Utility, telecom, basic material and health-care shares also performed well. Again, consumer-related and industrial shares failed to gain ground, which doesn’t exactly illustrate conviction with regard to economic recovery.
The S&P 500 has broken through the 950 level on an intraday basis for a third time now since last closing at that number back on October 21. We will probably need to break through that level to go higher; we’ve been stuck at the top end of this range for nine-straight session now. There’s still a lot of money on the sidelines and you know people want in after this 40% move from the wicked low of 666, but it may take a big bang economic number to drive us higher here over the near term rather than these readings that only look good compared to very low lows.
Market Activity for June 11, 2009
Treasury Auction, Rates and the Economy
The $11 billion 30-year Treasury auction went well yesterday, but of course the strong bid-to-cover ratio of 2.68 came at a much higher price to the government. The median bid on the previous auction was 4.185% and the one before that was 3.415%. Yesterday’s auction was executed with a 4.684% median yield. We have a record $3 trillion in government debt being issued this year alone and another $2 trillion (based on current estimates) for 2010. If there is anyone out there who hasn’t considered that higher rates will be an issue for the expansion, when it occurs, well maybe it’s a worthwhile exercise.
Further, unless the government screws up so royally as to stop an expansion in the monetary base, that is 10 times larger than any in the post-WWII era, from propelling economic growth then we’re going to have higher commodity prices that will jolt rates higher as well.
We want the economy to progress, we want stocks to go higher, we want risk-taking to occur, but they must occur for the right reasons otherwise we’ll be pushed back into another contraction much sooner than I think many realize. So, the interest-rate concerns waned yesterday, and they will certainly ebb and flow over the near term, but this daily vacillation of emotions should be telling us something.
These are things the equity investor needs to think about in this environment. If the horizon is long-term in nature, then find your risk level (and we should all know it now after what we’ve gone through over the past 10 months) and stick with it. But there is a tendency among many to attempt to recapture losses, its human nature. If this is the thought, just be very careful, we’re dealing with vast uncertainties both within and outside the economic world.
Oil Rises Again
Crude for July delivery continued to push higher, closing at $72.50 per barrel yesterday.
Stocks and oil have had a positive relationship over the past five months, and largely since the financial crisis took hold in September -- meaning they’ve been moving in tandem. Now with oil over $70 per barrel it’s likely they’ll begin to trade in an inverse relationship, which means it is even more important right now to get a grip on monetary policy and while the Fed won’t do anything substantial, they could make some comments and mild moves (refusing to increase quantitative easing and maybe boosting fed funds to 0.50%) that may be enough to strike a balance between oil and stocks and get the former to head down slightly and stocks to hold steady here.
Jobless Claims
The Labor Department reported initial jobless claims fell 24,000 – the market expected a decline of just 6,000 – to 601,000 for the week ended June 6. We’ve seen a nice trend off of the week ended March 27 high put in at 674,000 in claims, but let’s face it a number at this is level is difficult to get too excited about. What we’re dealing with here is steps, mild steps in a process to improvement, this is true regarding all economic data points and the same is true for jobless claims.
The four-week average of initial claims fell 10,500 to 621,750.
Continuing claims extended their record-setting streak to 19 weeks – the prior week’s data showed a halt to this record-setting trend when released but that number has now been revised higher to show it did make another new high. Claims jumped again in terms of this latest data (for the week ended May 30) – there’s a one-week lag between continuing and initial. This is bad news for the labor market -- yes, we’ve known it is weak, but some light at the end of the tunnel would be helpful – as it shows the degree of fragility has not improved.
The insured unemployment rate (as most readers know, this is the jobless rate among those eligible for unemployment benefits) held at 5.1%. This number closely tracks the direction of the overall unemployment rate so may be showing we’re close to topping out. It’s difficult to see this as the case, it seems we’ll blow through the 10% level sometime in early 2010, but the data is suggesting – assuming a subsequent week doesn’t show a jump – the overall jobless rate may peak at 10% or slightly below.
Retail Sales for May
The Commerce Department reported that retail sales for May rose 0.5% after two months of decline of 0.2% (which was revised up from -0.4%) and 1.2%, respectively. The ex-auto reading rose the same, up 0.5% as well.
Although the headline figure showed a nice increase, looking within the data there is little evidence of an underlying rebound in spending. The ex-gasoline figure rose just 0.2%, which is hardly impressive after the past two readings. Further, even if people, like me, do not believe consumer activity can rebound in a sustained way due to strong headwinds, you would still think there’d be a stronger bounce after the deep contraction in activity since September – the fact that it can’t muster more of an uptick is telling.
In terms of some of the components, the clothing store segment showed a welcome rise after two months of nasty, but this was offset by a 0.7% drop in department stores, a 0.1% decline in sporting and book stores, a 0.4% drop in non-store retail and a 0.2% fall among general merchandise. Also, I like to watch the eating & drinking component to gauge the directional degree of consumer activity (this component is driven the bar scene and this group is less susceptible to downturns); it rose just 0.1% after a 0.2% rise in April and a 1.0% decline March.
And this brings us to gas station receipts, the component that drove the overall reading as it jumped 3.6% for the month. Again, the overall reading was up 0.5% but just 0.2% ex-gasoline. This jump was due to the 18% increase in prices at the pump, a trend – if it continues – that will sap dollars from other aspects of the retail sales report.
Finally, retail sales ex gasoline, autos and building materials – the number that flows directly to the personal consumption component of the GDP report – came in flat for May. In fact, it is flat (down slightly but a statistically insignificant decline) for the first two months of the current quarter.
It’s pretty unlikely, as a result, that the personal consumption side of GDP will offer the key economic reading much if anything this quarter. As a result, we’ll depend on government, business spending and inventory building to boost growth, which is why GDP will post another negative reading for Q2. By the third quarter we’ll end this contraction and see a mild rise in GDP and by the fourth the inventory dynamic and government spending should kick in to drive the reading to a fairly strong positive print.
Business Inventories
Business retail inventories fell for the eighth-straight month, down 1.1% in April. All segments reduced stockpiles, but what’s driving inventory liquidation the most is the auto sector, which slashed stockpiles 2.4% -- and by 17.4% over the past 12 months.
Business sales fell 0.3% in April, after a 1.8% decline in March. Sales have been crushed over the past nine months, down 17% at an annual rate as firms went into full-blown caution mode following the financial/credit crisis.
While the inventory-to-sales ratio remains elevated, once sales do bounce, even if that bounce is mild, this ratio will come down to a more appropriate level in short order. I don’t believe we’re quite there yet, but another quarter out the inventory dynamic will begin to catalyze GDP. This cycle of inventory liquidation will have run its course within a couple of months.
Have a great weekend!
Brent Vondera
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