U.S. stocks continue to rally with another strong performance yesterday after better-than-expected earnings results out of Best Buy and the 7-year Treasury auction went very well, easing any concerns over a lack of demand after a UK auction failed on Wednesday.
Industrial and tech shares led yesterday’s rally as both sectors hugely outperformed, up 5.05% and 4.00%, respectively. Consumer discretionary shares also performed very well on that Best Buy news and material stocks continue to get a boost as the Fed’s action almost guarantees commodity prices are going higher.
The S&P 500 is now 23% above the nefarious March 9 low of 666 and it appears we’ve got momentum to move higher. The technicians say 840 is the next resistance, so if we can get above that level in the next couple of days we may have a shot at 900.
Yesterday’s rally occurred even as Treasury Secretary Geithner was on Capitol Hill yesterday exclaiming we cannot wait to set up a super regulator. His comments illustrate Washington continues to miss what has done such damage to the market. Without a doubt, the origin of the credit excesses is failed monetary policy and social engineering by Congress, which was followed by the natural human reactions to easy money.
But the reasons the stock market got crushed even beyond what occurred by mid-October (off the peak by 35% by mid-October) was the de-leveraging event, an overtly easy way to short stocks, lack of margin requirements in the credit default swaps (CDS) market and an accounting rule that has vaporized bank capital and allowed the shorts to game the system. (As Andy Kessler explained brilliantly in yesterday’s WSJ Opinion page, all the shorts had to do was bid up CDS prices, which increased the likelihood, or the perception at least, that CDO derivatives would default. As a result, banks had to mark these assets down across the board and watch their regulatory capital erode, at which point banks’ share prices plummeted and the short position became hugely profitable.
There’s nothing you can do about de-leveraging, it’s what needed to occur, but something can be done about the unnecessary ease of shorting the market and the increased ability to game the system that zero margin requirement in the CDS arena and mark-to-market accounting delivered We don’t need a monolithic regulator – as Geithner proposes, a machine that largely burdens the private sector. We need mark-to-market modified, reinstatement of the uptick rule and a clearinghouse (with margin requirements) for the CDS market. You do these things, refrain from micromanaging the private sector, and this market rally has a shot at some level of sustainability. Unfortunately, the agenda appears to be a move toward micromanagement and gives the perception that the administration is more interested in a power grab and feeding the current populist frenzy.
Market Activity for March 26, 2009
Fourth-Quarter Gross Domestic Product (final revision)
The Commerce Department reported the final revision to Q4 GDP was revised to -6.3% (in real terms at an annual rate) from the previous revision of -6.2% (the figure was first reported at -3.8% in the initial estimate back in January).
The big change from that initial estimate of -3.8% all the way down to -6.3% was due to the fact that the inventory estimate was very wrong. Inventories were estimated to have increased in that initial estimate by $6.2 billion when in reality stockpiles fell $25.8 billion. (The initial estimate has to make a lot of assumption because much of the quarter’s data is not out when the first look at GDP is released.)
The decline in economic activity last quarter was the most severe since the 1981-82 recession. Residential investment (housing construction) fell 22.8%; business fixed investment fell 21.7%; personal consumption (the largest component) slid 4.3% -- a huge decline for this segment. All of these figures are in real terms at an annual rate.
The decline in personal consumption follows a 3.8% drop in the third-quarter, marking only the third time we’ve seen back-to-back declines in consumer activity in the post-WWII era.
The current quarter is not shaping up much better. The personal consumption segment is shaping up to post a much better reading, and may actually be positive; however, business spending and inventory liquidation is going to weigh heavily on the figure and we’ll likely see another decline in GDP of at least 4.5%-5.0%. Nevertheless, the inventory dynamic (the huge degree at which stockpiles have been liquidated) should offer a boost to the second-quarter GDP reading – enough so to make it positive, but it’s a very early guess right now. And still, we cannot expect the consumer to offer much help for a while as the job-market picture remains bleak.
Corporate Profits
The corporate profits measure within the GDP report, known as NIPA (National Income and Products Account) showed economic profits fell 16.5% last quarter – this is not an annualized number – and has declined 21.5% over the past year. This decline was driven by the 59.3% plunge in financial-sector profits. Nonfinancial profits fell 10.7%. (These are called economic profits because they are adjusted for capital consumption and inventory changes.)
Initial Jobless Claims
The Labor Department reported initial jobless claims rose 8,000 to 652,000 in the week ended March 21. The four-week average was essentially unchanged, falling 1,000 to 649,000.
Continuing Claims jumped another 122,000 to 5.56 million for the week ended March 14 (that date is not a typo, continuing claims lag initial by a week).
The insured unemployment rate rose again, increasing to 4.2% (the highest level since the spring of 1983) from 4.1% in the prior week. This rate tracks the national unemployment rate and has risen from 3.8% in February. Because this latest continuing claims data (and the insured unemployment rate is attached to continuing claims) is for the week with which the March jobs report will use to calculate the first look at monthly payroll activity, it suggests the unemployment rate may rise to 8.5% from 8.1% last month.
The jobless claims figure is one of the best coincident (real-time) readings we have. We will need to see this figure reverse course (along with the ISM figure – another accurate real-time indicator) as a signal the economy is rebounding.
Have a great weekend!
Brent Vondera, Senior Analyst
Industrial and tech shares led yesterday’s rally as both sectors hugely outperformed, up 5.05% and 4.00%, respectively. Consumer discretionary shares also performed very well on that Best Buy news and material stocks continue to get a boost as the Fed’s action almost guarantees commodity prices are going higher.
The S&P 500 is now 23% above the nefarious March 9 low of 666 and it appears we’ve got momentum to move higher. The technicians say 840 is the next resistance, so if we can get above that level in the next couple of days we may have a shot at 900.
Yesterday’s rally occurred even as Treasury Secretary Geithner was on Capitol Hill yesterday exclaiming we cannot wait to set up a super regulator. His comments illustrate Washington continues to miss what has done such damage to the market. Without a doubt, the origin of the credit excesses is failed monetary policy and social engineering by Congress, which was followed by the natural human reactions to easy money.
But the reasons the stock market got crushed even beyond what occurred by mid-October (off the peak by 35% by mid-October) was the de-leveraging event, an overtly easy way to short stocks, lack of margin requirements in the credit default swaps (CDS) market and an accounting rule that has vaporized bank capital and allowed the shorts to game the system. (As Andy Kessler explained brilliantly in yesterday’s WSJ Opinion page, all the shorts had to do was bid up CDS prices, which increased the likelihood, or the perception at least, that CDO derivatives would default. As a result, banks had to mark these assets down across the board and watch their regulatory capital erode, at which point banks’ share prices plummeted and the short position became hugely profitable.
There’s nothing you can do about de-leveraging, it’s what needed to occur, but something can be done about the unnecessary ease of shorting the market and the increased ability to game the system that zero margin requirement in the CDS arena and mark-to-market accounting delivered We don’t need a monolithic regulator – as Geithner proposes, a machine that largely burdens the private sector. We need mark-to-market modified, reinstatement of the uptick rule and a clearinghouse (with margin requirements) for the CDS market. You do these things, refrain from micromanaging the private sector, and this market rally has a shot at some level of sustainability. Unfortunately, the agenda appears to be a move toward micromanagement and gives the perception that the administration is more interested in a power grab and feeding the current populist frenzy.
Market Activity for March 26, 2009
Fourth-Quarter Gross Domestic Product (final revision)
The Commerce Department reported the final revision to Q4 GDP was revised to -6.3% (in real terms at an annual rate) from the previous revision of -6.2% (the figure was first reported at -3.8% in the initial estimate back in January).
The big change from that initial estimate of -3.8% all the way down to -6.3% was due to the fact that the inventory estimate was very wrong. Inventories were estimated to have increased in that initial estimate by $6.2 billion when in reality stockpiles fell $25.8 billion. (The initial estimate has to make a lot of assumption because much of the quarter’s data is not out when the first look at GDP is released.)
The decline in economic activity last quarter was the most severe since the 1981-82 recession. Residential investment (housing construction) fell 22.8%; business fixed investment fell 21.7%; personal consumption (the largest component) slid 4.3% -- a huge decline for this segment. All of these figures are in real terms at an annual rate.
The decline in personal consumption follows a 3.8% drop in the third-quarter, marking only the third time we’ve seen back-to-back declines in consumer activity in the post-WWII era.
The current quarter is not shaping up much better. The personal consumption segment is shaping up to post a much better reading, and may actually be positive; however, business spending and inventory liquidation is going to weigh heavily on the figure and we’ll likely see another decline in GDP of at least 4.5%-5.0%. Nevertheless, the inventory dynamic (the huge degree at which stockpiles have been liquidated) should offer a boost to the second-quarter GDP reading – enough so to make it positive, but it’s a very early guess right now. And still, we cannot expect the consumer to offer much help for a while as the job-market picture remains bleak.
Corporate Profits
The corporate profits measure within the GDP report, known as NIPA (National Income and Products Account) showed economic profits fell 16.5% last quarter – this is not an annualized number – and has declined 21.5% over the past year. This decline was driven by the 59.3% plunge in financial-sector profits. Nonfinancial profits fell 10.7%. (These are called economic profits because they are adjusted for capital consumption and inventory changes.)
Initial Jobless Claims
The Labor Department reported initial jobless claims rose 8,000 to 652,000 in the week ended March 21. The four-week average was essentially unchanged, falling 1,000 to 649,000.
Continuing Claims jumped another 122,000 to 5.56 million for the week ended March 14 (that date is not a typo, continuing claims lag initial by a week).
The insured unemployment rate rose again, increasing to 4.2% (the highest level since the spring of 1983) from 4.1% in the prior week. This rate tracks the national unemployment rate and has risen from 3.8% in February. Because this latest continuing claims data (and the insured unemployment rate is attached to continuing claims) is for the week with which the March jobs report will use to calculate the first look at monthly payroll activity, it suggests the unemployment rate may rise to 8.5% from 8.1% last month.
The jobless claims figure is one of the best coincident (real-time) readings we have. We will need to see this figure reverse course (along with the ISM figure – another accurate real-time indicator) as a signal the economy is rebounding.
Have a great weekend!
Brent Vondera, Senior Analyst
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