U.S stocks pared mid-session gains but ended the day nicely higher, marking the fourth-straight day of increase. The broad market has moved a bit closer to fully erasing the losses of the previous two weeks as yesterday’s drivers were higher profit expectations and the most meaningful decline in jobless claims since January.
The earnings optimism followed results out of aluminum maker Alcoa. We touched on this yesterday, but I’ll just state again the optimism was pretty overdone. The firm achieved better-than-expected results only from a combination of major cost-cutting* (comment below) and China’s still voracious appetite for commodities as they seek to protect again dollar weakness. This sent average selling prices of aluminum higher by 24% for the quarter. The cash-for-clunkers program also provided a boost to Alcoa. Some are beginning to share this view this morning, fretting over the absence of aggregate demand, but yesterday the optimism over the company’s results definitely played a role in the rally.
What was more justified was the market’s rally on the jobless claims news. However, the 60% rebound from the March depths already reflect this degree of improvement in claims – let’s face it, it’s not like claims have moved down to 450K, which would still be elevated from a historical perspective – claims fell to 525K from 554K.
The leaders yesterday were energy, basic material, consumer discretionary and industrial shares. Telecom and health-care stocks were the laggards.
Volume showed there was a little more conviction in yesterday’s activity as roughly 1.2 billion shares traded in the NYSE Composite. This is still 8% below the six month daily average, but meaningfully better than the especially weak volume that accompanied the prior three-day rise in prices.
Longer-dated Treasury securities sold off yesterday (yields rose) after the $12 billion 30-year auction was not well bid. Investors had expected strong demand to meet this auction, particularly following very strong interest in Wednesday’s 10-year auction. The bid-to-cover ratio (gauge of demand) came in at 2.37, compared to 2.63 from the previous four auctions. Indirect bids (demand from foreign central banks) was just 34.5%, compared to 48.5% for the last four auctions.
One auction does not a trend make, but this is just something to keep our eyes on.
Market Activity for October 8, 2009
Jobless Claims
The Labor Department reported that initial jobless claims fell more than expected last week, down 33,000 to 521,000 (much better than the 19,000 decline forecasted). The previous week’s reading was revised a bit higher to show 554,000 in initial claims, 3,000 more than originally reported.
The four-week average fell to 539,750, the lowest level since the second week of January.
Continuing claims fell 72,000 to 6.04 million, but those moving to benefit extensions rose 67,000 – so this almost completely offsets the decline in the traditional measure of continuing of claims.
Just to touch on these extensions for new readers, when jobless benefits run the normal 26-week course there is a 20-week extension known as Emergency Unemployment Compensation (EUC). When those benefits run out there is an additional 13-week extension for most states. So this brings the total to 59 weeks.
(On top of that, the House passed an additional 13-week extension for people in states in which unemployment rates have hit at least 8.5%. This isn’t every state, a little more than half, but from a population perspective, this will cover the vast majority of the jobless who fail to find employment by the time benefits expire. The bill had ran into trouble in the Senate, not because members view more than a year of jobless benefits as a bad thing, but because 17 senators are objecting because their states would be excluded. I believe the Senate passed a measure last night that would provide extensions now to all states, but this will have to be reconciled with the House – I don’t it will run into a roadblock. Maybe I should start referring to Congress as parliament – this sounds a heck of lot more like France than the USA.)
What this jobless data for the first week of October tells us is that the pace of job cuts fell from the previous month, but firms remain reluctant to hire. The uninterrupted march higher in continuing claim extension rolls makes this abundantly clear.
Same-Store Retail Sales
Same-store sales (year-over-year sales results for stores open at least a year) rose 0.1% in September, marking the first increase in 14 months. The fact that same-store sales results have been in decline for this length of time is important to keep in mind as it means the comparisons to year-ago levels were quite easy.
The increase was helped by the discount retail components and drug sales. Wholesale club results (ex fuel sales) jumped 4.2%, drug-store retailers saw sales increase 3.7% and typical discount stores reported a 0.5% increase. The drags came from department stores, reporting a 2.3% decline; apparel stores, where sales fell 4.5%; and luxury stores that remain in a world of hurt, sales slid 8.5%. Still, with apparel results being the exception, September’s figures were an improvement from the large declines witnessed in previous months.
Wholesale Inventories
The Commerce Department reported that wholesale inventories fell 1.3% in August (the expectation was for a 1.0% decline). The July figure was revised lower to show a 1.6% contraction in stockpiles vs. the 1.4% drop initial estimated. This measure of inventories has declined for 13 consecutive months -- wholesale inventories account for roughly 25% of total business inventories.
The sales data did rise though, marking the fourth month of increase after a collapse that ran June 2008-March 2009. Excluding petroleum, sales rose for a second-straight month.
As a result, the inventory/sales ratio fell to 1.20 months worth from 1.23 months in July – down from the eight-year high of 1.34 months hit in January. The all-time low of 1.11 was hit in June 2008.
This is very good work on the inventory front, yet it does spell some issues for the third-quarter GDP report. Many had still been expecting the inventory dynamic to help catalyze GDP, but as we’ve been mentioning for a month now, that will probably be delayed, not showing up in earnest until the current quarter’s GDP reading is released.
Third-quarter GDP will get a boost from export activity and personal consumption (due to clunker-cash and back-to-school season) but little boost will arrive from the inventory side. That inventory dynamic should be quite robust for the fourth-quarter GDP report.
Bernanke’s Siren Song
Chairman Bernanke sang sweet sweet music to the equity markets last night by stating that there is no reason to even mildly raise rates. He offered the U.S. dollar lip service by stating that the central bank will be prepared to tighten when the outlook for the economy has “improved sufficiently.” However, his overriding statement was, “[m]y colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.” This was a shot across the bow to those Fed officials who have recently given speeches and written Op/Eds on the need for the FOMC to aggressively tighten policy in short order. This also flashed the green light to the easy-money trade.
The first 35% move of this stock-market rally from the depths of last March was completely justified; it was a typical move off of the oversold levels of March 9, 2009. However, the last 25% of this surge has purely been a zero interest-rate policy trade. It has nothing to do with economic fundamentals and the lurch forward from here makes the situation that much more dangerous for those attempting to trade this thing and wring evermore return.
Just as in Greek mythology, the Sirens (the seductive bird-women of Anthemusa) would entice sailors to the shores of their island with their enchanting music and voices, the comments from Bernanke were equally alluring. But the island was rocky and the shore abruptly shallow; the undisciplined sailors would shipwreck on the jagged coast.
Thus the term “siren song,” an appeal that is tough to resist, and if not repelled will lead to…well, a less than desirable result.
*Just to explain on the cost-cutting comment above. I would normally view this as a good thing; this is a beneficial effect of recessions as it causes firms to streamline. When the business cycle rebounds and sales come back firms are then more profitable. Long-term readers may remember me expressing optimism over the cost-cutting that occurred during the 2001-2002 downturn. But this time is vastly different. The aggressive nature of cost-cutting, particularly the slashing of payrolls, will make the rebound in final demand much more delayed. Further, we are dealing with much higher debt levels that will have to be worked down. The combination of high debt levels and abnormally high unemployment will keep final demand weak, which will very likely put pressure on profit growth after a two-quarter rebound coming off of very low levels.
Have a great weekend!
Brent Vondera, Senior Analyst
The earnings optimism followed results out of aluminum maker Alcoa. We touched on this yesterday, but I’ll just state again the optimism was pretty overdone. The firm achieved better-than-expected results only from a combination of major cost-cutting* (comment below) and China’s still voracious appetite for commodities as they seek to protect again dollar weakness. This sent average selling prices of aluminum higher by 24% for the quarter. The cash-for-clunkers program also provided a boost to Alcoa. Some are beginning to share this view this morning, fretting over the absence of aggregate demand, but yesterday the optimism over the company’s results definitely played a role in the rally.
What was more justified was the market’s rally on the jobless claims news. However, the 60% rebound from the March depths already reflect this degree of improvement in claims – let’s face it, it’s not like claims have moved down to 450K, which would still be elevated from a historical perspective – claims fell to 525K from 554K.
The leaders yesterday were energy, basic material, consumer discretionary and industrial shares. Telecom and health-care stocks were the laggards.
Volume showed there was a little more conviction in yesterday’s activity as roughly 1.2 billion shares traded in the NYSE Composite. This is still 8% below the six month daily average, but meaningfully better than the especially weak volume that accompanied the prior three-day rise in prices.
Longer-dated Treasury securities sold off yesterday (yields rose) after the $12 billion 30-year auction was not well bid. Investors had expected strong demand to meet this auction, particularly following very strong interest in Wednesday’s 10-year auction. The bid-to-cover ratio (gauge of demand) came in at 2.37, compared to 2.63 from the previous four auctions. Indirect bids (demand from foreign central banks) was just 34.5%, compared to 48.5% for the last four auctions.
One auction does not a trend make, but this is just something to keep our eyes on.
Market Activity for October 8, 2009
Jobless ClaimsThe Labor Department reported that initial jobless claims fell more than expected last week, down 33,000 to 521,000 (much better than the 19,000 decline forecasted). The previous week’s reading was revised a bit higher to show 554,000 in initial claims, 3,000 more than originally reported.
The four-week average fell to 539,750, the lowest level since the second week of January.
Continuing claims fell 72,000 to 6.04 million, but those moving to benefit extensions rose 67,000 – so this almost completely offsets the decline in the traditional measure of continuing of claims.
Just to touch on these extensions for new readers, when jobless benefits run the normal 26-week course there is a 20-week extension known as Emergency Unemployment Compensation (EUC). When those benefits run out there is an additional 13-week extension for most states. So this brings the total to 59 weeks.(On top of that, the House passed an additional 13-week extension for people in states in which unemployment rates have hit at least 8.5%. This isn’t every state, a little more than half, but from a population perspective, this will cover the vast majority of the jobless who fail to find employment by the time benefits expire. The bill had ran into trouble in the Senate, not because members view more than a year of jobless benefits as a bad thing, but because 17 senators are objecting because their states would be excluded. I believe the Senate passed a measure last night that would provide extensions now to all states, but this will have to be reconciled with the House – I don’t it will run into a roadblock. Maybe I should start referring to Congress as parliament – this sounds a heck of lot more like France than the USA.)
What this jobless data for the first week of October tells us is that the pace of job cuts fell from the previous month, but firms remain reluctant to hire. The uninterrupted march higher in continuing claim extension rolls makes this abundantly clear.
Same-Store Retail Sales
Same-store sales (year-over-year sales results for stores open at least a year) rose 0.1% in September, marking the first increase in 14 months. The fact that same-store sales results have been in decline for this length of time is important to keep in mind as it means the comparisons to year-ago levels were quite easy.
The increase was helped by the discount retail components and drug sales. Wholesale club results (ex fuel sales) jumped 4.2%, drug-store retailers saw sales increase 3.7% and typical discount stores reported a 0.5% increase. The drags came from department stores, reporting a 2.3% decline; apparel stores, where sales fell 4.5%; and luxury stores that remain in a world of hurt, sales slid 8.5%. Still, with apparel results being the exception, September’s figures were an improvement from the large declines witnessed in previous months.
Wholesale Inventories
The Commerce Department reported that wholesale inventories fell 1.3% in August (the expectation was for a 1.0% decline). The July figure was revised lower to show a 1.6% contraction in stockpiles vs. the 1.4% drop initial estimated. This measure of inventories has declined for 13 consecutive months -- wholesale inventories account for roughly 25% of total business inventories.
The sales data did rise though, marking the fourth month of increase after a collapse that ran June 2008-March 2009. Excluding petroleum, sales rose for a second-straight month.
As a result, the inventory/sales ratio fell to 1.20 months worth from 1.23 months in July – down from the eight-year high of 1.34 months hit in January. The all-time low of 1.11 was hit in June 2008.
This is very good work on the inventory front, yet it does spell some issues for the third-quarter GDP report. Many had still been expecting the inventory dynamic to help catalyze GDP, but as we’ve been mentioning for a month now, that will probably be delayed, not showing up in earnest until the current quarter’s GDP reading is released.
Third-quarter GDP will get a boost from export activity and personal consumption (due to clunker-cash and back-to-school season) but little boost will arrive from the inventory side. That inventory dynamic should be quite robust for the fourth-quarter GDP report.
Bernanke’s Siren Song
Chairman Bernanke sang sweet sweet music to the equity markets last night by stating that there is no reason to even mildly raise rates. He offered the U.S. dollar lip service by stating that the central bank will be prepared to tighten when the outlook for the economy has “improved sufficiently.” However, his overriding statement was, “[m]y colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.” This was a shot across the bow to those Fed officials who have recently given speeches and written Op/Eds on the need for the FOMC to aggressively tighten policy in short order. This also flashed the green light to the easy-money trade.
The first 35% move of this stock-market rally from the depths of last March was completely justified; it was a typical move off of the oversold levels of March 9, 2009. However, the last 25% of this surge has purely been a zero interest-rate policy trade. It has nothing to do with economic fundamentals and the lurch forward from here makes the situation that much more dangerous for those attempting to trade this thing and wring evermore return.
Just as in Greek mythology, the Sirens (the seductive bird-women of Anthemusa) would entice sailors to the shores of their island with their enchanting music and voices, the comments from Bernanke were equally alluring. But the island was rocky and the shore abruptly shallow; the undisciplined sailors would shipwreck on the jagged coast.
Thus the term “siren song,” an appeal that is tough to resist, and if not repelled will lead to…well, a less than desirable result.
*Just to explain on the cost-cutting comment above. I would normally view this as a good thing; this is a beneficial effect of recessions as it causes firms to streamline. When the business cycle rebounds and sales come back firms are then more profitable. Long-term readers may remember me expressing optimism over the cost-cutting that occurred during the 2001-2002 downturn. But this time is vastly different. The aggressive nature of cost-cutting, particularly the slashing of payrolls, will make the rebound in final demand much more delayed. Further, we are dealing with much higher debt levels that will have to be worked down. The combination of high debt levels and abnormally high unemployment will keep final demand weak, which will very likely put pressure on profit growth after a two-quarter rebound coming off of very low levels.
Have a great weekend!
Brent Vondera, Senior Analyst
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