U.S. stocks were able to shake off another very weak home sales report, rallying in the afternoon to propel the broad market’s (S&P 500) winning streak to five sessions.  The Dow and NASDAQ Composite posted their fourth gain in the past five days.

A better-than-expected increase in retail sales for stores open at least a year (known as chain-store sales) was really the best news yesterday and probably helped to offset the day’s other economic releases, which weren’t exactly helpful.  The latest data on pending home sales suggested that the housing-market weakness of the past couple of months will extend into February and March. 

The jobless claims data had to be viewed as a net negative – while initial claims fell, they remain at an elevated level and continuing claims are stuck at unprecedented levels.  Nonfarm productivity for the most recent quarter posted a very high reading, but only because firms have kept payrolls and hours worked to a minimum.  More on all of these releases below the jump.

Energy and health-care shares were a drag on the market.  Financials were the best-performing sector as some members of Congress look to dilute the proposed new regulations on the industry and delay its inception. 

Market Activity for March 4, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 29,000 last week to 469,000 – the prior week’s reading was revised up by 2,000 to 498,000.  The four-week average fell 3,500 to 470,750 – this reading needs to make it down to 400K to offer clear evidence that even mild monthly employment gains will take hold.

The continuing claims data rose as the standard issue of claims (those lasting 26 weeks) fell 134,000, while Emergency Unemployment Compensation (EUC) claims rose 197,000 to 5.68 million.  Continuing claims appear to have finally leveled off, but remain in the stratosphere. 

So, when we combined standard continuing claims and EUC (the extensions to standard claims, and Congress is working on yet another extension) they stand at just over nine million.  This is an exceptionally high level, a level not seen since the data began, but at least it looks like they’ve topped out.  We’ll see what happens when the next extension is rolled out, if continuing claims have leveled off merely because benefits have been exhausted, instead of because some level of job growth has emerged, then they’ll resume a trend higher.

I’ve got to say, as we’ve expressed before, there is a rational argument for some amount of jobless benefits, but they is no reason to extend them beyond six months.   This economy and its citizens have to get back to standing on their own and the long-length of jobless benefits only extends the long-term joblessness.  We now have more than four in 10 of the unemployed out of work for longer than six months and the average is 7.5 months.  This is by far a postwar record and at least partially due to jobless benefits extending out to as long as 99 weeks – that’s France but without the Champs-Elysees.  (Take a less-than-desirable job or continue to collect benefits? – there is a segment of the unemployed population that will choose the latter every time.)

In a separate report, the Labor Department revised fourth-quarter productivity up to 6.9% at an annual rate from the previous estimate of 6.2%.  Output rose 7.6% but hours worked rose just 0.6%.  This basically tells the story; firms are padding profits via lower payroll costs.  This is a very normal occurrence, as businesses wait to see if the economic rebound is for real before adding jobs.  But a high level of business caution may delay hiring commitments past what is normal and we don’t have the luxury of relying on credit to pick up some of the slack as household indebtedness is high.  This high level of productivity will be good for profits in the short term but without jobs final demand will be lacking and shorten the profit cycle. 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending home sales slid 7.6% in January, following a downwardly revised 0.8% increase in December and a record 13.7% plunge in November.  Pending sales were expected to rise 1.0%, so a big miss. 

This data tracks contract signings for existing home purchases.  The actual number for previously-owned home sales are not counted until the contract closes, thus these pending readings from December and January are very important in gauging what’s going to occur for February and March existing home sales – its takes 4-6 weeks for the contract process to complete from signing to close. 

By region, the West led the pending sales data lower as contract signings fell 13.2% in January.  Pending sales fell 8.9% in the Midwest, 8.7% in Northeast (truly affected by the weather), and 2.1% in the South.

It appears we’ll get another big negative reading for February and unless the next pending sales reading jumps, official home sales for March aren’t going to look good either – following the record decline in December and the second-largest decline in January, that’s a big deal.  Needless to say, the payback from the tax-credit boost to sales is proving to be quite unfriendly – the rush from buyers to get in on the initial stages of that credit stole sales from the future.  Sure, there is a weather-related effect here, but these levels of decline show it’s more about the high level of joblessness.

We may very well test the low put in on existing home sales (the new home sales data made a new cycle low in January).  Warmer weather in April and May along with the coming expiry of the tax credit are likely to provide a bounce from these levels.  However, one must have the contract signed by April 30 to receive the subsidy, so sales may not hold up into the normally peak buying months of June, July and August – particularly on a seasonally-adjusted basis.   The housing market needs jobs growth, without it the government’s attempts at juicing sales are an exercise in futility.

Chain Store Sales

Well, the weather didn’t adversely affect retail sales last month as the International Council of Shopping Centers (ICSC) reported that stores open for at least a year posted sales growth of 3.7% -- the third month of increase after a 13-month period of decline.  Of course, year-ago comparisons are super easy as the period was hit by a 13-year low in stock prices, 750,000 in monthly job losses and crushed consumer confidence.  Still, the 3.7% rise in same-store sales is a good reading and surpassed the 3.0% expectation. 

Apparel stores recorded a 6.8% boost in sales relative to a year ago; department-store sales rose 3.5%; luxury stores posted a 7.6% improvement (this segment was the hardest hit a year ago), discount stores posted a 4.0% improvement.  Drug stores were the only segment to post a decline, down 0.8% -- naturally, drug-store sales held up in the economic mayhem of a year ago so the comparison was tougher for this segment.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900