S&P 500: +6.06(+0.55%)
For the third straight day, stocks set fresh 2009 highs but failed to sustain gains. Still, stocks managed to fight off a couple of dips into negative ground to close the session in the black.
The main news today was the much better-than-expected November employment report. U.S. nonfarm employment fell by 11,000 in November, the smallest lass since 2007 and much better than the expected drop of 125,000. In addition, previous months were revised to reflect fewer job losses. Accordingly, unemployment decreased to 10.0%, from the previous reading of 10.2%.
The employment data helped drive the Dollar Index to a 1.4% gain. In turn, the CRB Commodity Index dropped 1%, with gold falling 4%. Strength in the Dollar ultimately limited gains in equities as well.
The employment report also led to increased bets that the Federal Reserve will move off its zero-interest-rate-policy sooner than originally anticipated. There is some concern that raising rates too early would de-rail the nascent recovery, but it seems unlikely that rates would move higher than 1% in 2010 – a level that is still highly accommodative. The next scheduled meeting of the Federal Open Market Committee (FOMC) a few weeks from now will, as always, be worth watching for clues.
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Peter J. Lazaroff, Investment Analyst
Friday, December 4, 2009
Daily Insight
U.S. stocks ended a three day rally after the latest service-sector survey missed expectations by a wide margin and moved back to contraction mode. This brought back another round of the “economic recovery is faltering” concern (we’ve seen this many times only to see the market shake it off and rock on). There was probably a little pause among traders in play as well as they waited for this morning’s monthly jobs report.
Stocks did begin the session higher after the latest jobless claims data showed the previous week’s move below 500K on initial claims was for real and not an aberration. Unfortunately, what occurred within the continuing claims data showed the labor market remains conspicuously troubled – more on that below.
Utilities (two days in a row) and telecoms were the best-performing sectors, the only of the major 10 that posted gains on the session. Financials, basic material and energy shares led the declines.
The Treasury market declined -- quite unusual on a down day for stocks, although what’s abnormal seems to be the norm these days -- as the government stated it will sell $74 billion in notes and bonds next week. We continue to see strong demand for U.S. government debt so it shouldn’t be an issue. One does wonder how these auctions will go whenever it is that the Fed removes the emergency level of rates. For now banks are more than happy to buy up Treasury securities at nothing yields because they are borrowing from the Fed at zero and depositors at something barely more than that. However, when the ZIRP comes to an end, it seems these auctions may not go quite so swimmingly.
Market Activity for December 3, 2009
Jobless Claims
The Labor Department reported that initial jobless claims declined for a second-straight week, which pretty much confirms the big decline in the previous week was for real. Initial claims fell 5,000 to 457,000 in the week ended November 28, which follows the meaningful 39,000 decline in the week prior that pushed the figure below the 500K level for the first time since January. The current level of initial claims is the lowest since just before the chaos – mid-September 2008 – and finally has moved just below the peaks of the prior two recessions.
The four-week average of initial claims fell 14,250 to 481,250.
This data is a tale of two situations though as the continuing claims data rose 28,000 to 5.465 million.
This is the standard reading for continuing claims, a number that does not include the Emergency Unemployment Compensation (EUC) claims and its various extensions that elongate benefits from the traditional 26 weeks up to 99 weeks. EUC surged 265,300, the second-largest weekly jump since the program began in July 2008, to 3.85 million. When we add EUC and its various extensions (which total 597,688) to the standard continuing claims data, it is literally off the chart at 9.8 million.
So what does this data tell us? As we’ve been discussing, it shows that the level of firings has eased substantially, yet firms have not begun to hire. They will first have to see final demand push current payroll workloads to the stretching point, then add back in workers who have been idled (which is particularly the case within the manufacturing sector) before slowly beginning to hire new workers.
There is still a likelihood that monthly jobs gains, yes gains, may present themselves a few months out, but nothing substantial is likely to occur for quite some time. The fact that unemployment benefits have been extended to nearly two years (undoubtedly reduces the sense of urgency for segments of the workforce) and the signals from Washington that hiring the next worker is about to become more expensive are other reasons the jobless rate will remain high for an extended period of time.
ISM Non-Manufacturing
The Institute for Supply Management’s service-sector survey for November didn’t com in quite as good as their look at the manufacturing index (which we discussed on Tuesday). The reading moved back to contraction mode after spending two months just barely in expansion territory. The reading fell to 48.7 (51.5 was expected) after 50.6 in October as the business activity and supplier deliveries readings both put pressure on the overall index. The employment reading didn’t help much either as it was barely changed and remained well in contraction mode.
This is not a good sign for the nascent recovery, even the index’s rebound to expansion mode was hardly convincing as the move over 50 in the previous two months was negligible – 50.9 in September and 50.6 in October.
The highest unemployment rate in 26 years (and only the second time the jobless rate has hit this level in the post-WWII era) is putting the clamps on consumer activity. Further, the state of the labor market and household indebtedness is hurting business confidence as firms are less than optimistic a sustained rebound in consumer activity will present itself.
In terms of the sub-indices, the new orders figure remained in expansion mode, although it decelerated slightly to 55.1 from 55.6. However, the business activity reading (a measure of production – and of business confidence) fell back below 50 (49.6 after October’s 55.2) for the first time since July. The supplier deliveries reading fell to 48.5 from 50.5. The employment reading improved to 41.6 from 41.1, but as the number suggests shows the service sector continues to reduce payrolls.
The big aspect of this report that sticks out is that new orders remain in expansion mode (although a substantial recovery would have this reading in the 60s), while production moved back to contraction. This is yet another illustration that the inventory rebuilding process has yet to occur, retailers continue to draw down stockpiles. On the optimistic side, this means that we’re getting closer to production kicking up as inventory will eventually need to be boosted. The degree of near-term consumer activity will dictate the degree of inventory rebuilding.
Chain-Store Sales
Coinciding to the ISM number, the ICSC (International Council of Shopping Centers) showed that its chain-store sales figures fell 0.3% in November after two months of increase – a two-month bounce that followed 11 months of decline, exactly what ISM had shown. To clarify, chain-store sales are simply comparing results for same-store sales to the same period of a year ago.
The segments that showed sales increased last month were discounters (up 0.6%), drug stores (up 2.3%) and wholesale clubs (up 1.9%). The wholesale-club segment also offers an ex-fuel sales reading, which rose just 0.1% and ends what looked to have been an emerging trend of 4% year-over-year gains.
The segments that declined were apparel (down 0.4%), department stores (down 4.5%) and luxury (down 6.9%). Luxury has been completely hammered since the credit crisis went into full tilt 14 months ago. Last month’s 1.8% increase looked as though the segment had turned the corner, but apparently not.
The fact that same-store sales remain shaky, unable to trend higher even compared to the year-ago period when economic malaise was in full effect, vividly illustrates the state of the consumer.
Bernanke Confirmation
The Fed Chairman endured quite a raucous confirmation process yesterday (President Obama nominated Mr. Bernanke for a second term in August but Congress has to confirm and that may not come before Christmas) and it wasn’t just the normal circus that is usually on display when politicians find themselves in front of the cameras. There were actually legitimate policy criticisms exhorted.
Unfortunately, the bulk of the serious and informed questions centered around how the Fed was negligent in regulating excessive risk-taking within the financial industry. That is certainly a fair shot at Bernanke & Co., but the session seemed to almost completely ignore the specific policymaking errors -- the very damaging mistake of keeping short-term rates too low for too long in the period 2002-2005. And here we are again, even lower this time. We’ll see how it turns out. (I must qualify this statement by saying the Fed had no choice this go around, but they continue the emergency level of rates and signal ZIRP will remain in place for an extended period.)
But for that period earlier in the decade, if not for that very aggressive easing campaign (fed funds was below the rate of inflation for three full years, which means you’re going to get a lot more leverage among institutions and consumers, and the risk taking that results) the fuel that sparked the credit bubble would have never doused the financial system in the first place. That is what we really need to be focusing on.
And then there is this, a thought I’ve had for several years now: It’s not a stretch to ultimately blame this entire event on the 9/11 attacks; the Fed would have never gotten so aggressive absent that event.
This is not to take Greenspan and Bernanke off the hook, it was stupid as stupid can be to move fed funds all the way down to 1.00% especially as late as they did – didn’t get there until June 2003; the economy had already been in expansion mode for all of 2002, even if it was low growth of 2.0%. And they compounded the problem by leaving fed funds at 1.00% for an entire year, even as 2003 GDP grew at 3.8%, and didn’t get fed funds back above 3.00% until the summer of 2005. This is the key element that created the housing and overall credit bubble. But if we were not attacked by the scourge of the earth, or we had placed ourselves in a better position to thwart that attack, the heavy stock market decline the Fed was obviously focused upon would not have ensued (and I’m not referring to the 22% decline in the year following the bursting of the tech bubble, but the second leg tumble of 27% that was clearly driven by the 9/11 event and the economic uncertainty it created) – thus I really doubt the fuel that created this mess would have been released by the Fed.
Anyway, Bernanke will be confirmed, but not without a heck of a lot of justified criticism.
Jobs
Payrolls grew by 79,000 in Canada last month, marking the third month of increase out of the last four. Just as Australia has shown, the resource-rich economies are performing much better than the rest of the world – they can thank global central banks actions, specifically our Fed as the policy has put pressure on the dollar and driven commodity prices higher, for this help. We also live in a country that is resource rich, too bad that we set a vast majority of these resources off limits. It’s an act of insanity; we could be producing tons of high-paying manufacturing jobs if we would just think practically.
In about an hour we’ll receive our employment report for November. It is expected to show payrolls declined for a 23rd straight month. We will need to see the average workweek rise from the current all-time low and temporary hiring trend higher. Those will be the key signs that job losses will move to statistically insignificant levels and then to mild monthly job gains in the near future.
Have a great weekend!
Brent Vondera, Senior Analyst
Stocks did begin the session higher after the latest jobless claims data showed the previous week’s move below 500K on initial claims was for real and not an aberration. Unfortunately, what occurred within the continuing claims data showed the labor market remains conspicuously troubled – more on that below.
Utilities (two days in a row) and telecoms were the best-performing sectors, the only of the major 10 that posted gains on the session. Financials, basic material and energy shares led the declines.
The Treasury market declined -- quite unusual on a down day for stocks, although what’s abnormal seems to be the norm these days -- as the government stated it will sell $74 billion in notes and bonds next week. We continue to see strong demand for U.S. government debt so it shouldn’t be an issue. One does wonder how these auctions will go whenever it is that the Fed removes the emergency level of rates. For now banks are more than happy to buy up Treasury securities at nothing yields because they are borrowing from the Fed at zero and depositors at something barely more than that. However, when the ZIRP comes to an end, it seems these auctions may not go quite so swimmingly.
Market Activity for December 3, 2009
Jobless ClaimsThe Labor Department reported that initial jobless claims declined for a second-straight week, which pretty much confirms the big decline in the previous week was for real. Initial claims fell 5,000 to 457,000 in the week ended November 28, which follows the meaningful 39,000 decline in the week prior that pushed the figure below the 500K level for the first time since January. The current level of initial claims is the lowest since just before the chaos – mid-September 2008 – and finally has moved just below the peaks of the prior two recessions.
The four-week average of initial claims fell 14,250 to 481,250.
This data is a tale of two situations though as the continuing claims data rose 28,000 to 5.465 million.
This is the standard reading for continuing claims, a number that does not include the Emergency Unemployment Compensation (EUC) claims and its various extensions that elongate benefits from the traditional 26 weeks up to 99 weeks. EUC surged 265,300, the second-largest weekly jump since the program began in July 2008, to 3.85 million. When we add EUC and its various extensions (which total 597,688) to the standard continuing claims data, it is literally off the chart at 9.8 million.
So what does this data tell us? As we’ve been discussing, it shows that the level of firings has eased substantially, yet firms have not begun to hire. They will first have to see final demand push current payroll workloads to the stretching point, then add back in workers who have been idled (which is particularly the case within the manufacturing sector) before slowly beginning to hire new workers.
There is still a likelihood that monthly jobs gains, yes gains, may present themselves a few months out, but nothing substantial is likely to occur for quite some time. The fact that unemployment benefits have been extended to nearly two years (undoubtedly reduces the sense of urgency for segments of the workforce) and the signals from Washington that hiring the next worker is about to become more expensive are other reasons the jobless rate will remain high for an extended period of time.
ISM Non-Manufacturing
The Institute for Supply Management’s service-sector survey for November didn’t com in quite as good as their look at the manufacturing index (which we discussed on Tuesday). The reading moved back to contraction mode after spending two months just barely in expansion territory. The reading fell to 48.7 (51.5 was expected) after 50.6 in October as the business activity and supplier deliveries readings both put pressure on the overall index. The employment reading didn’t help much either as it was barely changed and remained well in contraction mode.
This is not a good sign for the nascent recovery, even the index’s rebound to expansion mode was hardly convincing as the move over 50 in the previous two months was negligible – 50.9 in September and 50.6 in October.
The highest unemployment rate in 26 years (and only the second time the jobless rate has hit this level in the post-WWII era) is putting the clamps on consumer activity. Further, the state of the labor market and household indebtedness is hurting business confidence as firms are less than optimistic a sustained rebound in consumer activity will present itself.
In terms of the sub-indices, the new orders figure remained in expansion mode, although it decelerated slightly to 55.1 from 55.6. However, the business activity reading (a measure of production – and of business confidence) fell back below 50 (49.6 after October’s 55.2) for the first time since July. The supplier deliveries reading fell to 48.5 from 50.5. The employment reading improved to 41.6 from 41.1, but as the number suggests shows the service sector continues to reduce payrolls.
The big aspect of this report that sticks out is that new orders remain in expansion mode (although a substantial recovery would have this reading in the 60s), while production moved back to contraction. This is yet another illustration that the inventory rebuilding process has yet to occur, retailers continue to draw down stockpiles. On the optimistic side, this means that we’re getting closer to production kicking up as inventory will eventually need to be boosted. The degree of near-term consumer activity will dictate the degree of inventory rebuilding.
Chain-Store Sales
Coinciding to the ISM number, the ICSC (International Council of Shopping Centers) showed that its chain-store sales figures fell 0.3% in November after two months of increase – a two-month bounce that followed 11 months of decline, exactly what ISM had shown. To clarify, chain-store sales are simply comparing results for same-store sales to the same period of a year ago.
The segments that showed sales increased last month were discounters (up 0.6%), drug stores (up 2.3%) and wholesale clubs (up 1.9%). The wholesale-club segment also offers an ex-fuel sales reading, which rose just 0.1% and ends what looked to have been an emerging trend of 4% year-over-year gains.
The segments that declined were apparel (down 0.4%), department stores (down 4.5%) and luxury (down 6.9%). Luxury has been completely hammered since the credit crisis went into full tilt 14 months ago. Last month’s 1.8% increase looked as though the segment had turned the corner, but apparently not.
The fact that same-store sales remain shaky, unable to trend higher even compared to the year-ago period when economic malaise was in full effect, vividly illustrates the state of the consumer.
Bernanke Confirmation
The Fed Chairman endured quite a raucous confirmation process yesterday (President Obama nominated Mr. Bernanke for a second term in August but Congress has to confirm and that may not come before Christmas) and it wasn’t just the normal circus that is usually on display when politicians find themselves in front of the cameras. There were actually legitimate policy criticisms exhorted.
Unfortunately, the bulk of the serious and informed questions centered around how the Fed was negligent in regulating excessive risk-taking within the financial industry. That is certainly a fair shot at Bernanke & Co., but the session seemed to almost completely ignore the specific policymaking errors -- the very damaging mistake of keeping short-term rates too low for too long in the period 2002-2005. And here we are again, even lower this time. We’ll see how it turns out. (I must qualify this statement by saying the Fed had no choice this go around, but they continue the emergency level of rates and signal ZIRP will remain in place for an extended period.)
But for that period earlier in the decade, if not for that very aggressive easing campaign (fed funds was below the rate of inflation for three full years, which means you’re going to get a lot more leverage among institutions and consumers, and the risk taking that results) the fuel that sparked the credit bubble would have never doused the financial system in the first place. That is what we really need to be focusing on.
And then there is this, a thought I’ve had for several years now: It’s not a stretch to ultimately blame this entire event on the 9/11 attacks; the Fed would have never gotten so aggressive absent that event.
This is not to take Greenspan and Bernanke off the hook, it was stupid as stupid can be to move fed funds all the way down to 1.00% especially as late as they did – didn’t get there until June 2003; the economy had already been in expansion mode for all of 2002, even if it was low growth of 2.0%. And they compounded the problem by leaving fed funds at 1.00% for an entire year, even as 2003 GDP grew at 3.8%, and didn’t get fed funds back above 3.00% until the summer of 2005. This is the key element that created the housing and overall credit bubble. But if we were not attacked by the scourge of the earth, or we had placed ourselves in a better position to thwart that attack, the heavy stock market decline the Fed was obviously focused upon would not have ensued (and I’m not referring to the 22% decline in the year following the bursting of the tech bubble, but the second leg tumble of 27% that was clearly driven by the 9/11 event and the economic uncertainty it created) – thus I really doubt the fuel that created this mess would have been released by the Fed.
Anyway, Bernanke will be confirmed, but not without a heck of a lot of justified criticism.
Jobs
Payrolls grew by 79,000 in Canada last month, marking the third month of increase out of the last four. Just as Australia has shown, the resource-rich economies are performing much better than the rest of the world – they can thank global central banks actions, specifically our Fed as the policy has put pressure on the dollar and driven commodity prices higher, for this help. We also live in a country that is resource rich, too bad that we set a vast majority of these resources off limits. It’s an act of insanity; we could be producing tons of high-paying manufacturing jobs if we would just think practically.
In about an hour we’ll receive our employment report for November. It is expected to show payrolls declined for a 23rd straight month. We will need to see the average workweek rise from the current all-time low and temporary hiring trend higher. Those will be the key signs that job losses will move to statistically insignificant levels and then to mild monthly job gains in the near future.
Have a great weekend!
Brent Vondera, Senior Analyst
Thursday, December 3, 2009
Afternoon Review
S&P 500: -9.32 (-0.84%)
Stocks finished lower, ending a three-day winning streak, after spending most of the day in positive territory.
A surprising fall in initial jobless claims was offset by an unexpected decline in the service sector. Services are the largest portion of the U.S. economy. Meanwhile, retailers delivered uninspiring November same-store sales, which are sales at stores open at least a year.
Bank of America (BAC) lifted sentiment early in the session, with the company announcing it will repay its $45 billion TARP loan with $26.2 billion excess liquidity and $18.8 billion in proceeds from the sale of “common equivalent securities.” The financial sector was leading the market, but reversed course following downside fiscal 2010 guidance from Principal Financial Group (PFG).
In the bigger scheme of things, the Bank of America news is an encouraging sign as the financial climate is vastly improved from a year ago. Economic reports, though, paint an uneven story. Economic data is undoubtedly improving, but it is important to remember that the road to recovery will be a bumpy one.
Quick Hits
--
Peter J. Lazaroff, Investment Analyst
Daily Insight
The broad market managed to close the session fractionally higher as the day’s economic releases failed to provide much help; the market awaits tomorrow’s November jobs report. The NASDAQ Composite performed well as the utility and basic material stocks in the index (the leaders for the session) boosted the measure to a meaningful gain. These are the same sectors that kept the S&P 500 above the cut line.
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
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
Wednesday, December 2, 2009
Daily Insight
U.S. stocks rallied for a second-straight session on Tuesday, nearly erasing Friday’s Dubai-related losses. The latest reading on manufacturing activity showed the sector remained in expansion mode during November and pending home sales for October suggest that existing home sales will post another positive reading next month. The former missed expectations and the latter beat, in total they were enough to keep the pre-market momentum going.
(I can’t help but wonder if either of these readings would have engaged in any meaningful upswing, even from the depths hit earlier this year, without massive government support. Naturally, I can’t help but also imagine the paths these readings will take when Washington must remove its economic crutches – a level of spending and monetary easing that cannot have long lives without creating even greater problems down the road).
And speaking of problems created, the dollar got crushed yesterday, back down deep into the 74 handle on the Dollar Index – hence the old carry trade was alive and well and that kept the see, hear and speak of no risk environment in play.
All 10 of the major S&P 500 sectors gained ground on the session. Utility, telecom, basic material and energy shares led the rally. Financials were really the only true laggard, up just 0.1% for the day.
Volume was weak as less than 1.1 billion shares traded on the Big Board, 10% below even the lackluster six-month daily average of 1.2 billion shares.
Market Activity for December 1, 2009
ISM Manufacturing
The Institute for Supply Management’s manufacturing index showed that nationwide factory activity grew but at a slower pace than the previous month. ISM Manufacturing came in at 53.6 for November, a deceleration from October’s 55.7. This marks the fourth straight month of expansion. The reading did miss expectations for a print of 55.0.
The new orders, production and backlog of orders readings didn’t waiver too greatly. New orders accelerated to 60.3 from 58.5 and production slipped to 59.9 from 63.3 – although what occurs in new orders for the current month largely follows through via production in the month or two ahead, so we should expect factory activity certainly to remain in expansion mode for December.
The backlog of orders, one area we’ve been watching for early signs of a turn in manufacturing employment, fell slightly to 52.0 from 53.5. Along this same line, supplier deliveries slipped too, down to 55.7 from 56.9. Both remain in expansion mode as number above 50 illustrates, but these readings need to move closer to 60 (and sustain those levels for several months) in order to offer a sign that capacity utilization rates are expanding and thus firms will have to hire more workers to meet demand. At this rate, it will be quite a long time before factories feel stretched with regard to current payrolls and work loads – resource utilization rates are way to slack to believe otherwise.
The employment index also remained in expansion mode, for a second-straight month now, even though it declined to 50.8 from 53.1. However, this reading of expansion, even if tepid, is not showing up in the actual data as the monthly jobs report continues to show factory employment is being slashed – 61,000 factory jobs were cut in October, which is a bit more than the three-month average. We’ll see how November shapes up on Friday when the months employment data is released.
The inventory reading continues to show that firms have little confidence activity will continue to progress as the ISM’s inventory gauge fell to 41.3 from 46.9. This reading needs to hold in the upper 40s, the fact that fails to even after the record pace of inventory slashing that occurred a couple of quarters back is telling. Add in that the customers’ inventories reading hit a new low (this means factories believe their customers inventories are too low) and yet factories still have not boosted stockpiles, it shows just how weak confidence is. (When the customers’ inventories is below 45, the overall inventory reading is always either heading for 50 or beyond it – not this time as inventories reading remains low even customers’ inventories has averaged just 40 since June).
Surely GDP will continue to get a little help from this segment of the economy – all it takes is for stockpiles to fall at a slower rate than the previous quarter – but a full-blown inventory dynamic, in which actually restocking is taking place, has yet to occur.
Construction Spending
The Commerce Department reported that construction spending came in unchanged in October from a downwardly revised -1.6% in September (previously reported as an 0.8% increase last month). This number beat the estimate of what was expected to be a 0.5% decline, although that was based on the previous month’s believed 0.8% rise. Based on the big downward revision for September, the result actually missed expectations by a wide margin.
The reading continues to get hit by the commercial side of real estate as spending on non-residential buildings fell 1.5% -- the private-sector aspect of this segment fell 2.5% in October (down 20.6% y/o/y and 31.9% last three-months annualized). Public-sector commercial construction fell too, but just 0.4% for the month (actually up 3.7% y/o/y and down only 1.9% three-months annualized).
Residential construction is keeping total construction spending from really falling. Total residential construction rose 4.2% in October, fueled by a 4.4% increase on the private side – this was divided in half by actual new-home building and home improvements on existing homes. (Private home construction is down 23.6% y/o/y but up 11.1% three-months annualized) Public-sector home construction fell 2.4% for the month after a 4.1% increase in September (up 3.7% y/o/y and up 0.6% three-months annualized).
Pending Home Sales
This number was the big surprise for the day, rising 3.7% for October, blowing by the totally reasonable expectation of a 1.0% decline. The NAR (National Association of Realtors) has done an excellent job of informing buyers of the tax credit expiration (at least the expiration date of November 30 that was known back in October, it has since been extended) and thus I wouldn’t have thought any contract signings in the back half of October as it is taking at least six weeks to close – and the contracts had to close by November 30 to get the credit. But apparently the rush in the first two weeks of October was more than most people had estimated.
By region, pending sales (contract signings) rose 19.9% in the Northeast, 11.6% in the Midwest and 5.4% in South. Contract signings were down 11.2% in the West.
Based on the weekly mortgage applications report we get each Wednesday, November pending sales is going to take a hit. What this means for the next couple months worth of existing home sales (which are not counted until the contract is closed) is another good number for November, based on this October pending home sales reading, and then a substantial decline in December.
There is still a lot of government support out there, we’ll see if it can continue to offset the troubled labor-market conditions. Rock-bottom interest rates and tax credits that put $8,000 in home-buyers’ pockets are indeed juicy lures, but I’m not sure they’ll have the same effect as they have had over the past several months. And then, there is the reality that this government support must be taken away at some point. That’s probably when we see the next wave of housing market trouble.
Vehicle Sales
U.S. auto sales came in at 10.92 million at a seasonally-adjusted annual rate (SAAR) in November. This shows a bit of a bounce from the October reading, which printed 10.45 million, and is just barely higher than the very low readings of a year ago when the credit markets were in chaos. You can see by the chart below, the August bounce that was fomented by the clunker-cash program was largely a one-and-done event. Auto sales should remain well-below the 25-year average of 15 million units SAAR for an extended period as the jobless rate remains terribly elevated and households will have to reduce debt levels.
It’s not only about auto sales, but consumer spending in general. Think about it. The last (and only other) time the jobless rate moved above 10% in the post-war period was 1982-83. That jobless rate and economic contraction was a function of the Fed jacking rates above 15% -- fed funds averaged 12% for the four years that ran 1979-1983. This time, the jobless rate is going to test that 1982 record of 10.8% even as the Fed is at zero. We still have to get through the unwinding of this unprecedented level of monetary easing (whenever it does occur, and it will be a bit still because there may be another wave of this credit crisis to hit). I just don’t think enough people are thinking about the coming tightening campaign, even if it is off in the distance relative to the very short-term mindset that prevails in the current environment.
Have a great day!
Brent Vondera, Senior Analyst
(I can’t help but wonder if either of these readings would have engaged in any meaningful upswing, even from the depths hit earlier this year, without massive government support. Naturally, I can’t help but also imagine the paths these readings will take when Washington must remove its economic crutches – a level of spending and monetary easing that cannot have long lives without creating even greater problems down the road).
And speaking of problems created, the dollar got crushed yesterday, back down deep into the 74 handle on the Dollar Index – hence the old carry trade was alive and well and that kept the see, hear and speak of no risk environment in play.
All 10 of the major S&P 500 sectors gained ground on the session. Utility, telecom, basic material and energy shares led the rally. Financials were really the only true laggard, up just 0.1% for the day.
Volume was weak as less than 1.1 billion shares traded on the Big Board, 10% below even the lackluster six-month daily average of 1.2 billion shares.
Market Activity for December 1, 2009
ISM ManufacturingThe Institute for Supply Management’s manufacturing index showed that nationwide factory activity grew but at a slower pace than the previous month. ISM Manufacturing came in at 53.6 for November, a deceleration from October’s 55.7. This marks the fourth straight month of expansion. The reading did miss expectations for a print of 55.0.
The new orders, production and backlog of orders readings didn’t waiver too greatly. New orders accelerated to 60.3 from 58.5 and production slipped to 59.9 from 63.3 – although what occurs in new orders for the current month largely follows through via production in the month or two ahead, so we should expect factory activity certainly to remain in expansion mode for December.
The backlog of orders, one area we’ve been watching for early signs of a turn in manufacturing employment, fell slightly to 52.0 from 53.5. Along this same line, supplier deliveries slipped too, down to 55.7 from 56.9. Both remain in expansion mode as number above 50 illustrates, but these readings need to move closer to 60 (and sustain those levels for several months) in order to offer a sign that capacity utilization rates are expanding and thus firms will have to hire more workers to meet demand. At this rate, it will be quite a long time before factories feel stretched with regard to current payrolls and work loads – resource utilization rates are way to slack to believe otherwise.
The employment index also remained in expansion mode, for a second-straight month now, even though it declined to 50.8 from 53.1. However, this reading of expansion, even if tepid, is not showing up in the actual data as the monthly jobs report continues to show factory employment is being slashed – 61,000 factory jobs were cut in October, which is a bit more than the three-month average. We’ll see how November shapes up on Friday when the months employment data is released.
The inventory reading continues to show that firms have little confidence activity will continue to progress as the ISM’s inventory gauge fell to 41.3 from 46.9. This reading needs to hold in the upper 40s, the fact that fails to even after the record pace of inventory slashing that occurred a couple of quarters back is telling. Add in that the customers’ inventories reading hit a new low (this means factories believe their customers inventories are too low) and yet factories still have not boosted stockpiles, it shows just how weak confidence is. (When the customers’ inventories is below 45, the overall inventory reading is always either heading for 50 or beyond it – not this time as inventories reading remains low even customers’ inventories has averaged just 40 since June).
Surely GDP will continue to get a little help from this segment of the economy – all it takes is for stockpiles to fall at a slower rate than the previous quarter – but a full-blown inventory dynamic, in which actually restocking is taking place, has yet to occur.
Construction Spending
The Commerce Department reported that construction spending came in unchanged in October from a downwardly revised -1.6% in September (previously reported as an 0.8% increase last month). This number beat the estimate of what was expected to be a 0.5% decline, although that was based on the previous month’s believed 0.8% rise. Based on the big downward revision for September, the result actually missed expectations by a wide margin.
The reading continues to get hit by the commercial side of real estate as spending on non-residential buildings fell 1.5% -- the private-sector aspect of this segment fell 2.5% in October (down 20.6% y/o/y and 31.9% last three-months annualized). Public-sector commercial construction fell too, but just 0.4% for the month (actually up 3.7% y/o/y and down only 1.9% three-months annualized).
Residential construction is keeping total construction spending from really falling. Total residential construction rose 4.2% in October, fueled by a 4.4% increase on the private side – this was divided in half by actual new-home building and home improvements on existing homes. (Private home construction is down 23.6% y/o/y but up 11.1% three-months annualized) Public-sector home construction fell 2.4% for the month after a 4.1% increase in September (up 3.7% y/o/y and up 0.6% three-months annualized).
Pending Home Sales
This number was the big surprise for the day, rising 3.7% for October, blowing by the totally reasonable expectation of a 1.0% decline. The NAR (National Association of Realtors) has done an excellent job of informing buyers of the tax credit expiration (at least the expiration date of November 30 that was known back in October, it has since been extended) and thus I wouldn’t have thought any contract signings in the back half of October as it is taking at least six weeks to close – and the contracts had to close by November 30 to get the credit. But apparently the rush in the first two weeks of October was more than most people had estimated.
By region, pending sales (contract signings) rose 19.9% in the Northeast, 11.6% in the Midwest and 5.4% in South. Contract signings were down 11.2% in the West.
Based on the weekly mortgage applications report we get each Wednesday, November pending sales is going to take a hit. What this means for the next couple months worth of existing home sales (which are not counted until the contract is closed) is another good number for November, based on this October pending home sales reading, and then a substantial decline in December.
There is still a lot of government support out there, we’ll see if it can continue to offset the troubled labor-market conditions. Rock-bottom interest rates and tax credits that put $8,000 in home-buyers’ pockets are indeed juicy lures, but I’m not sure they’ll have the same effect as they have had over the past several months. And then, there is the reality that this government support must be taken away at some point. That’s probably when we see the next wave of housing market trouble.
Vehicle Sales
U.S. auto sales came in at 10.92 million at a seasonally-adjusted annual rate (SAAR) in November. This shows a bit of a bounce from the October reading, which printed 10.45 million, and is just barely higher than the very low readings of a year ago when the credit markets were in chaos. You can see by the chart below, the August bounce that was fomented by the clunker-cash program was largely a one-and-done event. Auto sales should remain well-below the 25-year average of 15 million units SAAR for an extended period as the jobless rate remains terribly elevated and households will have to reduce debt levels.
It’s not only about auto sales, but consumer spending in general. Think about it. The last (and only other) time the jobless rate moved above 10% in the post-war period was 1982-83. That jobless rate and economic contraction was a function of the Fed jacking rates above 15% -- fed funds averaged 12% for the four years that ran 1979-1983. This time, the jobless rate is going to test that 1982 record of 10.8% even as the Fed is at zero. We still have to get through the unwinding of this unprecedented level of monetary easing (whenever it does occur, and it will be a bit still because there may be another wave of this credit crisis to hit). I just don’t think enough people are thinking about the coming tightening campaign, even if it is off in the distance relative to the very short-term mindset that prevails in the current environment.
Have a great day!
Brent Vondera, Senior Analyst
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