Gold made another new high, which helped the commodity-related stocks post a third-straight day of gains. The basic material index is up 14% since October 31 as the Fed kept the ball rolling with their November 4 statement in which they stated ZIRP will remain in place for an extended period – there was some uncertainty prior to that meeting as to whether they would pull the “exceptionally low level of fed funds for an extended period” phrase. In the two weeks that followed, G-20 and APEC members pledged to keep stimulus measures intact and that kept the group on fire – up 86% since the March 9 lows. For comparison, the broad market is up 64% for the period.
Energy stocks weighed on the market after a very bearish weekly energy report.
The Fed released its Beige Book, the economic assessment from each of its 12 districts, which stated economic conditions improved. This helped the broad market pare late-morning losses. Although, a delving beyond the headline and into the text shows this is an improvement from low levels of activity, particularly so with regard to the real estate market – not that this is any revelation. The fact that the Fed keeps an emergency level of rates in play, unwilling to even gently boost fed funds to 0.75%-1.00%, speaks volumes as to what they truly believe.
Volume was vapid as just 985 million shares traded on the Big Board, 18% below the already low six-month average.
Market Activity for December 2, 2009
Weekly Energy Report
The price of crude oil slipped 2.2% to $76.65/barrel after the Energy Department reported that crude supplies rose 2.09 million barrels last week, expectations were for a build of just 400,000. Even worse, gasoline supplies surged 4 million barrels even as refinery operating rates slipped further to 79.7% (the long-term average is 88% and under normal circumstances 83% is considered rock bottom). This illustrates the sorry state of demand right now, which fell to 18.5 million barrels/day. This is 3% below even the year-ago level when the economy basically shut down. The average is 21 million barrels/day.
Mortgage Applications
The Mortgage Bankers Association reported that applications rose 2.1% in the week ended November 27 after a 4.5% decline in the previous week. Applications to purchase a home rose for a second-straight week, up 4.1% following the 9.6% increase during the previous week – this followed six weeks of decline. The promulgation to extend the tax credit has helped the purchases index rebound, although it remains at the lowest level in over a decade.
Applications to refinance a mortgage rose just 1.7% (refis currently up 72% of the total mortgage apps index) even as the 30-year fixed mortgage rate fell below 4.8%. Have the vast majority of those who can refinance already done so? Likely.
Challenger Layoff Announcements
The Challenger Job Cuts Survey, compiled by executive outplacement firm Challenger, Gray and Christmas, showed that employers cut the fewest amount of jobs since the recession began nearly two years ago. Planned firing, which is what this measure gauges, fell 72% in November to 50,349 relative to the same month a year ago – down 9.6% from the previous month.
ADP Employment Change
The preliminary jobs report from business outsourcing solutions firm ADP estimated that payrolls declined 169,000 in November – the expectation for the official jobs report to be released on Friday is for a decline of 123,000.
ADP estimates that goods-producing payrolls fell 88,000 in November, 44,000 of which occurred within the manufacturing sector. That would be an improvement from the official October losses of 129,000 for construction and manufacturing jobs.
On the service-providing front, ADP expects payrolls to decline 81,000, which would be worse than last month’s 61,000 loss.
Small (defined as 1-49 employees) and medium (defined as 49-500 employees) sized firms are the two main job creators – small firms are the key engine. ADP had small firms shedding 68,000 jobs last month and mediums cutting 57,000. Large firms were expected to have eliminated 44,000. (The White House will be hosting some sort of jobs summit today, but they didn’t invite the National Federation of Independent Business (NFIB), which happens to be the largest small-business organization. Many look to the NFIB’s monthly survey in order to gauge the small business environment. It’s confounding how one can have a jobs summit without NFIB).
American small and medium-sized businesses need to be empowered. Surely they will wait for current employee work loads to be stretched before increasing payrolls, that is always the case coming out of recession, as it should be. But they also need to have confidence that hiring the next marginal worker is not going to be increasingly costly. They will be much slower to increase payrolls if they believe the probability is high that hiring the next worker will become intensely more expensive. When Washington signals that general regulations, health-care requirements and tax rates are all going to become more onerous, the jobless rate will remain high. On top of that, businesses know that that Fed cannot keep rates floored forever. When that tightening campaign ensues, an economy that is dealing with credit contraction (as opposed to the typical recession that is sparked by Fed-tightening and excessive inventories) the Fed tightening becomes increasingly acute. This understanding alone will keep firms cautious and that caution becomes heightened when the government sends the wrong signals.
As we mentioned following the October jobs report, monthly payroll losses will soon move to statistically insignificant levels of <100,000. And it shouldn’t be long before we see some mild monthly job increases – possibly just three months out. But monthly job gains must reach 150,000, and stick there, in order to slowly bring the unemployment rate lower. The odds of this occurring are remote based on the policy signals from Congress.
Have a great day!
Brent Vondera, Senior Analyst
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