Financials led the rally after AIG’s CEO stated he believes the firm will be able to pay back the government. He didn’t give a timeline of course. AIG is on the hook for $182.5 billion and it is unlikely that the bailout money will be repaid in a decade, we’ll see.
Industrial and energy shares were also among the top performers on the news out of the Philly survey. All 10 major industry groups closed higher on the session.
Advancers beat decliners by a four-to-one margin on the NYSE, although volume remains weak with fewer than one billion shares traded on the Big Board. Yes, it’s late August, which is always a light-trading period, but these are below normal levels. This has been an issue with the latest leg of this rally as conviction doesn’t seem robust even though the market has shaken off most of the weak data days.
Market Activity for August 20, 2009
Jobless ClaimsThe Labor Department reported that initial jobless claims rose 15,000 to 576,000 in the week ended August 15. The previous week’s reading of 550K in initial claims was revised up to 561K. While the level of claims has come down from the 625K average during the first-half of the year, this range is still very high as the chart below illustrates.
This latest claims data coincides with the week the government collects its numbers for the August jobs report, so the boost in claims indicates we’ll see this month’s payroll losses exceed the July reading.
The four-week average of initial claims rose 4,250 to 570K.
Continuing claims rose marginally, up 2,000 to 6.241 million. This number too is nicely off of its peak, but remains extremely elevated. The decline from the apex of nearly 7 million in cont. claims appears to be due to the expiry of benefits rather than a new cycle of job creation – the latest monthly employment report showed jobs losses (while also off of their peak) continue at a level that is at the higher end of what is typically seen during the normal recession.
This chart of the exhaustion rate helps to illustrate the point that the decline in continuing claims is more a function of benefits running out rather than incipient job creation.
A measure of long-term unemployment, those that have been out of work for at least 27 weeks, is another indicator that continuing claims may rise again as jobless benefits are extended, which is coming.
I think it will be a few more months before monthly job losses become mild – by mild we mean less than 100K in monthly losses. We mentioned a few months ago that the job-market weakness will ease to levels that mirror the typical recession, and that appears to be occurring. But the labor market will remain rough for an extended period in my opinion and the unemployment rate will remain near double-digit territory. It takes 140K in monthly job creation to keep pace with population growth and keep the jobless rate from rising.Leading Economic Indicators (LEI)
The index of leading economic indicators rose for a fourth-straight month for July, up 0.6% -- the expectation was for a rise of 0.7%.
This trend is a very nice sign, and surely many will view this recent rebound as a reason to believe the economy is on the mend. For sure, that notion is largely correct, things have improved markedly from the deep recessionary levels of late/2008-early/2009 but just as I cautioned last month, one has to be leery of putting too much credence in this reading this go around. And yes, things are different this time (heck, look at corporate bond spreads, a chart I’ve put up in prior letters, that remain at previous recessionary levels, even if much narrower than the “Armageddon” spreads of early this year, and this is even with massive government back-stopping within the credit markets – off on a bit of a tangent there but just wanted to point that out).
For instance, the three components of the LEI index that pushed that reading higher for July were the average workweek, jobless claims and Treasury interest-rate spreads.
On the workweek, when this rises it generally indicates job growth is not far behind, but I don’t think job creation is going to make a come back any time soon after what businesses have been through and their concern about the degree of the recovery. Additionally, average workweek rose in July but just barely (up six minutes per week) from the all-time low hit in June. If past is prologue, it takes about a ½ hour increase in the workweek before job creation begins to come back. This time, since we’re coming from an all-time low, it may take a full hour and at this rate that will take a while.
On jobless claims, as touched on above, the August data showed the reading remains extremely elevated and will probably hurt LEI’s August reading.
On interest-rate spreads, this is normally one of the best forward indicators. When the spread between the short and long ends of the Treasury curve widens, and it is very near record wides right now, it indicates that bank lending activity will roar. But this time is a bit different as the demand for loans is depressed due to consumer debt levels in the face of high joblessness and business caution (C&I loan activity continues to decline). Even the most favorable interest-rate dynamics for the banks, borrow near zero and lend at 5-6%, will not change the demand side – only time will fix this issue.
So the overall point is the market should be careful in interpreting this figure, getting too excited could set us up for a significant decline in stock prices if actual economic growth does not improve as directly as LEI appears to be suggesting. Besides, the surge in stock prices from the March lows, at least the back-half of this rally, seems to already price in the boost to GDP by year end due to the inventory dynamic.
Philly Fed
The Philly Fed survey, a gauge of factory activity within the Federal Reserve Bank of Philadelphia’s region, hit positive territory for the first time in 11 months. The reading came in at 4.2 for August vs. the -7.5 for July and has improved massively from the deep contractionary levels of the fall of 2008 through the spring of 2009. The expectation was for the gauge to come in at -2.2, so beating that estimate and moving to expansion mode was big news.
The sub-indices showed nice improvement, although some remain in contraction mode. New orders rose to 4.2 from -2.2; shipments increased to 0.6 from -9.5; unfilled orders rose to -9.3 from -14.6; inventories hit 0.3 from -15.4 (the best news in this report as an increase in stockpiles illustrates at least some degree of confidence regarding the future; it snapped a streak of 22 months of decline); and the average workweek rose to -6.3 from -15.5.All of the manufacturing figures are pointing higher, with Philly and Empire (the New York factory gauge) rebounding the most. The largest regional factory survey, the Chicago Purchasing Managers Index, remains in contraction mode, as does the nationwide ISM figure, but both are on their way to expansion.
I suspect they’ll hit expansion territory by the September readings, but the bounce may prove short-lived as “cash for clunkers” will boost auto production in a transitory manner. It all depends on the overall inventory dynamic. If firms boost stockpiles for a length of time that last a couple of quarters, it will offset what may be another round of auto production weakness by late/2009-early/2010. If the cautious mindset within the business community remains elevated, however, these factory gauges will retrench. Really too early to tell right now, but it is hardly a given that we’ll soon see a rebound that has the legs that is typical of the normal expansion.
(On the clunkers program, as you probably know, it will come to an end on Monday, I think it was originally planned to expire in November. The government can’t administer the program and dealerships are dropping out for fear they won’t get paid. The administration wants to pull the plug on this thing because it shines a light on the operational incompetence of government and does additional damage to their universal health-care agenda – if so, this is the best $3 billion the government has ever spent. Again, these are my opinions and not the firm’s)
Mortgage Delinquencies
No comment required, see chart.
Have a great weekend!
Brent Vondera, Senior Analyst
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