Daily Insight

Markets searched for direction in the early going, but stocks ultimately finished with solid gains.

A relatively pleasing weekly jobless claims report showed a larger-than-expected decline in initial jobless claims to 440,000 and a continuing claims tally of 4.54 million – a one-year low. Additionally, markets cheered consumer price data and a lending report out of China that lacked evidence of inflation, suggesting China can lay off tightening measures for the time being. (Of course, China raised the bank reserve requirement this morning in an attempt to slow credit expansion, so apparently yesterday’s excitement was unwarranted.)

Meanwhile, leaders from the European Union announced that financial assistance will be made available to Greece, but no specific details were provided. Markets continue to wonder how much money will be involved and whether aid will extend to other countries currently facing fiscal challenges. It does appear, however, that investors are growing more optimistic on the situation and are more confident that Greece’s credit crisis won’t have spillover effects in the U.S.

The materials sector and the energy sector led the way with gains of 1.58% and 1.57%, respectively. More impressive was that they outperformed the broader market for the entire session, even in the face of a firmer dollar during the early going. Financials lagged as a report from the Financial Times said leading economies are close to agreeing on a global bank tax.

Market Activity for February 11, 2010
Job picture improves slowly, but surely

Weekly initial jobless claims declined 43k to 440k, versus last week’s figure which was revised upward by 3k to 483k. The four-week moving average, which provides a smoother trend in claims, dipped by 1k to 468.5k, while continuing claims dropped to 79k to 4.54 million.

A Labor Department official said the results reflect the end of an “administrative backlog” that built up when state government offices were closed during the year-end holidays. Next week’s claims data will probably be affected this week by the snow storms on the east coast.

Today’s Wall Street Journal has a nice article today (Page A4) that examines a concern mentioned before in this letter, which is that many of the jobs eliminated by the recession are gone forever. Economic growth will eventually return as will job creation, but the types of work will be in different industries.

Using the example from the Wall Street Journal, an economy growing at 3% will add roughly 133k jobs a month. The problem is that about 100k jobs a month are needed just to soak up new entrants to the work force, which means the pace of job creation economists are anticipating will only slowly reduce the high unemployment rate.

On the bright side, we are seeing the classic cycle unfold where layoff announcements ease first, which is then followed by a surge in temporary hiring and eventually leads to more permanent hiring. It’s just that this time the era between job losses and meaningful job gains is likely to be longer than normal.

Coming out of past recessions, the expansion of debt-financed consumption on housing, autos, and other durables has been the strongest engine of job growth – clearly there are massive impediments to this scenario occurring this time around.

On tap today

Advanced retail sales were initially scheduled to be released yesterday, but were delayed until today due to the weather in Washington. We will see further evidence that consumer spending has returned, albeit at a much lower level than before the crisis as the focus remains on deleveraging.

Other releases today include the preliminary January reading of the University of Michigan Sentiment Index, expected to rise to 75.0 from 74.4, while business inventories are forecasted to rise 0.2% in December after posting a 0.4% increase in November.

Have a great weekend!


Peter Lazaroff, Investment Analyst