Daily Insight

Most U.S. stocks closed lower on Friday but a good relative performance among technology shares resulted in a mixed session for the major indices. We’ve seen a number of mixed results lately; on Friday it was the Dow and S&P 500 losing some ground, while the NASDAQ Composite added a few points.

A lower consumer sentiment reading and weak import data both put the screws to those holding out for a bounce in consumer activity. Another decline in oil prices pressured energy shares, which held the Dow average back as Chevron and Exxon subtracted 20 points from that index.

The broad market has declined for four weeks now, the longest stretch since we’ve rebounded from the lows of early March. We’ve now backed off of the recent highs by 7%, something that should not have been unexpected after the substantial run from those March lows – the investor should be prepared for an additional pullback.

It is quite usual to see at least a 15% retracement in these trading-range environments and one needs to be cautious and pick their spots. No one knows how people will react to a 15% pullback (if we get it) after the shock they endured on the way to the notorious low of 666. If they fear another move to those levels they may just throw in the towel and make the move lower a severe retracement rather than a more moderate correction. (I’m not saying such a move would be justified, just explaining that this is a concern of mine)

Market Activity for July 10, 2009
The Economic Data Front

Overall Friday’s economic releases were not particularly good. The trade data was reported with a lean to the positive side because some of the export numbers were encouraging, but the import side remained very weak and was just another reminder of the depressed nature of consumer activity. The latest confidence reading, if one is to give these surveys a meaningful degree of credence, suggested we’re not ready to see the consumer bounce back just yet.

Import Prices

The Labor Department reported that import prices jumped 3.2% for June and marked the fourth month of increase. While the year-over-year reading continues to post deep negative readings, that will all change by the fall when the comparisons are no longer against the commodity-price spike of last summer.

A 20% increase in petroleum-product prices led the import data to its large gain last month. This got all the news as the financial press suggested that without this run up in petro prices the data would not be on this trajectory. However, a closer look at the data shows that industrial supply prices are on a run, bouncing a huge 10.3% in June and up 64% at an annual rate over the past four readings. Now, this increase has occurred off of large multi-month declines that ran September 2008- January 2009 but the trend is disturbing nonetheless.

On an overall basis import prices are up 18% at an annual rate since March and this is something to watch especially if the dollar weakens – such a scenario will have an even larger effect on import prices as a weaker domestic currency obviously makes imports more expensive.

This trend within some of the inflation gauges, and the pretty high potential for another spike in commodity prices, could spell trouble for corporate profits a few quarters down the road. I think we’ve got a shot at a 2-3 quarter run of high-powered profit results (a couple of quarters out from this point) but higher commodity prices (which is one aspect having an effect on industrial supply costs) could result in a significant margin squeeze quickly thereafter. This will either show up in softer bottom line growth or firms will simply hold off on adding to payrolls for an extended period. Neither issue is a good one.

Trade Deficit

The Commerce Department reported the trade deficit narrowed 9.8% in May to the lowest level in nearly a decade. Exports rose 1.6% (and would have been stronger if not for a 7.6% decline in auto exports) and imports fell 0.6%.

Exports were driven by better results out of Asia , something we’ve talked about a few times now and touched on again in Friday’s letter, as Chinese stimulus spending boosts activity in the entire region. Exports to the Pacific Rim rose 7.3% -- up 10.3% to Japan, up 8.9% to the NICs (newly industrialized countries), and a big 19.4% to Australia. (This is where China gets most of it imports and areas such as Japan the NICs and the Aussies get many of their machinery and industrial goods from the U.S.)

The import numbers illustrate U.S. consumer (and business) activity remains in the dirt, down 31.3% on a year-over-year basis. The monthly number of -0.6% was even worse when you adjust for the price increases – real $ imports fell 2.1% in May, which follows a large 3.0% decline for April.

University of Michigan Consumer Sentiment

As many readers know, there are two major confidence measures. The most watched reading remains the Consumer Confidence survey out of the Conference Board (an independent research organization), but this U. of M. number gets decent attention as well and it showed a decline in June that moved the level back below where it stood in April – the month when we really began to see improvement from the two-decade lows.

The U. of M. survey came in at 64.6 in June after hitting 70.8 in May. Too many people had assumed that consumer activity would make a sustained comeback simply because of better readings of the previous couple of months. This was a misguided view as the fragility of the labor market will keep a lid on consumer sentiment – this move back down should not be a surprise. It will take a full year, at least, for the consumer to get his/her bearings as a weak labor market combines with the reverse wealth effect via the plunge in stock and home prices.



Have a great day!


Brent Vondera