The broad-market rally extended to a fourth session as the S&P 500 honed in on its trading-range high of 946-950 (for those keeping count), roughly the post election-day high . Industrial, technology and basic material shares led the indices higher. Financials and telecoms were the laggards – bank stocks were hurt by the news that CIT will very likely go bust today (CIT being the holding company that offers lending to small and mid-sized businesses and to more than half of the “Fortune” 1000 names. The overall market had no problem shrugging it off, instead finding reason to rally on the Roubini comments.
Yesterday’s economic data was really no help. Initial jobless claims posted a substantial decline, but it was met with skepticism as seasonal adjustment factors likely played a major role in the decline rather than some meaningful improvement in the labor market. The latest manufacturing gauge deteriorated.
Volume was pretty soft again, even for this time of year, as just 1.1 billion shares traded on the NYSE Composite – 21% below the three-month average. Advancers beat decliners by a 3-to-1 margin on the Big Board.
Commercial Paper
The commercial paper (CP) market is shrinking at a record pace, as investors demand for all but the top-rated paper dwindles. A proposal from the SEC may worsen the situation by restricting money-market funds (these funds hold roughly 40% of the CP market, according to Bloomberg) to only top-rated debt – anything below A-1, which in short-term credit ratings is equivalent to anything below AAA and AA+ on long-term ratings.
Commercial paper is used by corporations to provide very short –term funding, allowing firms to borrow at cheaper rates. When your CP dries up a firm’s cost of capital rises as the business needs to borrow for longer terms, and that increase is substantial – depending on the credit rating of the firm it may be 4-8 percentage points higher! When borrowing costs rise, it results in less expansion and less jobs than would otherwise be the case. The short-term funding game is over for a lot of U.S. companies.
Maybe this is a good thing over the longer term, certainly CP issuance jumped to levels that were harmful by 2007 – harmful from the respect of when investors flee for safety your funding evaporates; long-term maturities reduce this effect, but the point is this situation is another thing that will affect economic activity over the next couple of years.
Jobless Claims
The Labor Department reported that initial jobless claims plunged 47,000 in the week ended July 11 to 522,000 (a decline of 12,000 was expected). This marks the second week in which we’ve seen a huge decline. Initial claims fell 48,000 in the week ended July 4, which I accounted to the holiday-shortened week and seasonal adjustments due to auto-plant closing.
However, with a second-straight week of huge declines maybe something else is occurring. It’s one of two things: Either the job market is beginning to improve substantially, or we still have this seasonal adjustment thing occurring. (That is, auto plants normally shutdown in July as they retool for new models, the seasonal adjustment factors this in. However, this year, with the GM and Chrysler bankruptcies, they shuttered plants a month earlier than usual so the normal rise in claims is not showing up when it typically does.
I find it very difficult to believe -- with the duration of unemployment making a new record high to 24.5 weeks, another 467,000 jobs slashed in June and the U6 unemployment rate hitting 16.4% -- that the labor market has improved to such a huge degree as this claims data is suggesting. It’s got to be the seasonal distortion. I want to be careful here not to send the wrong message. I’m not stretching to offer a negative view, I don’t want anyone to read it that way – I as much as anyone want the economic scene to improve and improve markedly. But we look at every number that comes across on a daily basis very closely and this large reduction in claims just doesn’t make sense. If the number remained below 600K but rose a bit, or even held steady, I wouldn’t have this level of skepticism, but this degree of decline is not commensurate with the other data.
Now, the rate of job cuts will ease (as we first talked about two months back when estimating that monthly job losses will fall back to the normal recessionary levels of 250K-300K by August) and this is going to have an affect on the claims data, but again this level of decline just seems to not quite jibe with reality. We’ve lost 6.46 million jobs since January 2008 as businesses had been shocked by the degree and quickness of the economic weakness, so we must see some sort of easing simply on a statistical basis. (And just to make something clear, I’ve seen a lot of people state that we’ve lost all of the payroll positions created from the previous expansion. That is not true, we still have a net gain of 1.86 million as 8.32 million were added September 2003-December 2007 and 6.46 have been lost since.
The four-week average on initial claims fell 22,500 to 584,500 – first move below 600K since January.
The Labor Department reported that initial jobless claims plunged 47,000 in the week ended July 11 to 522,000 (a decline of 12,000 was expected). This marks the second week in which we’ve seen a huge decline. Initial claims fell 48,000 in the week ended July 4, which I accounted to the holiday-shortened week and seasonal adjustments due to auto-plant closing.
However, with a second-straight week of huge declines maybe something else is occurring. It’s one of two things: Either the job market is beginning to improve substantially, or we still have this seasonal adjustment thing occurring. (That is, auto plants normally shutdown in July as they retool for new models, the seasonal adjustment factors this in. However, this year, with the GM and Chrysler bankruptcies, they shuttered plants a month earlier than usual so the normal rise in claims is not showing up when it typically does.
I find it very difficult to believe -- with the duration of unemployment making a new record high to 24.5 weeks, another 467,000 jobs slashed in June and the U6 unemployment rate hitting 16.4% -- that the labor market has improved to such a huge degree as this claims data is suggesting. It’s got to be the seasonal distortion. I want to be careful here not to send the wrong message. I’m not stretching to offer a negative view, I don’t want anyone to read it that way – I as much as anyone want the economic scene to improve and improve markedly. But we look at every number that comes across on a daily basis very closely and this large reduction in claims just doesn’t make sense. If the number remained below 600K but rose a bit, or even held steady, I wouldn’t have this level of skepticism, but this degree of decline is not commensurate with the other data.
Now, the rate of job cuts will ease (as we first talked about two months back when estimating that monthly job losses will fall back to the normal recessionary levels of 250K-300K by August) and this is going to have an affect on the claims data, but again this level of decline just seems to not quite jibe with reality. We’ve lost 6.46 million jobs since January 2008 as businesses had been shocked by the degree and quickness of the economic weakness, so we must see some sort of easing simply on a statistical basis. (And just to make something clear, I’ve seen a lot of people state that we’ve lost all of the payroll positions created from the previous expansion. That is not true, we still have a net gain of 1.86 million as 8.32 million were added September 2003-December 2007 and 6.46 have been lost since.
The four-week average on initial claims fell 22,500 to 584,500 – first move below 600K since January.
Continuing Claims fell a massive record-setting 642,000 to settle at 6.273 million in the week ended July 4 (there is a one week lag between initial and continuing claims data).
On a non-seasonally adjusted basis continuing claims rose 64,000 to hold above the six million mark.
Philly Fed
The Federal Reserve Bank of Philadelphia released their manufacturing survey for July, showing activity fell at an increased rate from the month prior. The Philly Fed index declined to -7.5 from -2.2 in June, which was the best reading since September when Philly posted its last positive reading. Expectations were for the reading to come in at -4.5.
A number of sub-indices actually improved, but a large decline in shipments made the headline number appear possibly worse than things actually were.
New orders improved to -2.2 from -4.8.
Unfilled orders looked better, hitting -14.6 from -19.6.
Delivery times picked up to -10.3 from -18.9.
The workweek improved substantially to -15.5 from -26.6 in June.
While all of these readings remain in negative territory, these are nice improvements.The sub-index that caused the headline figure to worsen was the decline in shipments, which fell to -9.5 in July from +2.1 in June. This reading was surprising since the new orders index improved greatly in June to -4.8 from -25.9 in May – new orders generally portend the direction of shipments. Either the Philly region saw a big cancelation in orders or we’ll just have to wait another month for it to flow to shipments.
On EarningsIBM blew by their number, reporting really good bottom line results – and the numbers weren’t like many other results of late by which a firm easily hurdles a low estimate but the year-over-year results are down big. IBM’s year-over-year profit rose 17% (operating earnings basis) on massive cost-cutting. They have also moved into markets, specifically consulting within the electric grid market, that will benefit from government spending. However, the company repeated what Intel, among other techies, have stated: businesses continue to delay spending. This has been a concern of ours, as we’ve expressed for a while now, and I don’t see how the direction of policy eases this situation beyond the very necessary equipment purchases.
On the top-line, things were not so rosy as revenue fell 13%. The market is ok for now with cost-cutting as the catalyst for better-than-expected results, but by next quarter investors and traders are going to want to see meaningful improvement in final demand and that means higher revenue numbers.
Google was also out last night, reporting that earnings rose 18% from the year-ago period, but this was below expectations. They predicted that online advertising would decline another 10% this year and that a recovery in technology will take longer than expected.
Bank of America is probably the big earnings news of the morning – at least before the delivery of this letter. The bank reported per share profit that beat expectations by 36% but those results were 66% below year-ago results. CEO Ken Lewis predicted the weak economy will persist into 2010 – he knows what’s coming in terms of commercial real estate defaults.
The bright spots were mortgage lending (big revenues on refi activity) and global markets (trading of stocks, bonds and currencies). The consumer area, just as JP Morgan showed earlier in the week, continues to worsen.
Brent Vondera
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