Daily Insight

U.S. stocks extended the latest winning streak to five-sessions as this peach of a market shows it has some juice left. A larger-than-expected drop in jobless claims, an increased forecast for oil demand and another Treasury auction that went swimmingly all provided impetus for the rally. (On the auction, it appears enough people just can’t keep enough of a 4.2% yield for 30 years – at some point the music’s going to stop but it appears it may be a while still.

Something does appear to be askew. Stock prices are rallying like the economy is out of the woods, yet the bond market is trading like it remains in a dark and dangerous place. Sure the Fed’s QE program (bond purchases) is skewing things, but I’ve got to say the differing outlooks from both of these market is extremely strange to watch.

Telecoms, energy and consumer discretionary shares led the rally.

Telecoms got a boost from an increased demand and sales forecast from Texas Instruments. The energy trade got a lift from the IEA’s boosted forecast for oil demand. Consumer discretionary shares may have been fueled by the initial jobless claims data, but as we’ll discuss below I’m not sure the numbers were suggesting consumer activity will surge any time soon. The index that tracks the group has been hot over the past two months, up 25% -- it now trades at a multiple that is above the long-term average; it seems the bid may have some unjustified euphoria in it with the jobless rate on its way to 10%.

We finally saw some good volume yesterday as roughly 1.5 billion shares traded on the NYSE Composite -- 28% above the three-month average.

Market Activity for September 10, 2009
Jobless Claims

The Labor Department reported that initial jobless claims fell 26,000 for the week ended September 5 – beating the expectation for a decline of just 10K, but the prior week’s number was revised up by 6K so it wasn’t off by quite that much. This is a really nice move lower, even if it is off of an upwardly revised number, after three weeks of averaging above 575K. Don’t get me wrong, as the chart we post each week illustrates, initial claims remain sky high, but this is a welcome decline.

The four-week average fell 2,750 to 570,000.

Continuing claims fell big, down 159,000 to 6.088 million. This is the closest we’ve gotten to the 5 million handle since April.

I still don’t think one can view the decline in continuing claims as a sign that job creation has begun, which believe it or not is what some took from the reading based on headlines. This is more a function of people exhausting benefits – Emergency Unemployment Compensation (an extension of benefits after they are exhausted) rose 73K to a new high of 3.102 million.

In addition, nothing in the monthly employment reports suggests such a thing. First, you must see an increase in temporary hirings before more permanent positions are created, and this segment of the data declined for the 20th straight month in August -- although the rate of decline has slowed. Further, you must see the duration of employment make a move lower. Yes, the average duration of unemployment (in weeks) fell to 24.9 in August, but this is just slightly off of the post-WWII high of 25.1 weeks in July.

What’s more, the percentage of those jobless for 52 weeks is still on the rise, as of the latest data.
But what this data does show is the degree of monthly job declines should continue to move in the correct direction. One hopes the monthly decline in payrolls will dip below the 200K level by the next employment report and this will enable us to get back to sub-100K losses (a statistically insignificant level) by early 2010.

The big question is, when will actual job creation occur? This varies by economic expansion. I’ve got a feeling since the bulk of the stimulus spending will arrive in 2010, we’ll see some payrolls added more quickly than is typically the case – largely via the construction industry.

However, the massive increase in government spending does crowd out the private sector (capital is diverted to buy the bonds to finance this spending and higher tax rates that follow damage profits) and also results in a prolonged period of caution among business decision makers. As a result, this largely offsets the short-term boost that will result from public spending and keeps the jobless rates high for a longer period of time than would otherwise be the case. We must remember that government construction jobs are not very permanent. When the road or building project is complete, that worker is out of a job again if the private sector is not there to pick them up. This was the lesson learned the last time we engaged in public projects on this scale. Some lessons need to be relearned apparently.

Trade Deficit

The trade deficit widened in July as the increase in imports outpaced that of exports. The figure widened to $32.0 billion in July from $27.5 billion for June.

Exports were up 2.2% for the month, driven by a 24.5% jump in auto exports, an 8.7% jump in computer-related equipment and an 8.1% rise in commercial aircraft. Imports increased 4.7%, driven by (again) a 21.5% boost in autos – clunker-cash baby, a 17% jump in commercial aircraft and a price-driven 7.6% rise in oil imports.

While these specifics are nice to talk about, and people who watch these things must be aware of what’s driving the figures, there are two main things people should take from this data:

One, you watch the import numbers as a gauge of consumer activity. The fact that autos were the main driver (and will be even more so for the August figure), helped immensely no doubt by Uncle Sugar’s clunker cash, is probably a sign that the boost in import activity will be short-lived.

Two, the direction of the deficit gap has implications for GDP. The trade figure had narrowed in the previous two quarters and that helped to ease the contraction within the GDP readings. Now, the deficit is widening again, and any boost from auto production due to the clunker scheme will be partially offset by imports outpacing exports – one of the components of GDP is net exports (exports – imports). Thus when the deficit widens, it does subtract some from GDP.

We will get the first positive GDP print (third quarter) after four quarters of decline. However, this increase will be held back by the widening in the trade deficit and the relative unwillingness for firms to boost inventory levels, which doesn’t appear likely to really show up in GDP until the fourth quarter.

September 11

It has been eight years now, as time passes are we returning to a 9/10 mindset?


Have a great weekend!


Brent Vondera, Senior Analyst