The day’s economic data wasn’t enough to give the market a clear directive as the latest releases on housing and the service sector were not compelling.
The dollar moved significantly lower, with most of its decline occurring after the minutes from the latest FOMC meeting showed interest among some policymakers in expanding their mortgage-security purchase program. Print more dollars…well that’s so 1980s, they actually electronically deposit the funds into accounts. Either way it’s all the same, dramatically increase the supply of something and the price will trend lower.
Basic material and energy shares helped to buoy the market. The index that tracks material shares gained 1.52% and energy shares rallied 1.03%. Crude prices rose to the $83 handle even as the weekly energy report showed stockpiles increased 1.3 million barrels -- expectations were for supplies to fall 1.6 million barrels. Such a substantial difference would have normally sent crude price lower, but the lower dollar drove the trade in the pits.
Market Activity for January 6, 2010
Mortgage Applications
The Mortgage Bankers Association reported that its mortgage applications index rose 0.5% in the week ended January 1 after two weeks of large declines – apps slid 22.8% in the prior week and 10.7% the week before that.
Purchases rose 3.6% in the latest week after declines in the previous two weeks of 4.0% and 11.6%, respectively. Refinancing activity fell 1.6%, which also followed big declines in the prior two weeks – down 30.5% and 10.1%
The rate on the 30-year fixed mortgage rose to 5.18%.
Weak Moves into the Paint Get Rejected
You may have noticed the tariffs Washington is levying on Chinese steel. Well, the old Chinese may come back with a little counter of their own by further reducing their purchases of Treasury securities. The disturbing policy events just keep building; I don’t think Washington wants to get into this game of chicken right now. Picking trade fights is a very dangerous endeavor, especially so during a time of economic fragility – in addition it increases costs upon an already burdened consumer. But the degree to which such activity can adversely affect things is heightened that much more as we engage in massive deficit spending. The last thing we want is to do is something that may curtail future bids for government debt.
When the Fed fully completes their $1.25 trillion in mortgage-backed security (MBS) purchases that is going to reduce demand for government debt as well – as PIMCO has explained, they and others are selling their MBS to the Fed and buying Treasuries with the proceeds. The Fed’s printing press strategy is providing the demand for the Treasury market and keeping rates low. So that’s one demand source that will evaporate (if the Fed doesn’t come back and buy up even more MBS when housing runs into trouble again post April). Implementing policies, such as disputes with trading partners, that could cause other sources of funding to disappear will sting.
Some of you may have noticed that earlier this week China pulled a Dikembe Mutombo and stuffed U.S. attempts to levy sanctions on Iran – I’m sure the tariffs on Chinese steel made their decision that much easier.
ADP Employment Change
The preliminary employment report out of ADP, the business outsourcing solutions firm, estimated that 84,000 jobs were cut in December. This is quite a bit worse than what the market expects via Friday’s official jobs data, which is for no change -- and many expect a mild increase.
ADP has been off by a large margin lately, overstating the employment losses by roughly 100K per month on average since August, prior to that ADP was doing a pretty good job of predicting the jobs data when the labor market was in full-fledged freefall late-2008/early-2009. As a result of the degree of inaccuracy of late, I’m not sure what good the ADP numbers are right now, but we’ll go over them quickly nonetheless.
The Mortgage Bankers Association reported that its mortgage applications index rose 0.5% in the week ended January 1 after two weeks of large declines – apps slid 22.8% in the prior week and 10.7% the week before that.
Purchases rose 3.6% in the latest week after declines in the previous two weeks of 4.0% and 11.6%, respectively. Refinancing activity fell 1.6%, which also followed big declines in the prior two weeks – down 30.5% and 10.1%
The rate on the 30-year fixed mortgage rose to 5.18%.
Weak Moves into the Paint Get Rejected
You may have noticed the tariffs Washington is levying on Chinese steel. Well, the old Chinese may come back with a little counter of their own by further reducing their purchases of Treasury securities. The disturbing policy events just keep building; I don’t think Washington wants to get into this game of chicken right now. Picking trade fights is a very dangerous endeavor, especially so during a time of economic fragility – in addition it increases costs upon an already burdened consumer. But the degree to which such activity can adversely affect things is heightened that much more as we engage in massive deficit spending. The last thing we want is to do is something that may curtail future bids for government debt.
When the Fed fully completes their $1.25 trillion in mortgage-backed security (MBS) purchases that is going to reduce demand for government debt as well – as PIMCO has explained, they and others are selling their MBS to the Fed and buying Treasuries with the proceeds. The Fed’s printing press strategy is providing the demand for the Treasury market and keeping rates low. So that’s one demand source that will evaporate (if the Fed doesn’t come back and buy up even more MBS when housing runs into trouble again post April). Implementing policies, such as disputes with trading partners, that could cause other sources of funding to disappear will sting.
Some of you may have noticed that earlier this week China pulled a Dikembe Mutombo and stuffed U.S. attempts to levy sanctions on Iran – I’m sure the tariffs on Chinese steel made their decision that much easier.
ADP Employment Change
The preliminary employment report out of ADP, the business outsourcing solutions firm, estimated that 84,000 jobs were cut in December. This is quite a bit worse than what the market expects via Friday’s official jobs data, which is for no change -- and many expect a mild increase.
ADP has been off by a large margin lately, overstating the employment losses by roughly 100K per month on average since August, prior to that ADP was doing a pretty good job of predicting the jobs data when the labor market was in full-fledged freefall late-2008/early-2009. As a result of the degree of inaccuracy of late, I’m not sure what good the ADP numbers are right now, but we’ll go over them quickly nonetheless.
On the headline number, the 84,000 decline in private-sector payrolls ADP expects is the smallest rate of decline since March 2008.
In terms of industries, ADP has goods-producing sectors shedding 96,000 for the month, which is a significant deterioration (if accurate) as the official numbers had these payrolls down 69K in November. (Goods-producing, manufacturing and construction, jobs have shed 3.5 million positions over the past two years – most of which are permanently gone or will take a long time to come back. The auto sector alone has slashed 840,000 and construction 1.5 million. The auto jobs are permanently gone as the industry had been living with bloated expenses as if the Big Three had hopped into the DeLorian and traveled back to the 1950s; some significant percentage of construction jobs have been eternally extinguished -- until at least the next housing bubble arises, which will be a while. Of course, we could create – I don’t have a number, but a lot – of high-paying manufacturing jobs if we implemented a sensible energy policy that tore down omnipresent restrictions. But this appears to be heresy to too many people, so scratch that repulsive thought.)
The service-providing sector actually added 12,000 positions in December, according to ADP. This would also show deterioration as the official data had 58K added within the service sector in November.
We’ll see how it turns out when the Labor Department releases the figures on Friday. We’ve talked about how monthly job growth will emerge over the next few months, a point we first mentioned following the October jobs data. It may be a little too early to expect a boost in jobs for December, but February and March should be good to go for a positive reading. And expect some big numbers via government employment, especially as they add 2010 census workers. From there it will take 100K-plus per month for an extended period to slowly bring the jobless rate lower.
ISM Service-Sector
The Institute for Supply Management’s latest gauge of service-sector activity was pretty much a snorer, and failed to confirm a rebound has taken hold within the service-providing segment of the economy. The index came in at 50.1 (50.5 was expected) for December after slipping to contraction mode in November with its print of 48.7. The line of demarcations between expansion and contraction is 50.
In terms of industries, ADP has goods-producing sectors shedding 96,000 for the month, which is a significant deterioration (if accurate) as the official numbers had these payrolls down 69K in November. (Goods-producing, manufacturing and construction, jobs have shed 3.5 million positions over the past two years – most of which are permanently gone or will take a long time to come back. The auto sector alone has slashed 840,000 and construction 1.5 million. The auto jobs are permanently gone as the industry had been living with bloated expenses as if the Big Three had hopped into the DeLorian and traveled back to the 1950s; some significant percentage of construction jobs have been eternally extinguished -- until at least the next housing bubble arises, which will be a while. Of course, we could create – I don’t have a number, but a lot – of high-paying manufacturing jobs if we implemented a sensible energy policy that tore down omnipresent restrictions. But this appears to be heresy to too many people, so scratch that repulsive thought.)
The service-providing sector actually added 12,000 positions in December, according to ADP. This would also show deterioration as the official data had 58K added within the service sector in November.
We’ll see how it turns out when the Labor Department releases the figures on Friday. We’ve talked about how monthly job growth will emerge over the next few months, a point we first mentioned following the October jobs data. It may be a little too early to expect a boost in jobs for December, but February and March should be good to go for a positive reading. And expect some big numbers via government employment, especially as they add 2010 census workers. From there it will take 100K-plus per month for an extended period to slowly bring the jobless rate lower.
ISM Service-Sector
The Institute for Supply Management’s latest gauge of service-sector activity was pretty much a snorer, and failed to confirm a rebound has taken hold within the service-providing segment of the economy. The index came in at 50.1 (50.5 was expected) for December after slipping to contraction mode in November with its print of 48.7. The line of demarcations between expansion and contraction is 50.
With all of the talk about the V-shaped recovery, one would think ISM Service would be able to at least hit 52 and hold there – this is the average for the 2002 period, which was when the recovery from the 2001 downturn began and it was a weak one with just 1.95% GDP growth for the year. (When things really began to accelerate in 2003 – 3.85% GDP for the year – ISM Service averaged roughly 55.) Unfortunately, this data only goes back to 1997 so we can’t match against other expansions.The best part of the report came via the inventory measure, which moved to expansion mode for the first time since August 2008 -- just before the credit trouble deteriorated to crisis mode. The figure came in at 51.5 and does offer some hope that business confidence within the service sector improved.
Ben Gay
The FOMC released the minutes from their December 16 meeting but these notes are becoming less useful as the Bernanke Fed offers more updated messages via speeches. We’ve talked about this for some time and there is zero doubt that Bernanke uses speeches as his primary beacon with which to send the market signals as to their latest views.
The latest signals have come via the three speeches delivered early this week (Bernanke and Vice Chairman Kohn addressed the American Economic Association on Sunday and Fed Governor Duke followed up with her comments to the Economic Forecast Forum on Monday. They were all very dovish, expressing the need for policymakers to keep the emergency level of rates in place to support the financial sector, housing, and the economy in general.
The only additional news the minutes provided, as touched on above, was that a few policymakers favored increasing and extending asset purchases – and some people think the financial system, the housing market and economy have healed? Only looks that way because of massive support, the economic crutches the government has provided. If the economy were in normal recovery mode then would there be any discussion of extending quantitative easing (QE), policy that will make things much more difficult for when they do eventually have to unwind it all?
“It might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the large-scale asset purchases and continuing them beyond the first quarter,” as the minutes showed some FOMC members suggested. They don’t exactly sound sanguine. Rather, some members appear to be pretty worried what happens to housing and the banking system when the Fed stops buying securities.
For new readers I’ll repeat, the Fed is in a box. If they stick to the current QE (asset purchases) expiration they know yields will rise, another round of difficulty housing will endure and the likely damage to riskier asset prices. But if they extend QE for fear of this all the US $ will test its very near-term lows and possible the all-time nadir, commodity prices will continue to move higher and possibly unmoor inflation expectations. While nominal stock prices may continue to go higher for a while, even a stock market that is jacked up on easy money will have to respond to the other damages a ballooning Fed balance sheet (money printing) will have on longer-term economic conditions. It’s quite a quandary they find themselves in.
What is for sure, Helicopter Ben is living up to this pejorative name some have given him. (The name arose from his 2002 speech about deflation in which he stated the government can produce as many U.S. dollars as it wishes at no cost. Maybe a more appropriate term for Bernanke, if they do go and extend QE, is B-29 Bomber Ben – or more concisely put: Ben Gay.
Have a great day!
Brent Vondera, Senior Analyst
It was unclear to home-borrowers, prior to the November 4 promulgation, whether or not the tax credit would be extended so there was a rush during August, September and October to get in before the deadline, which caused a respite in sales that may extend for a couple of months – it pulled sales forward. If existing home sales officially drop by this degree that pending sales is predicting (official number is released January 25) it will erase the boost that’s occurred over the previous two months, and then some.
Maybe the 2012 Prediction Isn’t So Crazy (No not that the world will end, the other prediction)
The internals continue to look good-to-strong in most cases. The new orders index jumped to 65.5 from an already hot 60.3 in November. Backlog orders slipped to 50.0 from 52.0, but remains at that cut line – this is one of those readings we’ve been talking about needs to remain in focus; if it fails to remain in expansion territory for an extended period it will signal current factory workers are not stretched and thus there will be no need to hire additional workers. Supplier deliveries, another gauge of resources becoming stretched, accelerated to 56.6 from 55.7. The employment index rose to 52.0 from 50.8, now three months above 50.
For the decade, the S&P 500 declined 24.10% in simple-price terms (down 2.71% annualized) and lower by 9.10% when including reinvested dividends (down 0.94% annually). On an inflation-adjusted basis, the decade in stockland was worse with the annual decline at roughly 3.5%, but this is just in terms of price and does not include the contribution from dividends. And worse still for the international investor as the dollar got clocked by 22.25%. (When the foreign investor converts back to his/her home currency, they received less of that currency.)
But what’s done is done, let’s look to the future. The multiple compression (decline in the market P/E) that’s occurred over the past several years makes the chances of strong returns for the new decade all the more likely. Of course, this is not axiomatic. For strong returns to materialize we must have sound monetary policy and a tax policy that incentives entrepreneurial endeavors, the investment that those upstarts need, and work over leisure. (We must also get much more serious about security.) The wrong policies will lead to another rough 10-year stretch, just ask the Japanese.
While the initial claims data show the pace of firings has eased greatly, the continuing claims data unfortunately show hiring has yet to take hold. Standard continuing claims (the traditional 26 weeks of benefits) fell 57,000; however, claims for Emergency Unemployment Compensation (EUC) more than offset this as they jumped 191,000. Until EUC halts its trend to new highs, there is no clue that meaningful monthly job growth has begun.
Besides, let’s be serious about how we define a strong expansion, we’re talking about business cycles here. You’ll hear most of the optimists effuse positively about 2010, but express concern over 2011. The average business-cycle expansion over the past quarter century has lasted roughly eight years on average. One year of growth is not an expansion; more frequent downturns is not a positive development. It will take a significantly higher than average growth rate for a prolonged period to bring back the jobs that have been extinguished over the previous two years. Without a durable recovery, the household-debt pay down process will take longer to play out.
Chicago Purchasing Managers Index
S&P CaseShiller Home Price Index
The increase was driven by a nice move within the expectations index (consumer’s view of things six months out), which rose to 75.6 from 70.3. That’s the highest since the recession officially began in December 2007. The cycle low, which is also the all-time low, of 27.3 was touched in February.
As we explain each month, the most important reading is the jobs “plentiful” less jobs “hard to get” reading. This is the confidence index’s best indication of future consumer activity trends. The measure made a new cycle low of -46.6 in November, but improved ever-so-slightly in December to -45.7. The all-time low is -58.7, hit in December 1982.
The share of respondents stating jobs are “plentiful” fell to 2.9 from 3.1 in the previous month, but those stating jobs are “hard to get” improved to 48.5 from 49.2, more than offsetting the decline in the plentiful reading.
Holiday Sales
Each time the average ten-year return of the S&P 500 was below 6%, the following ten-year period has been very good to investors, with an average return of 13.14%. The following 20-year period is even more impressive, averaging 14.82% per year.
Jobless Claims
Continuing claims also fell, down a meaningful 127,000 to 5.08 million -- that is for the standard 26 weeks of benefits. However, claims for EUC (Emergency Unemployment Compensation), which kicks in to provide up to another 73 weeks of benefits, added another 142,000. So, again, this suggests that the decline in standard continuing claims is more a function of those benefits running out rather than a resurgence in job growth. (That said, as I’ve been mentioning since the October jobs report was released, we should begin to see some job growth arise over the next couple of months, it’s just that the increase is likely to be quite mild.)
Until we see EUC begin to trend lower, or at least halt it’s consecutive-week increase, the evidence is just not there that statistically significant job growth will take place anytime soon. And frankly it is unreasonable to expect this to occur just yet. These things take time to materialize even during a normal expansion, which this is not. This time we must contend with very low capacity/resource utilization rates. Therefore, those resources have a longer distance with which to be stretched, if you will, before firms begin to aggressively add to payrolls – average hours worked per week continues to hover near the all-time low and until these hours pick up for existing workers, should one expect much by way of new hires?
We need to see this segment, as I’ve been saying for a while now, trend higher; this economy desperately needs help from the business side. One hopes for this to occur, but U.S. corporations appear to be managing capital expenditures to maintenance levels as they manage around lower sales. This will help profits in the short term but will not be helpful for overall economic activity if this process extends for a while – it will keep final demand depressed; business-equipment spending is a huge job creator.
$80 Looks to be Back in Play