 recession (avg. -185K in monthly losses), above the 1990-91 recession (avg. -147K) and above the 2001 downturn (avg. -173K). So improvement, yes, but still very weak.
ADP estimates that service-providing industries shed 103,000, which would be worse than the 80,000 actually cut in August. They estimated that goods-producing industries cut 151,000 positions – 136,000 were actually cut in August, according to the Labor Department’s official data.
Large firms (500-plus employees) cut 61,000 positions in September, as estimated by ADP. This is right in line with August’s 57,000 reduction in payrolls. Medium-sized firms cut 93,000 positions, a 13,000 improvement from August. Small firms (1-49 employees, and the main job creation engine of our economy) reduced payrolls by 100,000, which was better than the 114,000 decline in August, as estimated by ADP.
Final Revision to Q2 GDP
The Commerce Department reported second-quarter gross domestic product fell less than initially estimated, down 0.7% at a real annual rate vs. the 1.0% decline printed from the first revision. The main reason for the improvement was a slight upward revision to personal consumption and business equipment and software. Personal consumption, the largest component of GDP, fell 0.9%, not the 1.0% reported via the first revision. Business equipment and software spending dragged GDP lower by just 0.32% vs. the 0.56% previously reported.
So, the four-quarter contraction, the longest stretch of GDP decline in the post-WWII era ended on a sweeter note than previously thought. The current quarter will post a gain, likely to come in at at least +2.5% and maybe as high as 3.5%, but I’m skeptical of that higher number occurring even with the cash of clunkers-driven boost to auto sales and inventories.
We’ll then probably see a larger jump in economic activity in the fourth quarter as the inventory dynamic will take full effect, but final demand is likely to remain weak as result of continued job losses and a heavy debt burden; the government stimulus spending will not be able to fully offset this drag.
As a result of this reality, which will take time to work through, along with pressure from the reversal of monetary easing, higher tax rates, increased regulations, et al. in the near future this expansion will look nothing like the normal 6-10 year run we have become accustomed to over the past quarter century. No, this one will be different both in degree and duration. In degree, typically coming out of a huge economic contraction we see GDP bounce back as a 6%-8% rate – I think we’ll be lucky to see 4% this time. In duration, I don’t believe more than a four-quarter recovery is possible considering the headwinds we face.
Chicago Purchasing Managers Index
The Chicago PMI (a gauge of factory activity for the largest manufacturing region in the country) unexpectedly fell back to contraction mode in September. The reading declined to 46.1 from hitting the line of demarcation between expansion and contraction (which is 50.0) in August. Expectations were for additional progress – a reading of 52.0.
This is a major setback for the camp that believes we’re on the cusp of a serious expansion and shows that firms remain unwilling to rebuild stockpiles and buy capital equipment as concerns regarding a lack of final demand weigh heavily on the minds of decision makers.
All sub-indices of the index slid back to contraction mode, with the exception being the prices paid component – it accelerated. The forward-looking new orders and supplier deliveries readings fell to 47.2 and 49.3, respectively after hitting expansion territory in August. Order backlogs got clocked, falling to 36.7 from 45.8. Inventories picked up, rising to 38.9 from 27.5 (which was just slightly above the all-time low of 25.4 hit in June).
Everyone, including myself expected the clunker-driven auto assemblies to have a two-three month positive effect on Chicago PMI, only then to fall back again by the end of 2009/early 2010. . If the hangover has begun already, the CFC binge-drinking event was even more worthless than suspected.
Tomorrow we get the national look at factory activity via the ISM reading. This measure will combine the results from all regional manufacturing surveys and the market expects it to accelerate further into expansion mode for September. If it does, it will be the first time in the data’s history, which goes back to 1968, in which ISM posted two months above 50 without Chicago doing the same. If ISM does remain above 50, it will be because of the export component, which Chicago PMI does not include.
Have a great day!
Brent Vondera, Senior Analyst
The broad market vacillated wildly (at least relative to how chilled out volatility has become). Stocks rallied at the open, then retreated 1.6% following that Chicago PMI reading, bounced back to the flat line with just an hour left, slid again and looked headed for session lows, only to rally again in the final minutes – wasn’t enough to get back to the opening price though . This activity was like watching a buy-on-the-dips strategy all packed into one session – the scamper from mutual fund managers to window dress for quarter-end reports went right to the last minute.
The market was also buoyed by Federal Reserve Vice Chairman Kohn’s comments that dispelled opinions from a number of FOMC/Fed members over the past week suggesting the central bank will have to reverse policy in an aggressive manner and possibly sooner than many expect. Kohn explained that the Fed will hold its Keynesian models close to its chest, meaning they are very unlikely to raise rates while the unemployment rate remains elevated. (If the Fed couldn’t raise rates in early 2004 when the unemployment rate moved below 6%, it seems quite difficult to belief they’ll reverse policy when the jobless rate sits in the 8-10% range.) Kohn reminded everyone that the facts on the ground is the FOMC statement, and that statement explains that the Fed will keep fed funds at exceptionally low levels for an extended period. This was the beat down statement to the various Fed officials who have recently stated otherwise. This may be the most confused and conflicted FOMC/Fed in at least 30 years. I’m not an expert on this history, but I know a few things and don’t think this view is a stretch.
The market loves very low interest rates. Despite the fact that the Fed appears to be in disarray, traders only care about the here and now, and for now Fed policy will continue to support the market until a major economic data release, lack of final demand keeps corporate revenues in the tank, or geopolitical development scares the market into correction mode.
For the quarter, the S&P 500 and Dow Average both jumped 14.9%. The NASDAQ Composite gained 15.6%. Mid cap stocks, as measured by the S&P 400 climbed 19.5% and small caps, as measured by the Russell 2000, were up 18.8%.
By sector, financial, commodity-related basic material and industrial shares were the top performers during the third quarter. Financials led the way, for a second straight quarter now, as the index that tracks these shares surged 25%. This group was by far the most beaten down during the height of the credit crisis and still has another 158% to climb back to 2007 highs. Both basic material and industrial shares jumped 21% for the quarter. Industrials still have 61% to go to get back to the high. Basic materials need to jump 50% to climb back to the all-time high.
The laggards for the quarter were utilities (up 5.2%) and telecoms (up 4.2%).
Volume was strong, a rarity for the past three months, as 1.7 billion shares traded on the Big Board – that’s 30% above the six-month average.
Market Activity for September 30, 2009
Energy ReportThe Energy Department’s weekly report showed gasoline stockpiles unexpectedly fell 1.66 million barrels last week, a rise of 1 million barrels was expected. While crude inventories didn’t only rise, but rose more than expected – up 2.8 million barrels, a rise of 2 million was expected -- oil prices still rallied 5% to close at $70.25/barrel (retreated to $66 over the previous few sessions) as the decline in gasoline inventories supported the view that oil demand will rise to replenish refined product.
Mortgage Applications
The Mortgage Bankers Association’ s index of application activity fell 2.8% in the week ended September 25, following a strong 12.8% rise in the prior week. Applications to purchase a home fell 6.2% after a 5.6% increase in the week ended September 18 and refinancing activity was essentially flat – down 0.8% -- after a 17.4% surge in the prior week.
The fixed-rate 30-year mortgage remained in the sub-5.00% sweet spot, yet applications to purchase a home couldn’t string back-to-back gains. Is this a sign that sales were pushed forward due to the tax credit – those who applied for a mortgage in the week of September 25 are cutting it close to the meet the closing date deadline of November 30 to capture that credit. Even if the tax credit is extended, and I certainly wouldn’t bet against it, it won’t be a continuous extension and sales will show some weakness again as a result.
ADP Employment ReportThe preliminary employment report out of business outsourcing solutions firm ADP had payrolls decreasing 254,000 for September – the expectation was for this reading to come in at -200K, which is roughly the same estimate for the official jobs report that will be released on Friday.
If this number is accurate in predicting the official reading, which was not the case for August but ADP had been accurate in the previous few months, it means we continue to show improvement from the outsized monthly job losses of a few months back. Still, a number above 200K in payroll declines is elevated from a historical perspective. The job losses remain above the average of the 1981-82 recession (avg. -185K in monthly losses), above the 1990-91 recession (avg. -147K) and above the 2001 downturn (avg. -173K). So improvement, yes, but still very weak.
ADP estimates that service-providing industries shed 103,000, which would be worse than the 80,000 actually cut in August. They estimated that goods-producing industries cut 151,000 positions – 136,000 were actually cut in August, according to the Labor Department’s official data.
Large firms (500-plus employees) cut 61,000 positions in September, as estimated by ADP. This is right in line with August’s 57,000 reduction in payrolls. Medium-sized firms cut 93,000 positions, a 13,000 improvement from August. Small firms (1-49 employees, and the main job creation engine of our economy) reduced payrolls by 100,000, which was better than the 114,000 decline in August, as estimated by ADP.
Final Revision to Q2 GDP
The Commerce Department reported second-quarter gross domestic product fell less than initially estimated, down 0.7% at a real annual rate vs. the 1.0% decline printed from the first revision. The main reason for the improvement was a slight upward revision to personal consumption and business equipment and software. Personal consumption, the largest component of GDP, fell 0.9%, not the 1.0% reported via the first revision. Business equipment and software spending dragged GDP lower by just 0.32% vs. the 0.56% previously reported.
So, the four-quarter contraction, the longest stretch of GDP decline in the post-WWII era ended on a sweeter note than previously thought. The current quarter will post a gain, likely to come in at at least +2.5% and maybe as high as 3.5%, but I’m skeptical of that higher number occurring even with the cash of clunkers-driven boost to auto sales and inventories.
We’ll then probably see a larger jump in economic activity in the fourth quarter as the inventory dynamic will take full effect, but final demand is likely to remain weak as result of continued job losses and a heavy debt burden; the government stimulus spending will not be able to fully offset this drag.
As a result of this reality, which will take time to work through, along with pressure from the reversal of monetary easing, higher tax rates, increased regulations, et al. in the near future this expansion will look nothing like the normal 6-10 year run we have become accustomed to over the past quarter century. No, this one will be different both in degree and duration. In degree, typically coming out of a huge economic contraction we see GDP bounce back as a 6%-8% rate – I think we’ll be lucky to see 4% this time. In duration, I don’t believe more than a four-quarter recovery is possible considering the headwinds we face.
Chicago Purchasing Managers Index
The Chicago PMI (a gauge of factory activity for the largest manufacturing region in the country) unexpectedly fell back to contraction mode in September. The reading declined to 46.1 from hitting the line of demarcation between expansion and contraction (which is 50.0) in August. Expectations were for additional progress – a reading of 52.0.
This is a major setback for the camp that believes we’re on the cusp of a serious expansion and shows that firms remain unwilling to rebuild stockpiles and buy capital equipment as concerns regarding a lack of final demand weigh heavily on the minds of decision makers.All sub-indices of the index slid back to contraction mode, with the exception being the prices paid component – it accelerated. The forward-looking new orders and supplier deliveries readings fell to 47.2 and 49.3, respectively after hitting expansion territory in August. Order backlogs got clocked, falling to 36.7 from 45.8. Inventories picked up, rising to 38.9 from 27.5 (which was just slightly above the all-time low of 25.4 hit in June).
Everyone, including myself expected the clunker-driven auto assemblies to have a two-three month positive effect on Chicago PMI, only then to fall back again by the end of 2009/early 2010. . If the hangover has begun already, the CFC binge-drinking event was even more worthless than suspected.
Tomorrow we get the national look at factory activity via the ISM reading. This measure will combine the results from all regional manufacturing surveys and the market expects it to accelerate further into expansion mode for September. If it does, it will be the first time in the data’s history, which goes back to 1968, in which ISM posted two months above 50 without Chicago doing the same. If ISM does remain above 50, it will be because of the export component, which Chicago PMI does not include.
Have a great day!
Brent Vondera, Senior Analyst
S&P Case/Shiller Home Price Index
The present situation index fell to 22.7 from 25.4 – the cycle low is 21.9 touched in March and the all-time low is 15.8, touched in December 1982.
The expectations reading (view of economic prospects six month out) came in at 73.3, down slightly from August’s 73.8 – the cycle low is also the all-time low, 27.3 hit in February.
The most important aspect of this report, in my opinion, is the jobs “plentiful” less jobs “hard to get” figure; this is likely the best indication of future consumer activity trends. This reading fell to -43.6 from -40.0 in August.
The reasonable probability that aggregate demand will remain weak (as mentioned yesterday, today’s very aggressive corporate cost-cutting, mostly via payroll slashing, is tomorrow’s lack of final demand) does not seem to be factored into the equity-market valuation equation right now. Rather, particularly regarding the latest leg of this rally, the attraction to stocks seems to more a function of a run for money while the gettin’ is good type of behavior.
Fed Bank Economic Conditions Gauges
All sub-indices within the report remained in contraction with the exception of new orders and volume shipments. New orders rose to 8.0 from -1.7 in August. Volume shipments posted 0.3 after a -11.2 in August.
Durable Goods Orders
Shipments of durable goods orders fell 1.4%. This number flows directly to GDP, so it won’t be helpful for the third-quarter reading. And speaking of GDP, it appears that the biggest boost from the inventory dynamic will occur in the fourth quarter, not the current quarter as many had expected.
Both the Current Conditions and Economic Outlook (six months out) surveys were revised higher from the preliminary readings. Inflation expectations for the next year fell to 2.2% from 2.8%.
Initial Jobless Claims
Continuing claims fell too, down 123,000 to 6.138 million. That’s a nice move that nearly erases the damage done from the prior week’s 158K increase.
Emergency Unemployment Compensation (EUC) jumped 82,364 to 3.223 million -- new high. This is another indication that the decline in continuing claims is not due to job hiring but from the expiration of benefits. (Those who have extinguished their normal 26 weeks of benefits and then their 13 weeks of extended benefits move over to EUC (EUC gives them another 20 weeks).
The homes available for sale figure, which is not adjusted for the pace of sales, remains elevated from a historical perspective but has come down from withering heights.
Mortgage Applications
Crude
Financials led the rally, with energy and basic material shares also among the best performing groups – another dollar rout, hammered back down to a 13-month low, sent commodity prices like gold (back to $1015 per oz.) and crude (back above $70 to $71.55 per barrel).
Richmond Fed
But just like the other readings for September (the others being the New York and Philly regions) the sub-indices suggest some deceleration in the pace of activity. For instance, new orders volume slipped to 13 from 18 – still a good number though. The order backlog figure fell to contraction mode, coming in at -5 for September vs. 4 in August – needless to say that’s not a good sign. Also, as component of these regional surveys we have talked about lately, the vendor lead times (or supplier delivery times) fell to contraction mode as well, hitting -3 from the 2 posted for August – this means supplier deliveries sped up, you want to see them slow as it shows orders are coming in faster than they can easily handle.
On the bright side, the average workweek remained elevated, coming in at 15 – basically unchanged from August’s reading of 16. The wages component accelerated to 9 from 6, which will be a helpful event if it is sustained and proves true for the entire factory sector. And, while hiring plans among respondents were mixed, the overall employment gauge rose to 5 from 0 in August – the first positive reading since December 2007, which is the month the NBER says was the “official” start of the recession.
Treasury Auctions
More “Fixes” to Come