Daily Insight

The S&P 500 made a run for positive territory several times yesterday but to no avail, until the final push of the session moved the broad market fractionally to the plus side; the Dow and NASDAQ Composite managed slightly more substantial gains.

A strong manufacturing report out of the Chicago region appeared to do more harm than good as it led to some speculation the Fed will withdraw stimulus measures sooner than previously believed. I don’t know how many times Bernanke & Co. have to explicitly state that they’ll keep monetary policy floored for a while still, but we remain in this what’s-bad-is-good environment (bad is good because it means the easy money trade rolls on) so I guess the reaction, stocks struggling to move higher on a strong report, shouldn’t be terribly surprising.

Tech was the leading sector on the session; consumer discretionary shares the worst performing group. The 10 major sectors were spilt, with five in the green and five in the red.

The seven-year Treasury auction was well–received, as the rise in yields of late seemed to support this week’s $118 billion in debt sales.

We’ve got one session left before getting this decade in the market behind us. The S&P 500 has fallen 23% since the end of 1999 (that’s on a simple-price basis, not including dividends), the first decline for a decade since 1930-1939. Including dividends, the index lost roughly 10% since 1999 (0.9% per year), the first negative annualized return over a 10-year stretch in the index’s history, which goes back to 1927, according to S&P’s Howard Silverblatt.

Market Activity for December 30, 2009
Chicago Purchasing Managers Index

The Chicago PMI (a gauge of manufacturing activity from the nation’s largest factory region) jumped to 60.0 in December, the highest level in nearly four years, from 56.1 in November. The reading easily surpassed expectations, which had the figure slipping to 55.1. The Chicago region is the main factory corridor for the auto sector, so vehicle assemblies to restore what have been low inventory levels for this segment of manufacturing was likely the catalyst. Chicago does involve a good level of electronic-goods production also, the holiday shopping season surely played a supporting role as well.

Nearly all of the sub-indices of the report looked really good, The new orders index remained hot, hitting 63.5 (highest level since May 2007) after 62.8 in November; order backlogs entered expansion mode for the first time since August 2008, hitting 53.0 after 46.5 in the previous month – this is an important gauge to watch, if it remains above 50 for several months it’s one signal current workers are getting stretched and new hires will be necessary; the employment figure jumped to 51.2 from 41.9, the first move into expansion since November 2007; and supplier deliveries remained at a good level, slipping but just slightly to 56.2 from 57.4 in November – this is another key gauge as a sustained stay above 50 will also signal workers are stretched by new orders.

Unfortunately, the inventory reading remained in contraction mode, but it improved and that is all it takes to offer a boost to GDP. The reading rose to 39.4 from 34.9 – this is a depressed level, remaining below the average since the recession officially began (40.3) and below the average for the decade of 45.9.

So, we now have two of the major regional factory gauges that have posted strong results (Chicago and Philly) for the month of December, while two have shown deterioration (New York and Richmond). Now we wait for the nationwide look at manufacturing via the ISM data, which arrives on Monday. The market expects a reading of 54, which would be good. Chicago is predicting something more, but it hasn’t been the best indicator of late – normally it is an excellent signal for what’s to come from ISM.

Ticking

Last week, I think it was, we talked about the trouble brewing within the Chinese real estate market. Over the past 12 months apartments in Beijing have more than doubled in price and speculators have driven the high-end market up by 55% in the nine months ended September in Shanghai; housing starts have nearly tripled over the past 12 months.

It will be interesting to watch when exactly the Chinese banking bomb blows, they’ve had problem loans on their books for a while but nothing like the problems that arise when their real estate bubble pops. The escalation in Chinese RE prices appears to dwarf what occurred here in the U.S.

One indicator of economies becoming overheated, not a great one for those serious about this issue but interesting nonetheless, is the Skyscraper Index put together by Andrew Lawrence of Dresdner Kleinwort (it follows through on the Skyscraper Indicator, created by Ralph Elliot in the 1930s). The index holds that the impulse to build the world’s tallest structures is a strong indication that an economy is about to run into deep trouble. As Lawrence states, the planning for the Singer and Met Life buildings foretold the Panic of 1907; the Chrysler and Empire State buildings, the Great Depression; the Petronas Tower in Malaysia, the Asian Crisis. The tallest building in the world at the present is the Burj…in Dubai.

Next on the list? The Shanghai Tower, currently under construction. Heads up!


Have a great day and Happy New Year!


Brent Vondera, Senior Analyst