U.S. stocks rallied Thursday as stock–index futures reversed from being meaningfully lower early yesterday morning, shifting on a dime to up big after the jobless claims data was released at 7:30CDT and showed another decline in continuing claims. That momentum from pre-market trading flowed into the official trading session and held as the market looked favorably upon earnings reports that, I’m sorry, didn’t seem all that great to me. In fact, the earnings season has deteriorated substantially, now down 30.3% for second-quarter results with 65% of S&P 500 members in thus far.
Stocks were also helped as the nonsensical assumption that weighed on traders Wednesday, this irrational view that China would put the clamps on bank lending, subsided. (This is was really a moronic thought. China’s got uprisings to tamp down, among other things; there is no way they would do such of thing even if it were to their long-run benefit) As a result, the reflation/commodity trade made a comeback as the basic material sector led the broad-market’s rally.
On the earnings reports that got positive press, it appears people are stretching here. For instance, MasterCard processed more purchases in the second quarter even as consumer spending fell, because of the shift, a generational shift, from cash and checks to debit cards. (Debit-card activity rose to 48% of combined card use in 2008, up from 22% in 1999) I really hope people didn’t see the numbers as a sign consumer activity is on the rise (outside of the “cash for clunkers” stimulus, which we’ll touch on below) because that is not what the MC figures say.
There was also Dow Chemical’s results, which were celebrated even though earnings per share (EPS) was down 93% from the year-ago period.
International Paper’s results were also cited as a catalyst for stocks. While EPS massively beat expectations, results were down 64% from the year-ago and a big part of their number came from the alternative-fuel tax credits.
For those of you who remember my comments on these tax credits a few months ago, you know what I mean. For those who don’t, paper companies use a by-product of production (known as “black liquor”) to fuel their plants. The irony of these tax credits is that paper mills must actually use fossil fuels to gain the credits because the legislation states that alternative fuels (black liquor in this case) must be mixed with fossil fuels (because the assumption was that these traditional fuels were already the primary source) in order to receive it. So the industry is actually using more oil, nat. gas, coal etc. than they did before this legislation that was meant to curtail the use of these fuels. For those who may not understand my dismay with increased government involvement, maybe this helps illustrate the unintended consequences that always result. Sorry for getting off on that tangent.
Anyway, we should see a big bang in terms of profit growth two-three quarters out as firms have cut costs to the bone. However, I think too many presently expect this surge in earnings to occur in the current quarter and the final demand is not yet there to boost top-line results. For now, yes companies are beating earnings at an elevated rate but its whipped cream on… well you know, because profits are down big time. And when the earnings rebound does occur it will be short-lived, just as the recovery will be, because the way we’re going about this is not conducive for a sustained expansion.
Market Activity for July 30, 2009
The Money Runs Out
The “cash for clunkers” program (officially the Car Allowance Rebate System, or CARS) ran out of money yesterday, six days after it began. This puts dealerships in a bind as they must destroy the engine of the trade-in before receiving the government subsidy – one wonders how many have been destroyed just as news was coming that the funds ran out.
Nothing to fear though, you can bet Congress will boost funds to the program so it will continue to boost car sales for the next couple of months. But think about the larger issue, shouldn’t we have learned from borrowing from the future after all that has occurred? And that is exactly what is going on here. Oh, and this program adds debt to the consumer, I don’t think this is what we need right here with the unemployment rate pushing to 10% and incomes stagnant. This will undoubtedly reduce personal consumption in future quarters.
And what does this say about the economic state of things. All we hear about is how the economy is going to rebound, yet activity needs to be goosed to a huge degree. (For the record, we believe a statistical rebound is upon us – when Q3 GDP is released in October it will show the first positive GDP print in a year, as I’ve been stating in between a lot of negative comments for a couple of months now – but the recovery will be much much shorter than that with which we’ve grown accustomed)
So the government will expand the $1 billion CARS program to, who knows, another $2,3,5 billion in order to get it through to November, which was its original timeline. This will boost auto sales a bit for July and probably get us well over 10 million units at an annual rate for August. This, like a number of other things, will juice that euphoria we’ve been talking about for a while now, but then auto sales will slump again and people will look around and wonder, what now?
Initial Jobless Claims
The Labor Department reported initial jobless claims rose 25,000 to 584,000 for the week ended July 25, remaining below that 600K level but I’ve got a feeling we’ll see that mark eclipsed again. The four-week average fell for a third-straight week as the average does not involve a 600K initial claims figure for the first time since January.
Continuing claims fell 54,000 to 6.197 million in the week ended July 18 (one-week lag for this figure). While continuing claims remains far above anything we had seen during past recessions (since this data began in 1967), it has declined substantially over the past three readings.
If not for the average duration of unemployment that continues to hit new records, 24.5 weeks as of the latest monthly jobs report, I would see this move lower in continuing claim as a very welcome sign, very bullish in fact. But since this is not the case, one has to view the fall in continuing as either a function of seasonal-adjustment problems due to the timing of auto plant shutdowns (although the Labor Department stated that these distortions have “worked themselves out”) or the expiration of benefits. Of course, both issues may be playing havoc with the reading as the revisions may show.
We’ll find out if these assumptions are correct very shortly. The first sign will come on August 6 when the July employment report is released. It will show a substantive decline in the duration of unemployment if this drop in continuing claims is for real. (As mentioned a few times, I expect the pace of monthly job losses to ease substantially either in the July report or most likely by the August reading to 150K-250K in monthly losses from this very elevated level of 400k-500k Still, this does not help continuing claims as hiring remains nearly non-existent) After that Aug. 6 jobs report, we’ll see it in the claims data itself. If the labor market has truly improved, then continuing claims will not rise again even as the duration with which one can collect jobless benefits extends, read below.
For now stocks remain on their “sugar high,” getting a boost from another decline in continuing claims. But beware, states are in the process of extending benefits to 59 weeks from 26 weeks (that’s right, 59 weeks). These 33-week extensions were supposed to kick in for all states in July, but several states are having a problem identifying who is eligible so the extensions will not be fully implemented until sometime in August. If this claims data begins to move in the wrong direction again, and that Super Ring Blow Pop is sucked dry, the market may soon be crying itself to sleep.
Have a great weekend!
Brent Vondera, Senior Analyst
Stocks were also helped as the nonsensical assumption that weighed on traders Wednesday, this irrational view that China would put the clamps on bank lending, subsided. (This is was really a moronic thought. China’s got uprisings to tamp down, among other things; there is no way they would do such of thing even if it were to their long-run benefit) As a result, the reflation/commodity trade made a comeback as the basic material sector led the broad-market’s rally.
On the earnings reports that got positive press, it appears people are stretching here. For instance, MasterCard processed more purchases in the second quarter even as consumer spending fell, because of the shift, a generational shift, from cash and checks to debit cards. (Debit-card activity rose to 48% of combined card use in 2008, up from 22% in 1999) I really hope people didn’t see the numbers as a sign consumer activity is on the rise (outside of the “cash for clunkers” stimulus, which we’ll touch on below) because that is not what the MC figures say.
There was also Dow Chemical’s results, which were celebrated even though earnings per share (EPS) was down 93% from the year-ago period.
International Paper’s results were also cited as a catalyst for stocks. While EPS massively beat expectations, results were down 64% from the year-ago and a big part of their number came from the alternative-fuel tax credits.
For those of you who remember my comments on these tax credits a few months ago, you know what I mean. For those who don’t, paper companies use a by-product of production (known as “black liquor”) to fuel their plants. The irony of these tax credits is that paper mills must actually use fossil fuels to gain the credits because the legislation states that alternative fuels (black liquor in this case) must be mixed with fossil fuels (because the assumption was that these traditional fuels were already the primary source) in order to receive it. So the industry is actually using more oil, nat. gas, coal etc. than they did before this legislation that was meant to curtail the use of these fuels. For those who may not understand my dismay with increased government involvement, maybe this helps illustrate the unintended consequences that always result. Sorry for getting off on that tangent.
Anyway, we should see a big bang in terms of profit growth two-three quarters out as firms have cut costs to the bone. However, I think too many presently expect this surge in earnings to occur in the current quarter and the final demand is not yet there to boost top-line results. For now, yes companies are beating earnings at an elevated rate but its whipped cream on… well you know, because profits are down big time. And when the earnings rebound does occur it will be short-lived, just as the recovery will be, because the way we’re going about this is not conducive for a sustained expansion.
Market Activity for July 30, 2009
The Money Runs OutThe “cash for clunkers” program (officially the Car Allowance Rebate System, or CARS) ran out of money yesterday, six days after it began. This puts dealerships in a bind as they must destroy the engine of the trade-in before receiving the government subsidy – one wonders how many have been destroyed just as news was coming that the funds ran out.
Nothing to fear though, you can bet Congress will boost funds to the program so it will continue to boost car sales for the next couple of months. But think about the larger issue, shouldn’t we have learned from borrowing from the future after all that has occurred? And that is exactly what is going on here. Oh, and this program adds debt to the consumer, I don’t think this is what we need right here with the unemployment rate pushing to 10% and incomes stagnant. This will undoubtedly reduce personal consumption in future quarters.
And what does this say about the economic state of things. All we hear about is how the economy is going to rebound, yet activity needs to be goosed to a huge degree. (For the record, we believe a statistical rebound is upon us – when Q3 GDP is released in October it will show the first positive GDP print in a year, as I’ve been stating in between a lot of negative comments for a couple of months now – but the recovery will be much much shorter than that with which we’ve grown accustomed)
So the government will expand the $1 billion CARS program to, who knows, another $2,3,5 billion in order to get it through to November, which was its original timeline. This will boost auto sales a bit for July and probably get us well over 10 million units at an annual rate for August. This, like a number of other things, will juice that euphoria we’ve been talking about for a while now, but then auto sales will slump again and people will look around and wonder, what now?
Initial Jobless Claims
The Labor Department reported initial jobless claims rose 25,000 to 584,000 for the week ended July 25, remaining below that 600K level but I’ve got a feeling we’ll see that mark eclipsed again. The four-week average fell for a third-straight week as the average does not involve a 600K initial claims figure for the first time since January.
Continuing claims fell 54,000 to 6.197 million in the week ended July 18 (one-week lag for this figure). While continuing claims remains far above anything we had seen during past recessions (since this data began in 1967), it has declined substantially over the past three readings.If not for the average duration of unemployment that continues to hit new records, 24.5 weeks as of the latest monthly jobs report, I would see this move lower in continuing claim as a very welcome sign, very bullish in fact. But since this is not the case, one has to view the fall in continuing as either a function of seasonal-adjustment problems due to the timing of auto plant shutdowns (although the Labor Department stated that these distortions have “worked themselves out”) or the expiration of benefits. Of course, both issues may be playing havoc with the reading as the revisions may show.We’ll find out if these assumptions are correct very shortly. The first sign will come on August 6 when the July employment report is released. It will show a substantive decline in the duration of unemployment if this drop in continuing claims is for real. (As mentioned a few times, I expect the pace of monthly job losses to ease substantially either in the July report or most likely by the August reading to 150K-250K in monthly losses from this very elevated level of 400k-500k Still, this does not help continuing claims as hiring remains nearly non-existent) After that Aug. 6 jobs report, we’ll see it in the claims data itself. If the labor market has truly improved, then continuing claims will not rise again even as the duration with which one can collect jobless benefits extends, read below.
For now stocks remain on their “sugar high,” getting a boost from another decline in continuing claims. But beware, states are in the process of extending benefits to 59 weeks from 26 weeks (that’s right, 59 weeks). These 33-week extensions were supposed to kick in for all states in July, but several states are having a problem identifying who is eligible so the extensions will not be fully implemented until sometime in August. If this claims data begins to move in the wrong direction again, and that Super Ring Blow Pop is sucked dry, the market may soon be crying itself to sleep.
Have a great weekend!
Brent Vondera, Senior Analyst
Mortgage Applications
The shipments figures have yet to respond, and this is what funnels into the GDP results. Durable goods (ex-transportation) shipments were down 0.5% last month, which followed a 1.4% decline in May. This should pick up on the heels of the May and June rise in orders, offering a boost to that Q3 GDP reading.
S&P/CaseShiller Home Price Index
The most important reading within the survey, especially with the jobless rate pushing to double-digits and the duration of unemployment at an all-time high (going back to 1947), is the net jobs “plentiful” jobs “hard to get” figure; the reading hit a 26-year low of -44.5 (lower segment of chart below). Those citing jobs as “plentiful” fell to 3.6% of respondents, down from 4.5% in June. Those stating jobs as “hard to get” jumped to 48.1% from 44.8% in the prior reading.
We have cautioned against the tendency to get excited as the confidence readings rose from the deep lows hit in February and March as the stock market rose from its lows. Some seemed to assume the bounce off of these levels was a sign further improvement in sentiment would ensue. Unfortunately, we’re now seeing the troubled state of the job market (and the decline in wealth even if the stock market has rallied hard off of its lows) is keeping consumers’ outlook in the tank and this does not bode well for a sustained housing rebound and certainly does not indicate that consumer activity in general is poised to make a steady comeback.
All sub-indices of the survey either rose or remained in expansion mode with the exception of employment. New order volume jumped to 24 from 16 in June, shipments rallied to 16 from 2 and capacity utilization doubled to 14 from 7. These are great moves, now if we can get the various other regional manufacturing reports to show the same degree of improvement, and the national factory survey (ISM) to move closer to expansion mode, it will help confirm the third-quarter of 2009 will post the first positive print on GDP in four quarters.
Market Activity for July 27, 2009
Shrinking Loan Activity
Sales of new homes are down 21% from the year-ago period, but falling prices (down a huge 5.8% in June) and near record low mortgage rates are now helping to offset high levels of joblessness.
The inventory-to-sales ratio remains elevated, but the three-month rally in sales and a huge decline in construction have made very nice progress in pushing this number lower. The inventory-to sales ratio for new homes declined to 8.8 months’ worth, down from 10.2 in May. Let’s hope the labor market has made a significant turn for the better several months out because the housing market will need it when the tax credits expire and very low interest rates are no longer with us.
The new-home sales report kicked off a big week of data.
