U.S. stocks pared fairly large early-session losses thanks to an afternoon rally that sent the S&P 500 higher by 1.5% from the day’s low.  The broad market failed to make it back to the cut line and all 10 major industry groups decline on the session but I think we can call this one a moral victory – for perspective, the Dow was off by as much as 188 points at the day’s worst.  Mid and small cap indices managed fractional gains.

Things got started on a bad note as futures were pointing lower due to concerns over growth prospects in Europe and the likelihood that sovereign debt woes would spread throughout the zone.  Also putting the hurt on morning trading was the latest report on jobless claims, which showed the uptrend has extended to seven weeks now.  Initial claims have just about returned to the 500K mark – peak levels of the last two economic contractions.

But around 1:00CST stocks staged a comeback, which was also right around the time Bloomberg News reported that the Obama Administration may ban all foreclosures until they have been screened and rejected by the government’s Home Affordability Mortgage Program, or HAMP.  We discussed this proposal to halt foreclosures in Wednesday’s letter, so I won’t get into it again here.

Telecommunication and financial shares led the decline.  Consumer-related and health-care shares were the relative winners, but still down for the session. 

Market Activity for February 25, 2010

Jobless Claims

The Labor Department reported that initial jobless claims rose 22,000 to 496,000 in the week ended February 20 – economists had expected the reading to fall 14,000 to 460K.  The four-week average rose 6,000 to 473,750, which is the highest level since late November.

This was a terrible report and extends the latest trend to seven weeks – which does make it kind of difficult to blame completely on the weather, even without big snowfall in certain parts of the country the figure would likely still be above the 450K level. 

In early January the reading appeared to be headed for the 400K range – a mark that everyone’s been watching for as it’s always accompanied by some degree of job growth.  Now, it is all but back to 500K – the peak level of the past two recessions/downturns. 

I should explain that it is not unusual for jobless claims to engage in these bounces following a steep decline from previous highs (a slide that occurred during the final three months of 2009), but the degree of this move is more than is typically seen.  I still believe claims will move back down over the next few weeks, but I am not at all convinced that they’ll get to a level that suggests significant job growth will ensue any time soon.

While the initial claims data continued to deteriorate, the continuing claims figures improved.  However, it’s tough to get excited about a decline in overall continuing claims when initials are on the rise – such behavior sends the message that the drop in continuing claims is due more to the expiration of benefits (as the long-term unemployment readings continue to rise) rather than the presence of hiring commitments.

Standard continuing claims (the sort that last the traditional 26 weeks) rose 6,000 to 4.62 million, but that’s not a meaningful increase.  The claims for Emergency Unemployment Compensation (EUC), which is the reading I’m keeping a closer eye on as these claims have eclipsed those of the standard sort -- EUC claims are currently at  5.68 million, fell 320,000 and thus more than erased the rise in the previous week.  Unless this decline becomes a trend though, and sorry to repeat myself, it suggests the fall is due to exhaustion of benefits.  (EUC and its various extensions offer an additional 73 weeks of jobless benefits.)

Durable Goods Orders

The Commerce Department reported that overall durable goods orders rose 3.0% in January, after a 1.9% increase in December, but the number was boosted by a 126% jump in commercial aircraft – a very volatile figure that engages in wild swings from month-to-month.

As a result, Commerce reports an ex-transportation reading on durable goods and that figure showed orders declined 0.6% after a 2.0% increase in December, which was revised up at twice the rate of the flash estimate last month.  So, you put the two months together and you basically get what the market has expected.

The problem within the report was the 2.9% decline in the non-defense capital goods ex-aircraft component, which is the proxy for business-equipment spending.  This follows two months of increase (up 3.3% for December and 3.2% for November), but we need this figure to trend higher for several months still as the economy needs all the help from the business side it can get as consumer activity will be subdued for a while.  One should not expect this reading to move consecutively higher for 4,5,6 months in a row, business outlays don’t work that way.  However, after a month of decline it is essential for this reading on business spending to rebound in the following month in order to offer some confidence that businesses are spending in earnest. 

The computer & electronics segment jumped 4.6% (here’s that maintenance level of business spending we’ve been talking about) after a mild 0.3% rise in December and electrical equipment orders rose 1.4%, after a 3.0% decline in December.  A 9.7% plunge in machinery orders during January is what dragged the business-equipment reading lower – this decline more than erased the 7.4% increase in machinery orders for December. 

The best shot at job growth is going to come from business activity.  When firms engage in business-equipment purchases, it provides a huge shot in the arm to the job market but they need confidence and certainty before they increase spending in a durable manner.  The problem is businesses don’t have confidence and are contending with a high level of uncertainty due to the intense government involvement and the messages coming from Washington.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900