Daily Insight

U.S. stocks rallied in the final hour of trading on Friday to finish the first three-month gain for the S&P 500 since hitting the record 1565 in October 2007, as commodity-related shares lead the charge. Despite the 36% rally from the wicked 666 low of March 9 the market remains 41% below that record high.

Stocks were able, again, to brush aside ugly economic data and one wonders how long this is probable. Right now we’re going on hopes for an Asian recovery (I think what is currently known tells us there will be some rough waters to get through in June and July domestically); the record bounce in Japan’s latest industrial production reading and the third month of expansion within the manufacturing sector in China has really boosted expectations regarding a recovery in the Pacific Rim. For sure, very targeted and large fiscal stimulus out of China will help things over the next several months, but China remains an export-driven country and with the U.S. consumer pretty weak here I find it hard to believe that region won’t run into its troubles spots as well over the next few months.

I think the data will begin to record much more solid results by the fall, but between auto-production shutdowns, a business community that remains very cautious and a consumer still being hit by 500K-plus monthly jobs losses we’re not there yet.

For the week, the S&P 500 gained 3.62%, marking the 10th week of gain out of the past 12.

This week will be an important one. Will we be able to get past that 930 wall, or not? It’s worthwhile to notice how, on Wednesday, that the market gave back nearly Tuesday’s entire 5.9% surge after hitting 929. This week will bring both manufacturing and service-sector ISM numbers and the May jobs report, none of which should be inspiring. It will be interesting to watch how the market responds to these figures as it may be telling for near term activity (next three months) I believe. Then next week we get big 10 and 30-year Treasury auctions, they better go well.

Market Activity for May 29, 2009


Washington Motors (WM) – that ticker is available now that Washington Mutual is no longer around

I wanted to refrain from mentioning the GM thing because the entire situation is so pathetic, but it’s become obligatory to state that what has been known as General Motors will finally file for bankruptcy this morning. Now, Washington will run the company, which pretty much seals the deal for how the business will perform over the next several years. You think GM had troubles before, wait until the company is run based upon a short-term political focus rather than a framework that at least in some respect has profit as the goal.

Notice that the UAW Health-Care Trust will receive 17.5% in the new company, down from 38% in the former plan. It appears the UAW desired an additional stake in dividend-paying preferred shares, and higher level on the totem pole if things go bad, rather the nearly 40% stake via common shares – I guess they aren’t too optimistic on the viability of the company either. This of course makes what has been reported as a “sweetened deal” for unsecured bond holders, who will not only get a 10% equity stake but now another 15% in warrants, maybe not so sweet after all. Good luck with those warrants.

WM investors better hope that gasoline prices soar because the government is going to demand the automaker produce very small “efficient” (what exactly is efficient anyway? Is 275 horsepower that achieves 25 mpg inefficient? Does a car need to be small, and likely more dangerous, and high mpg to be termed efficient?) autos that Americans in the aggregate do not want. This stuff works in Europe where birthrates are nil, but it’s kind of tough to stuff the family of four into the Chevy Cavalier and have the peace of mind that they’ll be relatively safe as the Mrs. carts them around town or you all take off on that summer trip. But fear not, because between restrictions on domestic energy production and the way the Fed will pummel the dollar you can be assured that pump prices are going much higher. And speaking of the dollar…

Dollar Down

The dollar really got hammered last week as the estimate for government debt issuance in 2009 has jumped to 3.25 trillion, up from the already unprecedented $2.5 trillion. (That’s as a percentage of GDP, and outside of WWII). Further, I don’t think anyone believes the Fed is going to put a halt to monetizing the debt (buying Treasury securities and inflating away the debt in terms of nominal GDP) and that means the printing press will be working overtime


First revision to Q1 GDP

The Commerce Department reported that first-quarter GDP was revised up to show the economy contracted at a 5.7% real annual rate rather than the 6.1% initially estimated last month. Still, the fourth quarter of 2008 and the first-quarter of 2009 combined to mark the worst two-quarter contraction since the 1957-58 recession – that period posted -4.2% in Q4 1957 followed by -10.4% in Q1 1958.

So what caused the upward revision? A lower-than-initially estimated reduction in business inventories added 0.45 point back to GDP (still companies cut stockpiles by the largest amount since records began in 1947) and net exports added 0.19 point (the decline in exports was less than the decline in imports, but both did decline: down 10.7% for exports and down 17.5% on imports). A narrower trade gap adds to GDP.

These adjustments more than offset a substantial downward revision to the personal consumption component – the largest aspect of gross domestic product. The initial personal consumption figure of +2.2% (again, remember this is in real terms at an annual rate) never made sense based on the personal spending figures for the period, which we touched on at the time of the initial GDP report last month. The reading was revised down to 1.5%, which makes more sense based upon the chained $ quarter-over-quarter consumption figure within the personal spending data, which is what one watches to gauge this GDP component.

We’ll get the April personal spending reading today and this will help us gauge how consumer activity is going for the current quarter. I suspect it will show another decline and am not confident personal consumption will offer much support to Q2 GDP.

Chicago PMI

The Chicago Purchasing Managers Index stated factory activity contracted at a faster pace in May, showing the state of manufacturing remains precarious. The reading came in at 34.9 after April’s bounce to 40.1 from the nearly 30-year low of 31.4 in March. A number below 50 indicates activity contracted.

That April rebound had many believing the manufacturing sector was on the rebound, as a number of economic data sets have given economists the old head fake – this is why defenders are supposed to remain focused on the body, not the head – the same is true for economic data, focus on multi-month trends rather than getting all excited about one month pops.

We have also discussed over the past month how it will be important to rely on the other regional factory surveys, rather than Chicago. Chicago is usually the most important one to watch for signals of what’s occurring nationwide, but with its significant exposure to the auto industry the plant idling for May and June are going to put pressure on Chicago. Nevertheless, that fact that the readings took such a blow last month shows that other areas likely endured damage as well.

The new orders index, a sub-index of the overall report, illustrates things won’t get much better for June.

The employment index was slammed back to a new low.

This morning we get the personal income and spending figures for April, one of the big readings of the week. We’ll also get ISM manufacturing for May. The big big report will come on Friday with the release of the May jobs report.


Have a great day!


Brent Vondera, Senior Analyst