Daily Insight

U.S. stocks rallied the most in nearly three weeks (going back to the 10.8% jump on October 28) as the market rocketed higher in the afternoon session; much of this jump occurred in the final hour. Six percent of the 11% rally from the day’s nadir occurred in the 50 minutes that brought us to the bell.

The S&P 500 appeared to be headed for another 4% decline, but after moving through the October 27 multi-year low of 818 just after lunch, a powerful rally ensued, soaring 11% to the close from that intraday low. We’re trying to cement a bottom here, it’s going to take some time before we no whether we’ve found it or not. For the Dow, we held about 100 points above the October 10 intraday low of 7890, for what it’s worth.

Still, investors are going to have to get past a series of really weak economic data over the next couple of months. One can make the argument we’ve priced in this weakness and moves like the one witnessed yesterday offer some confidence to this belief. We shall see, sentiment will certainly be tested through year end.

Energy and basic material stocks, led the advance, jumping 11.10% and 8.28%, respectively. Industrial shares were among the relative laggards, gaining just 5.74%, on a day the broad market rose nearly 7%.

These areas may over the most promise as we come out of this mess. The massive amounts of liquidity the Fed has pumped into the system should cause commodity prices to jump again – the Fed will be very reluctant to take this liquidity back until the economy is well into expansion mode. For industrials, the group is feeling the pain of current realities, but global infrastructure projects will fuel profits for this sector over the next few years. Besides, it’s reasonable for one to expect the traditional areas of growth to return – like industrials --, as the financial sector is moving back to a more sustained degree of leverage

The Economy

The Mortgage Banker’s Association reported mortgage applications climbed last week from a nearly eight-year low. Applications plunged 20.3% in the week ended October 31.

The index of applications to either purchase a home or refinance a loan rose 11.9% for the week ended November 7. The group’s purchase index increased 9% and the refinancing gauge jumped 16%.

The decline in mortgage rates likely brought some buyers back into the marketplace as the average rate for a 30-year fixed loan fell to 6.24% from 6.47%. As a result, demand for fixed-rate financing increased 12%.

In a separate report, the Commerce Department reported the U.S. trade deficit narrowed more than forecast as a record decline in the cost of crude-oil caused imports to tumble.

The trade gap shrank 4.4% to $56.5 billion for September from $59.1 billion in August. This was completely due to the plunge in the price of oil; excluding petroleum, the deficit widened as exports of U.S. goods dropped by the most since 2001 – that’s on a month-over-month basis.

The chart below shows the year-over-year changes.

The focus from here will be on imports, which will post significant declines for a few months due to economic contraction here at home.

The trade gap will certainly narrow again for October – the decline in oil was most pronounced last month. However, in the months that follow this narrowing will ease, and may in fact reverse course as our export activity is cooling very quickly after a couple of years of robust growth – up 16.3% at an annual rate for the two years that ran July 2005 – July 2007. Overseas economies are enduring weakness too and thus will continue to curtail their purchases.

Viewing the pattern of the export data, weakness was specifically evident in Europe. Asia slowed significantly but not yet to the same extent as did Europe. The only regions/countries in which export growth picked up were Mexico, Canada and Asia NICs (Newly Industrialized Countries).

Lastly, the Labor Department reported initial jobless claims for the week ended November 8 finally breached the 500k level, rising 32,000 to 516,000 – a jump that was greater than expected. We’ve been watching for this event and here it is. The payroll declines of the past two months (now that the September reading was revised significantly lower) show the labor-market conditions are looking more like the typical job-market contraction.

For the first eight months of the year the monthly job losses has been mild as firms were holding onto jobs – indeed, they had no reason to lay many workers off as the troubles, for the business side at least, did not occur until September. But everything changed when Lehman went down and the credit chaos took hold. Now both claims and the payroll data are showing significant weakness.

The four-week average – the chart you are all familiar with as we post it each week – has eclipsed the 2001 level and appears to have its sights set on the peak hit during our last real recession – 1990-1991. By this measure, claims increased 13,250 to 491,000, the highest reading since March 1991.

Continuing claims – those that have been on the dole for longer than a week – has really shot up, surpassing the levels of both the 1990-1991 recession and the 2001 downturn. We have to go all the back to 1983, coming out of the nasty 1982 contraction, to see a reading this elevated.

We’ll note, however, when adjusting for labor-force growth, continuing claims would need to shoot all the way up to 5.2 million (the numbers on the chart are in thousands so 3897 means 3.897 million). The labor force was 112 million back in 1983, today it stands at 155 million. I highly doubt we’ll hit levels that near the five-million mark, which would be in line with an unemployment rate of 9-10% -- our feel is unemployment will top out at 7.5% based on what is currently known.

What all this tells us, which is pretty obvious, is that this real-time indicator (jobless claims) is signaling the November jobs report (released December 5) will be worse than the last two readings and may surpass a decline of 300,000. We’ll have a better sense of this with next week’s jobless claims number as it will align with the November payroll survey week.

This morning we get import prices for October, retail sales (also for October) and business inventories for September.

The import data will show improvement as the price of oil has plunged and the US dollar has soared – both obviously push import prices lower.

However, the retail sales data will be abysmal, although this is expected; so long as we hold to the expectation the market should take the news relatively well.

For business inventories the data will be weak. What we look to here is the underlying sales data, which is going to look really soft for the next couple of readings – this too should already be baked in.

Have a great weekend!
Brent Vondera, Senior Analyst