Afternoon Review

S&P 500: +4.06 (+0.37%)

The S&P 500 managed to finish the week with a small gain after better-than-expected retail sales and consumer confidence offset concerns regarding sovereign government debt. Also lifting sentiment was bullish data from China (larger-than-expected increase in industrial production and new lending) as well as a bullish 2010 forecast from J.P. Morgan.

November retail sales signal the holiday shopping season got off to a nice start, with strength in electronics and “nonstore” (i.e. internet) retailers. It appears consumers can continue to spend during the deleveraging process, but a challenging labor market and tightening credit should restrict the pace at which spending will rebound in 2010.

The U.S. Dollar Index again made gains along stocks, gaining 0.7% today and now up 3.1% since November 25.

During the past several months, stronger economic data caused risk aversion to fade, pushing stocks higher and the greenback lower. This trend may be changing, though, with the market increasing bets on interest rate hikes in 2010.

If the dollar continues to rally, we should see a shift in outperformance from the companies that derive a large portion of their revenues internationally to those that derive the most of their revenue domestically.

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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks pared their early-session gains but spent the entire day in positive territory and, most importantly, closed on the plus side. The financial press pointed to a jobless claims report that showed initial claims remained below 500K, as the main reason behind the market’s advance. I’m not buying it though as the continuing claims number suggested that labor-market troubles continue to lurk.

A more likely impetus behind the advance was day’s other economic release, the October trade figures, which, beyond showing that energy demand remains very weak, did illustrate pretty good discretionary spending.

Another factor may have been near-record wides in the yield curve (274 basis points between the 2s and 10s– just shy of the 275 record – and 355 bps between 2 and 30 – close to the record wide of 368). This spells continued strong interest income for the banks, and boy do they need all the help they can get by the way the coverage ratio looks – provisions set aside are hugely inadequate for the level of non-performing loans. According to the FDIC, that coverage ratio sits at 60%; the 15-year average is 140%.

Consumer discretionary shares led the gains, which gives at least some credence to the thought that the trade numbers helped investor sentiment. Utilities, health-care and energy shares were the other out-performers. Financials and basic material shares were the losers on the session.

Small caps continue to lag the broad market, which is usually a sign that a rally has become winded. The smalls peaked on October 14, about six weeks before the S&P 500 hit its post-March lows high-point. Since mid-October, the smalls are down 4.5%, while the S&P 500 is about flat.

Market Activity for December 10, 2009
Jobless Claims

The Labor Department reported that initial jobless claims rose 17,000 last week, rising to 474,000 – the reading was expected to fall by 2,000. This ends a five-week streak of decline but the reading remains nicely below 500K so that’s something to take a little comfort in. The four-week average fell 7,750 to 473,750.

Continuing claims slid 303,000 to 5.157 million, but the decline is meaningless as EUC (Emergency Unemployment Compensation – the jobless are moved to this program when their standard 26 weeks of benefits run out) claims more than offset that move by jumping 327,729. This shows that the move lower in standard continuing claims is more about the expiration of benefits (see chart immediately below) rather than from some level of job creation occurring.

The claims numbers continue to exhibit that the pace of firings has substantially slowed (as exhibited by the initial claims readings – possibly confirmed by the third month below 500K), yet firms are not yet adding net jobs (illustrated by the jump in EUC).

Trade Balance

The trade deficit narrowed in October by 7.6% to $32.9 billion from $35.7 billion in September. Exports rose 2.6%, while imports increased just 0.4%. I can hear it now, there will be economists exhorting that the lower value of the dollar is the reason and thus we should applaud the erosion in our currency. (A lower dollar means that U.S. goods are cheaper to the rest of the world and hence exports outpace imports. However, this doesn’t exactly work out in the longer term as well as the text books teach us because a weaker dollar causes a higher price of oil over time – and with our restrictions on domestic energy production we import a lot of petroleum products; this segment makes up 30% of imports.)

The narrowing appeared to be more of a domestic energy demand problem – not a surprise as office vacancy rates are on the rise and less people are driving to work. And the decline in crude imports, down 12% for the month, was not a function of a decline in prices – the price/barrel was down just 1.1%. In terms of barrels, we imported 32 million less barrels for the month of October – a 19.2% drop from the year-ago level. From the year-ago period crude imports are down 38.5%, even as the price of crude us up 48%.

Many categories posted some pretty good monthly readings though. Capital goods exports rose 3.7% -- fueled by an 8.9% increase in semiconductors, a 10.8% jump in computer accessories and a 2.2% rise in telecom equipment. On the import side, consumer goods were up 2.8% -- boosted by an 8.5% in pharmaceuticals. While this is more of a necessity product, clothing imports rose 5.5%, so there was a decent move from the discretionary aspect of consumer purchases. Autos also climbed 2.6%.

Outside of the significant drop in energy demand that continues the 14-month trend lower, U.S. consumer demand for other goods has shown decent improvement from very low levels.

Around the World

Australia reported that payrolls rose for a third-straight month, up 31,200 for November. Adjusting for population, this amounts to a 450,000 increase in U.S. terms (and payrolls are up roughly 1.4 million past three months). Last week we saw that Canada – another commodity-rich nation, particularly with regard to energy – posted a 79,000 increase in payrolls last month. Adjusted for population that’s a 790,000 increase in U.S. terms. This continues the theme that the commodity-laden economies of the world continue to post the best results

These countries can thank the Federal Reserve as it is their zero-interest rate policy that has the U.S. dollar just 6.5% above its all-time low; the path of the dollar both directly and indirectly is a major determinant of the price of commodities. Too bad we don’t aggressively remove production restrictions on our own energy holdings. This would be the most direct and effective way to create high-paying manufacturing jobs here at home.

Futures

Stock-index futures are up strong this morning on the heels of a higher than expected industrial production reading out of China. The figure jumped 19.2% in November on a year-over-year – the November 2008 reading it’s being compared to marked the cycle low. Even so, this is a large increase.

The growth in Chinese production over the past couple of months is commensurate to levels seen during 2003-2007; a period of robust consumption. Production is being driven by what is largely still a command-and-control government structure and history has shown, on several occasions, that such a political-economic system can lead to big trouble. I do wonder where exactly China is going to find the consumer activity to absorb all of these goods with global jobless rates double the levels they were just two years ago. Unemployment rates are still pretty low in Asia, but the region doesn’t have the domestic consumption to absorb this level of production as Asians’ propensity to save remains very high.


Have a great weekend!


Brent Vondera, Senior Analyst

Afternoon Review

S&P 500: +6.40 (+0.58%)

An unexpected narrowing of the trade deficit and favorable components of the jobless claims report helped the S&P 500 finish higher despite global government debt concerns. Volume was lacking for most of the day as stocks traded sideways for most of the session.

It’s also worth noting that the broad-based gains were made in the face of a stronger dollar, bucking the recent trend. Dollar gains have most often led to selling in the stock market due to the drag of a stronger dollar on commodity prices and repatriated profits from multinationals.

Small cap stocks finished lower today and continue to lag behind larger capitalization stocks this quarter. This trend is typical of a rally that is entering a later, more mature phase. The high beta stocks often see some of the sharpest rallies off the market bottom start to slow down.


Quick Hits

• The dollar’s fall reflects a new role for reserves
  
  

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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks bounced into positive territory on two separate occasions Wednesday after beginning the session lower on sovereign credit concerns. However, the final push above the cut line occurred in the final hour of trading so the numbers posted a resplendent green by the close.

A bounce in basic material and technology stocks led the market higher. A turn down in the U.S. dollar helped the commodity-related material shares. Technology shares seemed to get a boost from Hewlett-Packard shares as the company announced it will cancel its normal two-week holiday break for the sales staff (normally begins December 21) in order to spend the time closing deals – obviously this it the kind of alacrity investors like to see.

Advancers just edged out decliners on the NYSE Composite by a margin of 9-to-8. Volume was weak at just over one billion shares traded.

The 10–year Treasury auction, a re-opening of the November issue, was a bit weaker than we’ve seen as the yield was about 4 basis points above where the when issued was trading and the bid-to-cover of 2.62 was below the 2.80 average of the last four auctions – not concerning though. The weakest aspect of the auction was that just 32.9% went to indirect bidders (a gauge of foreign central bank demand), meaningfully lower than the recent average of 45.6%. Tomorrow we get a $13 billion 30-year re-open and we’ll see if the heightened concerns that a sovereign default will occur (troubles in Dubai and Greece have garnered the headlines but Spain and Italy have been included in the mix – frankly I could see Russia as the next default; Abu Dhabi will bail out Dubai and the EU will make sure one of their members doesn’t actually default) may make for a more difficult auction.

For the U.S. no one has to worry about default, but higher interest rates are bound to become an issue with all of this debt issuance. Those lending money for 10 and 30 years at 3.4% and 4.4%, respectively, is where the major risk lies. Then again, if the economy runs into trouble in short order (and lower coverage ratios even as non-performing loans continue to grow has me quite concerned about another wave of bank trouble), 3.4% for 10 years may not look all that bad.

This is a strange environment, a tough environment – one can see several situations affecting rates, in either direction. Still, this is no time to increase risk levels whether it be by becoming more aggressive on the equity side of things or extending out in an attempt to reach for a little more yield.


Mortgage Applications

The Mortgage Bankers Association reported their application index rose for a second-straight week, up 8.5%. This follows a 2.1% increase in the week ended November 27 and broke a string of six weeks of decline. Applications to purchase a home rose 4.0%, just about matching the previous week’s 4.1% rise. The difference this week was that refinancing activity picked up, jumping 11.1% after a very mild 1.7% rise in the previous week. The 30-year fixed-rate mortgage held below 5% for a sixth-straight week, averaging 4.88% for the week ended December 4.

We saw the purchases index decline for six weeks that ended November 13 as potential buyers were uncertain as to whether the tax credit would be extended. Now that it has officially been extended to April 30 (and beyond just first-time buyers as those who have owned a home for five years will be offered a $6500 credit to buy a new or existing home) sales have picked up again. I continue to believe that the affect the credit has on sales will be less robust than it was back during the traditional buying season, but we will see. No matter how it turns out, the home-buyers tax credit will expire and at that point it is likely sales will retrench.

Wholesale Inventories

Distributors’ inventories rose for the first time in 14 months, increasing 0.3% in October from September’s 0.8% decline – the estimate was for a 0.5% decline. The increase was boosted by higher stockpiles of motor vehicles, nondurable goods (such as clothing) and petroleum products (recall the weekly energy reports we’ve been touching on in which very low demand has pushed crude and gasoline stockpiles higher – and yesterday’s report showed no sign of improvement has presented itself). Stockpiles of durable goods ex-autos were down 0.4% for the month. From the year-ago period, total wholesale inventories are down 13.5%

So while there is some evidence that this overall inventory rebuilding is a function of the affects from clunker cash sales and low energy demand, this does get the first month of the final quarter of 2009 off to a good start – we’ll need to see some inventory building in order to get the next GDP reading above 2.5% in my view, based on what we currently know for the quarter. (For clarity on the clunker-cash comments, auto inventories fell for eight straight months, but began to build again in September following the big August sales gain related to the clunker program.)

Even if a full-blown inventory dynamic does not ensue, this segment of the economy will at least add somewhat to GDP as the three-month annualized change has moved to -$27 billion from -$56.8 billion in the prior month – and all it takes is a slower rate of decline to add to GDP.

The sales data within the report showed its sixth month of increase, up 1.2% for October – down 9.6% from the year-ago period. This is a nice trend we’ve got going here and it will have to be maintained to keep factory production on an upward trajectory.

The inventory-to-sales ratio has come crashing lower, down to 1.16 months worth (this measures how long it would take to sell off all inventories based on the current sales pace) from 1.34 months worth in January – the cycle high.

This shows just how effectively the private sector adjusts to new economic realities. While it is an unpleasant process, to say the least, the adjustment occurs quickly and fosters an environment in which we can begin producing goods again, on a net basis of course. Again, sales will have to remain on the current glide path or firms will simply keep stockpiles at rock-bottom levels.

We’ll receive the broader business inventories report for October tomorrow.

The Un-stimulus

Everyone is talking about Britain’s decision to slap a 50% tax rate on bank bonuses above $41,000 – Chancellor of the Exchequer Alistair Darling explained to Parliament that this tax will be borne by the banks, not the employees. You’ve got to be kidding; are these people really this clueless?

But the big news is Britain’s decision to raise income tax rates on bank employees making over $240,000 -- a 10 percentage points increase to 50%. Add this to the national insurance tax and the London city income tax and you’re honing in on 55%. (The 50% tax on bonuses is only in effect until April 5, 2010 so banks will either defer bonuses or come up with some other way around this onerous tax, which is why the top income-tax rate hike is the larger issue.) Keep in mind that the financial services industry is the best thing London has going for it –for now at least. In many Asian financial centers, tax rates on incomes of similar size are set around 20%. What do you think is going to happen?

Now we have Prime Ministers Brown (Britain) and Sarkozy (France) in an Op/Ed this morning explaining how economies across the globe need to increase regulations and tax rates. These are about the only two things a Frenchman and a Brit can ever agree upon.

Well, Messrs Brown and Sarkozy, at least here in the U.S. we’re importing enough of your Western European socialism. Those Americans that will be looking for work or fighting to move up the economic ladder don’t need anymore of it, thank you.


Have a great day!


Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks declined Tuesday as a number of issues caused investors to flee for a little bit of safety – Treasury securities and the dollar rallied – but the equity market’s move lower was a mild one. Stocks have traded sideways for seven weeks now, moving as low as 1035 on the S&P 500 and topping out at the 13-month high of 1110, but overall no where since October 14.

This latest bought of weakness all started off with Bernanke’s speech on Monday in which, among other things, he mentioned that the economy faces “formidable headwinds.” A decline in German industrial production, a credit rating downgrade of Greek debt (which highlights government deficit risks) and a decline in small-business optimism, all occurring yesterday, put additional pressure on stocks. The budget problems in Greece, which is hardly the only nation with issues right now, follows the troubles out of Dubai that surfaced in late November.

Energy, basic material and industrials shares – all early business-cycle plays – led the broad-market’s decline. All 10 of the major industry groups lost ground on the session.

As a result of the dollar’s climb, back up to the 76 handle on the Dollar Index, commodities sold off. Gold fell for a third-straight session, down 7% over this stretch, and oil is back down to $72/barrel after holding in the high $70s since mid October.

Outside of some geopolitical event or a sovereign default it is tough to imagine the dollar breaking its downward trend – especially as the Fed continues to signal their zero interest-rate policy will remain in place.


Market Activity for December 8, 2009
Too Big Too Fail Fix – Give Me a Break

The House Financial Services Committee voted 31-27 last week to approve legislation that would augment government authority to police large firms that pose risks to the economy. Debate on the House floor will begin this week to create a council of regulators that monitor financial industry risks and impose costs (funds that would bail out reckless firms) on the largest firms within the industry. The legislation would grant the Treasury Secretary, among others, the authority to dismantle healthy, well-capitalized firms whose size threatens the financial system. It also removes a 30-year ban on audits of monetary policy – it’s not clear to me whether this pertains to just the Fed’s balance sheet or interest-rate policy as well; this is a treacherous road if it includes the latter, the Fed has made large mistakes this decade but you can expect plenty more if Congress and the GAO are allowed to get involved.

If this is passed, we may all watch firms take on even greater risks over time as healthy firms will see their costs rise, effectively backstopping those that get themselves in trouble – this has a certain moral hazard problem attached as far as I’m concerned.

Giving the government the ability to dismantle healthy and well-capitalized financial firms carries its own problems -- more government involvement in the private sector has never been long-run helpful and its not going to be this time. Further, it will eventually have to be acknowledged that we wouldn’t have had a credit bubble, and thus this de-leveraging process that ensued, if the Fed would not have kept fed funds below the level of inflation (negative real fed funds) for three full years earlier in the decade. Firms wouldn’t have been lured, taunted and encouraged to take on stupid levels of leverage in the first place -- implement insanely low levels of interest rates and you’re going to get more debt and whacky 30-to-1 leverage, unless of course the economy is so crushed that both the supply of and demand for financing craters, as is currently the case.

Rather than going down this road, imposing costs on the industry at this time of distress and possibly encouraging reckless behavior down the road, what we need is to allow the market to determine interest rates (not the Fed) and the Federal Reserve need only be there as a lender of true last resort. If the period we’ve just been through doesn’t wake everyone up to this reality, the high-probability that current monetary policy will engender new problems should do it.

Another key point is when new costs are imposed on industry those costs are passed through to the consumer. If the government decides to add on new fees to the largest banks in the financial sector, and they’re already looking at imposing much higher costs on all banks via the FDIC funding agenda, then we’ll see consumers face higher financing costs. This will add another impediment to credit expansion and thus increases the velocity of the headwinds confronting the economy.

NFIB Small Business Economic Trends

The National Federation of Independent Business (the largest small-business organization) stated that their economic trends index fell in November to 88.3 from 89.1 – the lowest level in four months. The six-month average is 88.2. The cycle low of 81.0 was touched in March; the all-time low of 80.1 was hit in April 1980, but just four months later the index was back to 94 and never returned to the 80 handle until this latest recession.

The report showed that six of the index’s 10 components registered negative responses – the key gauge being the hiring figure, which decelerated to -3 from -1. The six-month avg. is -2. As we’ve been talking about, this report is another indication that small businesses will be slow to hire – small firms account for at least 60% of job creation.

Another key reading is the measure of capital spending plans, this is important as an increase in plant and equipment outlays is a major job producer. The gauge fell to 16% from 17% in October –- this matches the lowest point on record; the first time this low was put in was March. The six-month avg. is 17%.

The share of executives expecting better business conditions six months out dropped to 3% from 11% in October. The six-month avg. is 6%

The NFIB’s chief economist stated that “sales are not picking up, so survival requires continuous attention to costs – and labor costs loom large.” He also stated that reductions in stockpiles (the gauge of executives expecting to increase inventories was unchanged at -3; the all-time low of -13 was put in in March and the six-month avg. is -5) “sets the stage for support for new orders in future periods.” This is something we’ve talked a lot about, but firms must first gain confidence in the future.

“New” Stimulus

President Obama, in a speech at the Brookings Institute yesterday, unveiled some “new” ideas – many of which aren’t exactly new. The administration continues to rely on additional extensions to unemployment benefits, food stamps, this idea of providing $250 payments to seniors and veterans and subsidizing health insurance costs for the unemployed – none of which fires up economic activity or job growth, but they’ll seek to spend another $100 billion on these programs. Yes, jobless benefits are the countercyclical programs that put more money than would otherwise be the case in the pockets of the unemployed. But look, benefits already extend out to 99 weeks and each dollar spent by government simply takes a dollar away from the private sector -- either in future taxes or currently as funds are needed to finance this deficit spending.

He also explained that the administration will seek to add $70 billion to infrastructure spending.

However, Mr. Obama did offer some things that actually work. He stated that they would push to extend the higher current-year expensing on business equipment and bonus depreciation schedules through 2010 – such initiatives have a track record of incentivizing business-equipment spending as it allows a business to quickly recover the cost of major asset purchases. (Why does it take a 10% unemployment rate to drag policymakers toward implementing efficacious polices?)

Still, this program that is held over from the Bush years is only effective so long as other government decisions don’t smother its otherwise beneficial effects. I applaud him for offering something here that makes sense.

In all, any stimulus plan that is not simply a function of government getting out of the way of private industry only drags out the adjustment process, elongating economic weakness. Sure it may offer the appearance that improvement has arrived, but in actuality results in weaker levels of growth and more frequent business-cycle contractions. Capitalism is about creative destruction, tearing down old industries that no longer compete and replacing them with more innovative ones that provide for higher living standards in the future. It is also about washing out excesses. While the adjustment process is unpleasant, it does allow for a more fundamentally sound and longer-lasting recovery to ensue. We seem to be forgetting this.

Have a great day!


Brent Vondera, Senior Analyst

Afternoon Review

The S&P 500 closed out with its second straight loss and its fourth decline in eight sessions. Continuing the recent trend of correlation, the dollar rose as crude, gold and stocks all dropped.

In focus today was sovereign debt related news, including a downgrade in Dubai and Greece as well as a warning to the U.S. and U.K. None of these countries debt problems are new, but they give market participants a perfectly good reason to sell a top-heavy market.
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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks slipped a bit on Monday, led by a decline in financial shares after Fed Chairman Bernanke gave a speech explaining that credit continues to contract and suggested delinquency rates will remain elevated as he cited the employment situation several times. Interestingly, consumer discretionary shares were among the top-performing sectors. Telecoms and utility shares were the leaders on the session.

In one relatively short speech Chairman Bernanke dispelled any idea that the Fed is about to even mildly remove its unprecedented level of monetary easing (recall this was the topic yesterday) by stating that the economy faces formidable headwinds, has some way to go before a self-sustaining recovery is assured, and questioned whether growth will be strong enough to materially bring down the unemployment rate. As a result, the dollar dropped like a rock from its early-session gains and the price of gold came off if its lows.

Funny thing that occurred though was stocks turned lower about two hours after the Bernanke speech and the dollar bounced off of its speech-driven plunge. I call this funny because the trend that’s been in place has been stocks rally when the Fed makes negative remarks (and signals ZIRP’s life expectancy has increased) – this trend has signaled the easy-money trade remains in the game. However, this late-session move lower in stocks, and up from the day’s low point in terms of the dollar, may now indicate a little safety trade in back on. We’ll have to watch this week’s activity to confirm a new trend but for what its worth (which probably isn’t much) it felt like things changed a bit.

Volume turned back down yesterday after Friday’s more normal levels (only the second session out of the past 20 in which we broke the 1.2 billion mark) as activity came in below one billion.

Market Activity for December 7, 2009
Stimulus Rolls On, But Other Actions May Smother

As we were just talking about Friday’s trade in yesterday’s letter, specifically the concern that the Fed will remove their aggressive level of accommodation sooner than previously believe, the Chinese government came to the rescue. That government stated early Monday morning that they will maintain “moderately” loose monetary policy and “proactive” fiscal policies through 2010. This helped to ease pressures on pre-market futures trading and flowed into the trading session. Stocks were set to move much lower when I came in on Monday morning.

The market continues to depend on stimulus programs (I’m shifting back to the domestic front) because the data shows that this nascent recovery is weak, at least to this point. While things are lackluster right now even with stimulus efforts (literally more than half of the 2.8% increase in third-quarter GDP was due to clunker-cash driven auto assemblies and fed-induced ground-level interest rates and tax credits that helped home sales and thus a bump in home building) there are a lot of economists that believe the expansion will soon turn robust.

Historically, it is true, the deeper the contraction the stronger the expansion that follows. We’ll find out if the current environment will prove consistent with this history when the fourth-quarter GDP reading is released. The historical record shows that coming out of the deepest postwar recessions –1958, 1974 and 1982 – that two quarters after the final negative GDP print the economy began to surge at a 7.8% pace in the following year, on average. (That two-quarters-removed reading begins in the current quarter.) Yet I feel many people seem to be forgetting that expansions are generally helped by the Fed lowering rates and the increase in household debt levels that ensue. That expansion of credit allows for spending to offset general economic weakness. This time though, while the Fed has certainly floored interest rates, households are not in a position to increase debt loads -- not with the jobless rate in double-digit territory and consumers flush with debt; the two have never occurred simultaneously in the postwar era.

And there is another thing: the EPA slipped an “endangerment” finding on carbon dioxide in April and declared it a health hazard yesterday, which set the stage for President Obama to formally declare CO2 a dangerous pollutant. (Offers the president some bargaining power at the Smokenhagen conference) The promulgation is expected this week, as the WSJ reported yesterday. Yes, that’s right; CO2 will be considered a pollutant – you now must refrain from exhaling. Quiet though, we don’t want to alarm the plants.

What this means is that it doesn’t take passage of a cap-and-trade system (officially, the Waxman-Markey bill), this allows Washington the power to regulate all production in the U.S. – all without a vote. This will only increase uncertainty regarding future business costs and thus takes away another historical driver of expansions – business-investment spending.

It apparently isn’t enough that firms must attempt to manage their businesses unaware and trepidatious as to just how the health-care legislation will come down and to what extent tax rates will be increased. I guess Washington feels the private sector needs yet another burden to work around. The result will be a heightened level of business caution – and that caution will show itself in lower job growth and much less private-sector activity in general. (This is showing up in the monthly NFIB Small Business Confidence Survey, which is just out for November. The reading, which would normally begin to rise by this point remains stuck – we’ll touch on this reading in tomorrow’s letter.)

Of course, there are many among us that do not at all believe this is by accident or a complete ignorance as to just how our economy works, but rather by design. I’ve got to say, based upon the way that the current congressional leadership believes an increased government role in the economy will prove beneficial it’s pretty difficult to argue with them. Bottom line is that this all increases the headwinds that the early-stages of expansion must endure – these headwinds appear to be picking up speed.

Conference Board’s Employment Trends Index (ETI)

The Conference Board (a 90-year old independent economic research group) stated its ETI rose to 90.8 for November from October’s reading of 89.2. The reading is the highest since March, but remains nearly 10% below that of a year ago. A year ago the economy was shedding 650,000 jobs per month.
(The reading is well below that of a year ago probably because two of the indicators that comprise the index continue to pressure. These are: respondents who say jobs are “hard to get” and the number of people working part-time because they cannot find full-time work. The Conference Board doesn’t give the specifics on these readings, so I’m guessing here based upon other economic readings that suggest these two areas continue to fall. People saying jobs are “hard to get” continues to make new highs as shown by the consumer confidence survey and the monthly jobs report shows that the number of people working part-time for economic reasons remains at extreme elevations.)

The improving indicators were jobless claims, the number of temporary workers, industrial production, job openings and real manufacturing and trade sales. The index is released the Monday following a monthly jobs report.


Consumer Credit

The Federal Reserve reported that consumer credit contracted in October for the 10th month in a row, which extends the record (data goes back to 1943). The figure is being pressured by a significant decline in credit card lines. The drop in overall credit was well-below what was expected though, contracting just $3.5 billion vs. the $9.4 billion that was expected. The September data was revised up also, showing credit declined $8.8 billion instead of the $14.8 billion initially estimated.

Revolving credit (credit cards) continues to plunge -- down $7 billion, or 9.3% at an annual rate -- as lines are being slashed due to eroding credit quality and consumers cut back. Fitch Ratings stated that more consumers fell behind on credit-card payments in October and several banks reported their highest delinquency rates for 2009. Such is reality with 10% joblessness and 17.2% underemployment.

Non-revolving credit (basically car loans) rose $3.4 billion, or 2.6% at an annual rate. The average maturity on an auto loan stretched out to 64.4 months in October and the loan-to-value increased to 93%.

We’ll be without a major economic release until Wednesday. The big event of the week will be the October retail sales data that is due out on Friday.


Have a great day!


Brent Vondera, Senior Analyst

Afternoon Review

The S&P 500 finished a volatile session in red with the day’s market direction primarily dictated by the U.S. dollar and comments from Fed Chairman Ben Bernanke. Friday’s jobs report led some to believe that the Fed would need to raise interest rates sooner than later.

In a speech today, Bernanke said, “we are still looking at the extended period,” with regard to low interest rates. At first, stocks rallied on the phrase extended period, which in other words means the liquidity party isn’t over. However, the market seemed to pause and reflect on the “formidable headwinds,” Bernanke referred to such as a weak labor market and tight credit.

Financials were by far the weakest sector today, off 1.61%. Citigroup and Wells Fargo disagreement with the government over TARP repayment is getting much press. Also receiving attention is the fact that the total cost of TARP could be cut by $200 billion.

Telecom was the best performing sector, notching a 1.77% gain. Telecom stocks have gained 4.67% in the past five sessions. Utilities have gained 3.77% during the same time period.



Quick Hits

• An Iranian nuclear bomb, or the bombing of Iran?
• Companies Must Flex Spending Muscles

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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks closed higher on Friday, but a jobs report that was vastly more positive than expected did result in a session of pretty wild fluctuations as traders re-assess their estimates for the unwinding of the Fed’s unprecedented monetary easing stance.

Industrial, financial and tech shares led the gainers – seven of the top 10 major sectors rose on the session.

Basic material and energy stocks were the worst-performing sectors as the jobs report worried the dollar-carry traders (borrowing in dollars at rock-bottom rates and investing in virtually anything else). Concern that the Fed will end their zero-interest rate policy (ZIRP) sooner than previously thought will lead to some covering of those borrowed dollars – the dollar rallied as a result, and continues to this morning.

This concern over monetary policy was seen in the equity markets as stocks reversed course big time, moving to negative territory mid-morning after beginning the session higher by nearly 2%. The reversal shows that risk-trading strategies are more about easy money than economic fundamentals. In the final 90 minutes of trading the broad market recouped about a third of the day’s high-water mark.

While I wish the Fed would remove its emergency level of accommodation, gently bringing their benchmark rate to 0.75%-1.00%, the concern that the Fed is going to engage in a full-blown unwinding of their aggressive monetary easing is a premature concern. First, it is very normal for the unemployment rate to tick down before peaking. Second, once the jobless rate peaks, the average length of time with which the Fed begins to raise rates averages six months (shortest amount of time is one month, the longest is 22 months).

One thing is clear, if the dollar does trend higher on the belief the tightening is right around the corner, we’ll see just how directly the market’s upswing has been connected to the dollar carry trade by moves in the equity markets -- those shorting the buck will scurry to cover those positions and stocks will fall.

Volume on the NYSE Composite was the strongest in a month as 1.4 billion shares traded, roughly 16% above the six-month average – however, still below the norm of the 2004-2007 period.

Market Activity for December 4, 2009
November Jobs Report

So that was the lead up, let’s get to the specifics.

The Labor Department issued a big surprise as it announced payrolls declined just 11,000 in November. This is well-below the consensus estimate of a 123,000 decline. Since the prior month’s report we’ve talked about the monthly change moving to the statistically insignificant level of < 100,000/month, but this occurred much quicker than expected. However, I’ll note that during the 1982 job-market contraction jobs printed a month of just -6,000 only to see large monthly losses ensue in the following eight months. This is in no way an attempt to compare the 1982 recession and job contraction to the current environment. Back then, both tax rates and interest rates were in the process of tumbling. This go around we’ll have the opposite working as a headwinds to this recovery. But I use this period just because it also showed an especially long stretch of large monthly job losses and a month of ease in between.

The previous two months of losses were revised up big time, showing 159,000 fewer jobs were lost than previous calculated.

In terms of industry, the goods-producing industries shed 69,000 (the preliminary ADP report was pretty inaccurate as it predicted 88,000 were lost), a large improvement from the prior month’s loss of 113K – and much better than the three-month average of 92K. The construction segment shed just 27,000 positions (29th month of decline), and improvement from October’s 56K decline – the three-month average is -45K. The manufacturing sector cut 41,000 positions (24th month of decline), a decent improvement from the -51K in October – the three-month average is -44K.

The service-producing industries added 58,000 positions – this is strange considering the ISM service-sector index continues to show positions are being cut (ADP was way off, estimating 81,000 were eliminated). The revision to October service-sector employment also showed a gain (a pick up of 2,000 positions), a huge upward revision from -61,000 reported last month. Trade and transportation cut 34,000 positions, much better than the 60K loss in October – three-month average is -50K. Retail cut just 15,000, up from -44K in October – the three-month average is -33K.

Business services posted a big increase of 86,000 jobs and temporary employment (a key indicator of future jobs gains) jumped 52,000, which follows an upwardly revised 44K addition in October. This marks the third month of increase for temp. hiring. We want to see temporary hiring increase, as it is generally an indication that permanent hiring is not that far behind. However, with temp making up so much of the increase in business services, 65% of the increase, I do wonder if firms are relying more on temp work as the uncertainty regarding the future cost of hiring the next worker is high. We’ll just have to wait a few months to ultimately find out.

Education and health-care continued to keep the ball rolling, this segment never endured even a month of decline during this entire contraction, as the segment added 40,000 positions. This matches the prior month’s gain and in line with the three-month average of +39K.

The unemployment rate ticked down to 10.0% from 10.2% in October (it was expected to come in unchanged) – a result of the decline in the labor-force participation rate. That is, more people removed themselves from the labor force as they did not look for work during the four weeks of this November survey. When laid-off workers begin to feel better about things and come back in to look for work, the jobless rate will rise again. A tick down in the jobless rate prior to a cycle peak, as mentioned above, is evident in almost labor-market downturn. This is the second move lower for the current cycle, the first being in July when the jobless rate fell to 9.4% from 9.5%.

The U6 unemployment rate (the underemployed rate as it includes discouraged workers and those working part-time because they can’t find full-time work) fell for only the second time in 20 months. It remains extremely elevated as it settled at 17.2% in November (down from 17.5% in October). This number was re-calculated in 1994 and based on the former methodology it sits at 13.7% -- the record of 14.3% was hit in 1982.

The worst aspect of the jobs report was the jump in the average duration of unemployment, up to 28.5 weeks from the 26.9 in October. This jibes with what the jobless claims data is suggesting – the pace of firings has eased greatly, but hiring is not yet occurring. This is a very very normal event, firms do not begin to hire this soon in the recovery, but the large increase in this reading (up from what was already a record level) shows that some aspects of the labor market are actually a little worse.

The average weekly hours worked reading bounced off of its record low, up to 33.2 from 33.0. This is nice to see, as the number needs to hone in on 34.0 before meaningful jobs gains ensue. The average over the past decade is 33.8

For stocks, the market may, as appeared to be the case mid-session on Friday, begin to worry that the end of ZIRP is near – it’s kind of that what’s bad is good environment we’ve been in as bad means ZIRP lives and good reminds the easy-money trade that ZIRP will be laid to rest. But while I keep harping on what’s in store when ZIRP is removed, traders shouldn’t get too worried just yet that the Fed will remove aggressive levels of accommodation.

The excitement over the jobs report did seem a little amateur to me. Again, after the huge job losses over the past two years (especially over the last 12 months) one has to assume some mild payroll additions will show up soon. However, and I don’t enjoy stating this, the labor market is very likely to remain troubled for an extended period and it is not reasonable whatsoever to believe that the normal job rebound of 200K-350K in monthly job creation will present itself (credit contraction, uncertainty over future employment costs, plenty of room to still stretch existing workers, a lack of final demand and big time trouble within state and local budgets are all serious headwinds for job creation).

So let’s hope that the months ahead prove the economy is close to ending job-slashing mode, but I fear we won’t see much in terms of job growth.


Today is the 68th anni of the Pearl Harbor attack – America’s wake up call to the axis threat.

Have a great day!


Brent Vondera, Senior Analyst