Daily Insight

Due to technical difficulties, tables and graphs will posted later.

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U.S. stocks engaged in a post-Labor Day rally as traders came back looking to get in on this thing. The market held onto the rally despite a plunge in consumer credit for July, which followed a huge downward revision for June. While this is a backward-looking indicator, credit is kind of a key driver for economic growth, so in that sense it was surprising to see stocks hold momentum – more on this below.

Commodity related shares led the rally as energy and basic materials were the best-performing sectors. Industrial and consumer stocks were close behind. The laggards were the traditional safe-havens, utilities and health-care – the latter being the only of the 10 major industry groups to close down on the session.

Volume was a bit more robust yesterday now that the summer vacation season has ended as 1.275 billion shares traded on the NYSE Composite. While this is fairly weak activity from a longer-term perspective, about 12% below the two-year average, it is nearly 10% above the three-month average. Advancers beat decliners by close to a three-to-one margin.

The latest Treasury auction, this one for $38 billion of three-year notes went off without a hitch. The massive supply that is coming through is not causing any problems yet as the notes came in at a yield of 1.487%, below the 1.493% just before the auction, and the bid-to-cover ratio (the main gauge of demand) was strong, at 3.02 – the average from the past 10 auctions is 2.58.

Market Activity for September 8, 2009
Gold’s Three-Peat

The price on the front month gold futures moved above $1,000 yesterday, before pulling back to $995. For reference, it crossed the four-figure mark for the first time in March 2008 and for the second time during the “welcome to the jungle” period back in late February. While equity traders, always short-term in their thinking, favor easy money Fed policy, gold investors may be looking beyond the here and now to the cost the economy will have to bear as result of another round of prolonged easy money, along with runaway fiscal spending and heightened geopolitical risks (North Korea’s claim to have weaponized plutonium, rough going in Afghanistan and the uncertainties that loom between Israel and Iran).

And speaking of Iran, quickly, I see their president carted himself over to Venezuela this past weekend to cement a deal with Hugo Chavez in which he’ll provide Iran with gasoline. Why is this important? Because it is one of Iran’s major weaknesses; they have loads of oil, but little capacity with which to refine it. That was to be one of the most effective sanctions we had, whenever it is that we were to get around to using it. That one appears to be off the table right now, the options are dwindling. And then in an Op-Ed yesterday, the venerable Manhattan DA Robert Morgenthau suggests that Iran may be building weapons in Chavez country – I’ve got a feeling Mohamad El Baradei and the IAEA aren’t looking there. Sorry for the digression but is kind of an important element in explaining one of the reasons gold is on the rise.

Further, we can see by way of the past couple of TIC reports (data that shows foreign flows into the U.S. Treasury security market) that China is shifting their purchases to the short-end of the curve, buying more T-bills and easing their purchases of T-notes and bonds. While the Chinese must continue to buy dollar-denominated assets for fear their own currency will rally and harm export activity, they can accomplish this and still hedge against dollar weakness by keeping things short. They can go a step further, which I believe they are doing, by also purchasing hard assets, like gold. This will help them to hold down the risk of future dollar damage.


Let me make clear, one can never tell where gold is going – and obviously this is true with everything but especially so on the gold trade. As a result, owning commodity-related stocks (with their earnings streams and dividends) seems like a more reasonable play to us, especially for those that have more than a very short-term trading mindset.

In addition, while one has to acknowledge that things are set up to favor gold over the next two years, there’s always the risk of the trade shifting to oil – it would get the dollar-hedge/uncertainty trade accomplished just the same.

I bring this topic up because gold’s move over the past few sessions seems like an important market development. I’m not specifically advocating a position in gold at this level as it hardly seems practical to chase these things; waiting for pullbacks in this market seems the more appropriate course. That said, at least coming from someone who does have concern over the chances for harmful levels of inflation to result and heightened geopolitical risks, it’s tough to argue against the gold bulls.


Latest NFIB Survey

It’s been a while since I’ve reported on the monthly National Federation of Independent Business survey (small business optimism on economic trends), so long in fact even longer-term readers have likely forgotten it. There have been so many things to talk about and we can only fit so much into this letter on a daily basis.

Anyway, the NFIB’s survey for August showed a slight decline of 1.3 points to 86.5. This marks the second month of decline after the survey rebounded off of its lowest reading for this recession, which was 81.0 in March – the all-time low was hit in 1981 at just below 80.0. The main cause for the August decline was deterioration in expectations that business conditions would improve six months out.

On hiring plans, the net percent planning to hire (firms planning to “increase” hiring minus those planning to “decrease”) over the next three months fell to -3 from -1 in July; prior to this recession, you have to go back to the 1980 recession for the last time this measure recorded a negative reading. Owners stated they are reducing compensation, on average, as well.

These are not good trends for the employment picture since small business is the main engine for U.S. job creation and obviously doesn’t speak well to the chances of consumer activity making a sustained comeback. This is a theme we’ve touched on for some time now.

In another theme we’ve spent time on, the low likelihood that firms will increase capital spending outlays in a manner that is consistent with that seen during the normal recovery, this survey showed capital outlay plans over the next three months was essentially unchanged at 18, just above the all-time low of 16 hit in March. Only 5% of firms characterized the current period as a good time to expand facilities, a very low historical reading.

In addition, NFIB showed small business owners continue to liquidate inventories, this segment of the survey remains at a record low, and plans to increase inventories over the next 3-6 months remains low at -5 (but nothing near the record low of -15 back in 1980 – of course you had more inventory bloat back then).

I continue to believe current-quarter GDP will get a boost from inventory rebuilding (that inventory dynamic we keep referring to) but it may be quite tempered and the more data we view it appears the economy will have to wait until the fourth quarter for the big inventory boost.

The commentary from the survey stated “consumers and business owners’ emergency reserves are depleted, jobs have not returned, and the stimulus seems to have failed on the ground (even if observers agree its effects are yet to come, expectations were set for a quick rescue). The recession is wearing Main Street folks down.”

Small business is very important for our economy and it appears things have yet to improve much for this vital segment.

Consumer Credit

Finally, the Federal Reserve reported that consumer credit took a big hit in July, down $21.6 billion, or 10% at an annual rate. That was more than five times as much as forecast as banks restricted lending and the demand for loans declined due to the labor market conditions and already heightened debt levels.

Revolving loans, such as credit cards, fell $6.1 billion, or 8%, and non-revolving, such as auto loans, fell $15.4 billion, or nearly 12%. (Mortgage loans are not included in this data)

This is something to keep our eyes on, especially considering the shape the labor market is in, and the real possibility that the jobless rate will remain above average for a prolonged period this go around. The fact that we don’t have credit to grease the wheel this time may make it so. This is a harsh, but needed, reality for longer-term stability. In the near term, as consumers reduce debt it will weigh on economic activity.

The whole process of the debt paydown may very much have been delayed by the clunker-cash scheme. I would expect we’ll see the August reading on consumer credit rise on increased car loans (which ran at an average 92% loan-to-value in July – whoa!). This will help in the short term but put back the process needed, which is a reduction in debt levels.


Have a great day!


Brent Vondera, Senior Analyst