U.S. stocks rallied yesterday, marking the largest presidential Election Day rally since 1984 as it seems the market rejoiced over the fact that the uncertainty of the event has ended. Policy implications will develop over time but with all that’s occurred, the anticipation of removing an additional unknown was a welcome thought.
I do think investors had a sense that the Senate would not give the current majority a two-thirds stance so in that way there is a check against the untoward, even if is it is a fairly weak one – the ability to filibuster may prove a big market plus over time. (This is not yet official as four Senate seats are still too close to call – the seat Al Franken is running for is still up in the air – are we serious in these challenging times? The answer is obvious.)
Energy shares led the advance; the S&P 500 index that tracks these shares gained 6.39% as oil futures jumped nearly 10% advance during Tuesday’s session. Basic material, financial and industrial shares also performed very well, up 5.69%, 5.50% and 5.45%, respectively.
Market Activity for November 4, 2008
Crude-Oil
While stocks liked the fact that the election has finally arrived, the dollar took a decent beating as there was talk of another “stimulus” package – this one totaling $500 billion. Of course, what’s being discussed isn’t simulative at all – food stamp and jobless benefit increases, even infrastructure projects, offer nothing in the way of an economic kick start. I love the infrastructure talk. Anyone who has even a minimal understanding of this form of government action knows it takes years to get off the ground as states must approve and you have the typical environmental lawsuit activity that arises. This stuff takes 12-18 months to implement, not to mention the private sector activity it crowds out.
Anyway, talk of such a plan – especially the size -- sent the dollar down and may have been behind a rally in commodity prices as traders search for an inflation hedge. I’m not saying a trend has begun, but the $500 billion number definitely worried a lot of people. Spending plans of this size, in addition to the $700 billion TARP and trillions in spending President-elect Obama has promised will not treat the dollar well. When the dollar falls this allows inflation to ramp – as everyone has spent the last year learning first hand, specifically with regard to import prices. Add in trillions of dollars the Fed has pumped into the system and you’ve got a snap back in inflation rates down the road. Oil jumped 9.26% as a result. Commodities in general were up 5.34%.
The Credit Markets
Credit spreads/indicators continue to improve. We’ve talked at length on this topic for a month now so there’s not much more to say other than letting the charts (LIBOR and TED Spread) speak for themselves.
For new readers, LIBOR is a rate charged for inter-bank lending. As this rate spiked, it showed banks were unwilling to lend to one another. This has intensive implications to the flow of credit and is a key reason the markets and economic data have taken a turn for the worse lately. Now that things have eased, the stock market has bounced back – up 18.5% from the closing low hit on October 27 – but it will be a while until the economic data shakes this event off.
And…the TED Spread is a measure of risk aversion. The index measures the spread between three-month LIBOR and three-month T-bills. A rising LIBOR, as stated above, means banks become more cautious and a plunging T-bill rate is indication investors flee to the safety of the Treasury market – hence risk aversion is heightened. When the spread narrows, obviously, risk aversion wanes. We still have a pretty high level of the safety trade occurring, but when this eases (T-bill rates rise), TED Spread will come back down to 1.00-1.50. When this occurs it will be a good sign that investors are willing to take on more risk and both corporate bonds and stocks should rally hard.
The Economy
On the economic front, the Commerce Department reported factory orders fell 2.5% in September after a large 4.3% decline for August. While this data is fairly out-dated (this is for September and we’ve already seen what’s occurred for this segment of the economy with the durable goods orders we received last week and manufacturing data for October yesterday), it does offer additional clues, specifically regarding the energy industry.
The weakness really came from the non-durables side of the report as durables were boosted by large increases in aircraft and other transportation equipment, something we discussed last week after the October durables goods report came out. Non-durables, which were hurt by the plunge in commodity prices, showed a significant decline of 5.5% in September – the second month of meaningful weakness. Of course, weakened demand has something to do with this decline as well.
We’ll add that refinery shut-downs due to Hurricane Ike, which hit Galveston on September 13, also played havoc with the figure. Point is the September decline in orders probably overstates the weakness the economy endured for the month due to this transitory event. However, we are pretty sure the October reading will be down big and will be a good measure of the fundamental weakness that took hold last month.
Inventories (specifically the inventory-to-sales ratio) has spiked a bit, although remains historically low. We should expect this figure to rise to 1.40 months’ worth of supply, but it should prove to be a low enough level to spur a ramp up in production when things normalize.
This morning we’ll see what occurred in the service sector last month by way of the ISM Non-Manufacturing Composite. The reading should come in below 50, which will indicate service-sector activity contracted in October. The index has averaged 50.3 over the past 12 months
The big news of the week will come on Friday as the October jobs report is due out. This will be a big hurdle for the market to get past; although, we think it is likely the market has already priced in an ugly number, and that we will get as we’ll see at least 175,000 payroll jobs were lost – and quite possibly a number closer to 200,000. A decline of this magnitude is more in line with the typical labor market contraction. We’ve heard a lot about the weak job market over the past nine months, but the losses were mild. We are about to see what a labor-market downturn really looks like – pay attention financial press, so at least you’ll know the difference next time around.
Have a great day!
Brent Vondera, Senior Analyst
I do think investors had a sense that the Senate would not give the current majority a two-thirds stance so in that way there is a check against the untoward, even if is it is a fairly weak one – the ability to filibuster may prove a big market plus over time. (This is not yet official as four Senate seats are still too close to call – the seat Al Franken is running for is still up in the air – are we serious in these challenging times? The answer is obvious.)
Energy shares led the advance; the S&P 500 index that tracks these shares gained 6.39% as oil futures jumped nearly 10% advance during Tuesday’s session. Basic material, financial and industrial shares also performed very well, up 5.69%, 5.50% and 5.45%, respectively.
Market Activity for November 4, 2008
Crude-OilWhile stocks liked the fact that the election has finally arrived, the dollar took a decent beating as there was talk of another “stimulus” package – this one totaling $500 billion. Of course, what’s being discussed isn’t simulative at all – food stamp and jobless benefit increases, even infrastructure projects, offer nothing in the way of an economic kick start. I love the infrastructure talk. Anyone who has even a minimal understanding of this form of government action knows it takes years to get off the ground as states must approve and you have the typical environmental lawsuit activity that arises. This stuff takes 12-18 months to implement, not to mention the private sector activity it crowds out.
Anyway, talk of such a plan – especially the size -- sent the dollar down and may have been behind a rally in commodity prices as traders search for an inflation hedge. I’m not saying a trend has begun, but the $500 billion number definitely worried a lot of people. Spending plans of this size, in addition to the $700 billion TARP and trillions in spending President-elect Obama has promised will not treat the dollar well. When the dollar falls this allows inflation to ramp – as everyone has spent the last year learning first hand, specifically with regard to import prices. Add in trillions of dollars the Fed has pumped into the system and you’ve got a snap back in inflation rates down the road. Oil jumped 9.26% as a result. Commodities in general were up 5.34%.
The Credit Markets
Credit spreads/indicators continue to improve. We’ve talked at length on this topic for a month now so there’s not much more to say other than letting the charts (LIBOR and TED Spread) speak for themselves.
For new readers, LIBOR is a rate charged for inter-bank lending. As this rate spiked, it showed banks were unwilling to lend to one another. This has intensive implications to the flow of credit and is a key reason the markets and economic data have taken a turn for the worse lately. Now that things have eased, the stock market has bounced back – up 18.5% from the closing low hit on October 27 – but it will be a while until the economic data shakes this event off.
And…the TED Spread is a measure of risk aversion. The index measures the spread between three-month LIBOR and three-month T-bills. A rising LIBOR, as stated above, means banks become more cautious and a plunging T-bill rate is indication investors flee to the safety of the Treasury market – hence risk aversion is heightened. When the spread narrows, obviously, risk aversion wanes. We still have a pretty high level of the safety trade occurring, but when this eases (T-bill rates rise), TED Spread will come back down to 1.00-1.50. When this occurs it will be a good sign that investors are willing to take on more risk and both corporate bonds and stocks should rally hard.
The Economy
On the economic front, the Commerce Department reported factory orders fell 2.5% in September after a large 4.3% decline for August. While this data is fairly out-dated (this is for September and we’ve already seen what’s occurred for this segment of the economy with the durable goods orders we received last week and manufacturing data for October yesterday), it does offer additional clues, specifically regarding the energy industry.
The weakness really came from the non-durables side of the report as durables were boosted by large increases in aircraft and other transportation equipment, something we discussed last week after the October durables goods report came out. Non-durables, which were hurt by the plunge in commodity prices, showed a significant decline of 5.5% in September – the second month of meaningful weakness. Of course, weakened demand has something to do with this decline as well.
We’ll add that refinery shut-downs due to Hurricane Ike, which hit Galveston on September 13, also played havoc with the figure. Point is the September decline in orders probably overstates the weakness the economy endured for the month due to this transitory event. However, we are pretty sure the October reading will be down big and will be a good measure of the fundamental weakness that took hold last month.
Inventories (specifically the inventory-to-sales ratio) has spiked a bit, although remains historically low. We should expect this figure to rise to 1.40 months’ worth of supply, but it should prove to be a low enough level to spur a ramp up in production when things normalize.
This morning we’ll see what occurred in the service sector last month by way of the ISM Non-Manufacturing Composite. The reading should come in below 50, which will indicate service-sector activity contracted in October. The index has averaged 50.3 over the past 12 months
The big news of the week will come on Friday as the October jobs report is due out. This will be a big hurdle for the market to get past; although, we think it is likely the market has already priced in an ugly number, and that we will get as we’ll see at least 175,000 payroll jobs were lost – and quite possibly a number closer to 200,000. A decline of this magnitude is more in line with the typical labor market contraction. We’ve heard a lot about the weak job market over the past nine months, but the losses were mild. We are about to see what a labor-market downturn really looks like – pay attention financial press, so at least you’ll know the difference next time around.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment