U.S. stocks fell on Friday, the biggest one-day hit in about four months, as a drop in consumer spending for September (this should have been expected) and the employment gauge in the latest manufacturing survey both increased concerns that stocks have gotten ahead of realties on the ground.
Of course, we’ll just have to wait and see if this is simply a correction phase after the significant rally from the March depths or something more serious. There is little doubt the economic picture remains quite troubling, especially with regard to the banking industry’s woes and the ramifications this has on economic growth over the next 12-18 months.
The sectors that have led this rally got smoked on Friday as financials lost 4.75%, basic materials slid 3.82% and energy fell 3.49%.
We’ve seen a lot of people talk about the reflation trade, commodity and energy stocks, but these groups are likely to pull back meaningfully before rising again. These areas were places investors should have been looking to get into back in March, but not after their huge run from those late-winter lows. This is one reason I’ve ripped on the bandwagon tendencies of Wall Street. There’s been a lot of “strong buy” recommendations on the commodity stocks lately, a dangerous thought for those looking to make a quick buck – basic materials soared 80% from their lows before this latest reversal.
The broad market ended the month down 1.98%, the first monthly decline in eight months. However, on a 12-month rolling return basis, the S&P 500 marked its first positive return in 22 months.
Market Activity for October 30, 2009
Personal Income and Spending
The Commerce Department reported that personal income was flat in September, as another strong month for rental income and an outsized rise (from historical average not in terms of this new larger government world we now live in) in government transfer payments offset declines in the most important segments – compensation and wage & salary.
In terms of those segments, compensation fell 0.1% in September (down 4.3% y/o/y); wage & salary fell 0.2% (down 5.2% y/o/y); proprietor’s income rose 0.1% (down 6.3% y/o/y); rental income rose 1.9% (up a large 24.2% y/o/y); interest income down 0.6% (down 8.3% y/o/y ); dividend income down 1.3% (smashed by 25.4% y/o/y); and transfer payments – out of your pocket and into others’ – rose 0.8% (up 13.5% y/o/y).
So, we continue to see incomes in general continue to erode, without the $17.3 billion in transfer payments personal income would have been down about 0.2% last month. But this is no surprise as the very weak labor market means that the two most important segments of this data (compensation and wage/salary) are going down. So not to totally disrespect the retired, of course interest income is an important number also, you can thank the Fed’s ZIRP for much of this erosion.
On the spending side, consumption fell 0.5% in September after the “cash for clunkers” (CFC) and back-to-school/sales tax holiday induced jump of 1.3% in August.
Spending on durables got clocked, down 7% last month after CFC boosted the figure by 6.1% in August. Funny though, the decline in September completely erases the August gain and puts the durable spending figure below that seen in July. So as we’ve been talking about the clunker cash scheme was completely a one-and-done event.
Spending on non-durables was solid though, up 0.7% in September after the BTS/sales tax holiday induced 2.2% jump in August.
The saving rate increased to 3.3% from 2.8% in August. I love this one. Policy makers are doing everything they can to make sure this figure doesn’t rise above 4% as they keep coming up with schemes to keep people spending. The cash savings rate moved to 4.0% early in the year and hit 5.9% in May before the government came up with the clunker cash program that pushed it back down.
But all we’re doing is delaying what needs to occur. Households need to boost cash savings as stock and home prices have been pounded (stocks down 30% from the peak and homes down 25%). The cash savings rate needs to go to 6%-8% and stick there before consumer spending can trend higher in a sustained manner.
Via Thursday’s GDP report we see consumer spending rose to a post-WWII high of 71% of GDP. This figure needs to, and will, move back to the historic average of 65% of GDP, particularly due to high unemployment. When the bill for this spending comes due (higher tax rates) and the Fed must eventually unwind its unprecedented monetary easing experiment (higher interest rates) consumer spending will move back down to that historic average and the hit to economic growth will be felt as a result. I do not enjoy effusing this negative tone, but it is the reality of things; wishful thinking has no place in the world in which we currently live.
Chicago PMI
The Chicago Purchasing Managers Index printed a blowout number (for this environment) with several of the sub-indices up big; however, the employment figure declined ans remains in deep contraction mode. Maybe this is why stocks sold off even as the headline figure was strong.
The reading for the most important regional factory survey came in at 54.2 for October (highest since September 2008 – significant date, credit meltdown began) , which easily beat the forecast of 49. The September reading was 46.1.
The new orders index jumped to 61.4 from 46.3; order backlog rose to 41.9 from 36.7; delivery times 50.7 from 49.3; inventories remain in the dirt, falling another seven points to 32.2. Nevertheless, if October’s strength in new orders continues it will signal a good pace of inventory rebuilding will ensue. But it will take a solid new orders trend.
The number of employees figure dipped to remain at low level of 38.3. Unfortunately, Chicago PMI does not offer an average workweek (hours worked per week) reading. This is a key number to watch for the factory sector in general as firms will squeeze every bit they can out of the existing workforce before adding to payrolls.
The market will be intensely focused on the employment figure in today’s ISM reading (nationwide manufacturing survey) as economists attempt to gauge the October jobs report for signs at to whether the pace of job losses trend lower or remain at past recessionary levels.
Futures
U.S. stock-index futures are higher this morning on strong, and trending higher, PMI (Purchasing Managers Index) out of China. China’s huge and infrastructure-focused stimulus is boosting manufacturing activity in the country. Their $586 billion stimulus amounts to 18% of GDP. For an equivalent here in the U.S. we’d have to triple our $787 billion fiscal stimulus.
The Chinese government has also directed banks to lend. Credit expansion has doubled in the past six months and this is also boosting activity. But can it last? The global economic environment does not seem to be self-supporting. Even China’s Commerce Minister warned that the global economy may “plunge” if nations withdraw support measures.
And speaking of support, Ford’s earnings results are just out and the automaker posted its first profit in North America since the first quarter of 2005. A lot of this was due to cost cutting, but clunker cash was another factor. Thanks Uncle Sugar!
Have a great day!
Brent Vondera, Senior Analyst
Of course, we’ll just have to wait and see if this is simply a correction phase after the significant rally from the March depths or something more serious. There is little doubt the economic picture remains quite troubling, especially with regard to the banking industry’s woes and the ramifications this has on economic growth over the next 12-18 months.
The sectors that have led this rally got smoked on Friday as financials lost 4.75%, basic materials slid 3.82% and energy fell 3.49%.
We’ve seen a lot of people talk about the reflation trade, commodity and energy stocks, but these groups are likely to pull back meaningfully before rising again. These areas were places investors should have been looking to get into back in March, but not after their huge run from those late-winter lows. This is one reason I’ve ripped on the bandwagon tendencies of Wall Street. There’s been a lot of “strong buy” recommendations on the commodity stocks lately, a dangerous thought for those looking to make a quick buck – basic materials soared 80% from their lows before this latest reversal.
The broad market ended the month down 1.98%, the first monthly decline in eight months. However, on a 12-month rolling return basis, the S&P 500 marked its first positive return in 22 months.
Market Activity for October 30, 2009
Personal Income and SpendingThe Commerce Department reported that personal income was flat in September, as another strong month for rental income and an outsized rise (from historical average not in terms of this new larger government world we now live in) in government transfer payments offset declines in the most important segments – compensation and wage & salary.
In terms of those segments, compensation fell 0.1% in September (down 4.3% y/o/y); wage & salary fell 0.2% (down 5.2% y/o/y); proprietor’s income rose 0.1% (down 6.3% y/o/y); rental income rose 1.9% (up a large 24.2% y/o/y); interest income down 0.6% (down 8.3% y/o/y ); dividend income down 1.3% (smashed by 25.4% y/o/y); and transfer payments – out of your pocket and into others’ – rose 0.8% (up 13.5% y/o/y).
So, we continue to see incomes in general continue to erode, without the $17.3 billion in transfer payments personal income would have been down about 0.2% last month. But this is no surprise as the very weak labor market means that the two most important segments of this data (compensation and wage/salary) are going down. So not to totally disrespect the retired, of course interest income is an important number also, you can thank the Fed’s ZIRP for much of this erosion.
On the spending side, consumption fell 0.5% in September after the “cash for clunkers” (CFC) and back-to-school/sales tax holiday induced jump of 1.3% in August.
Spending on durables got clocked, down 7% last month after CFC boosted the figure by 6.1% in August. Funny though, the decline in September completely erases the August gain and puts the durable spending figure below that seen in July. So as we’ve been talking about the clunker cash scheme was completely a one-and-done event.
Spending on non-durables was solid though, up 0.7% in September after the BTS/sales tax holiday induced 2.2% jump in August.
The saving rate increased to 3.3% from 2.8% in August. I love this one. Policy makers are doing everything they can to make sure this figure doesn’t rise above 4% as they keep coming up with schemes to keep people spending. The cash savings rate moved to 4.0% early in the year and hit 5.9% in May before the government came up with the clunker cash program that pushed it back down.
But all we’re doing is delaying what needs to occur. Households need to boost cash savings as stock and home prices have been pounded (stocks down 30% from the peak and homes down 25%). The cash savings rate needs to go to 6%-8% and stick there before consumer spending can trend higher in a sustained manner.Via Thursday’s GDP report we see consumer spending rose to a post-WWII high of 71% of GDP. This figure needs to, and will, move back to the historic average of 65% of GDP, particularly due to high unemployment. When the bill for this spending comes due (higher tax rates) and the Fed must eventually unwind its unprecedented monetary easing experiment (higher interest rates) consumer spending will move back down to that historic average and the hit to economic growth will be felt as a result. I do not enjoy effusing this negative tone, but it is the reality of things; wishful thinking has no place in the world in which we currently live.
Chicago PMI
The Chicago Purchasing Managers Index printed a blowout number (for this environment) with several of the sub-indices up big; however, the employment figure declined ans remains in deep contraction mode. Maybe this is why stocks sold off even as the headline figure was strong.
The reading for the most important regional factory survey came in at 54.2 for October (highest since September 2008 – significant date, credit meltdown began) , which easily beat the forecast of 49. The September reading was 46.1.
The new orders index jumped to 61.4 from 46.3; order backlog rose to 41.9 from 36.7; delivery times 50.7 from 49.3; inventories remain in the dirt, falling another seven points to 32.2. Nevertheless, if October’s strength in new orders continues it will signal a good pace of inventory rebuilding will ensue. But it will take a solid new orders trend.The number of employees figure dipped to remain at low level of 38.3. Unfortunately, Chicago PMI does not offer an average workweek (hours worked per week) reading. This is a key number to watch for the factory sector in general as firms will squeeze every bit they can out of the existing workforce before adding to payrolls.The market will be intensely focused on the employment figure in today’s ISM reading (nationwide manufacturing survey) as economists attempt to gauge the October jobs report for signs at to whether the pace of job losses trend lower or remain at past recessionary levels.Futures
U.S. stock-index futures are higher this morning on strong, and trending higher, PMI (Purchasing Managers Index) out of China. China’s huge and infrastructure-focused stimulus is boosting manufacturing activity in the country. Their $586 billion stimulus amounts to 18% of GDP. For an equivalent here in the U.S. we’d have to triple our $787 billion fiscal stimulus.
The Chinese government has also directed banks to lend. Credit expansion has doubled in the past six months and this is also boosting activity. But can it last? The global economic environment does not seem to be self-supporting. Even China’s Commerce Minister warned that the global economy may “plunge” if nations withdraw support measures.
And speaking of support, Ford’s earnings results are just out and the automaker posted its first profit in North America since the first quarter of 2005. A lot of this was due to cost cutting, but clunker cash was another factor. Thanks Uncle Sugar!
Have a great day!
Brent Vondera, Senior Analyst
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