U.S. stocks closed smack-dab on the 17-month high Thursday (1150 on the S&P 500, initially hit on January 19) to fully erase the 8.1% pullback the market ran into a month back.  A late-session surge brought the market out of negative territory, where it had been for virtually the entire day, to match that near-term high. 

Jobless claims that remain stuck at high levels and foreclosure filings that continue to rise at a pace of 300K per month couldn’t stop a spate of optimism that banks have put damaging loan quality behind them.  That’s a dangerous assumption in this environment. But hey, it sure feels good. 

As a result, financials led the market higher with consumer discretionary shares being the next best performing sector.  Basic material stocks participated in the advance for the first time in three sessions as the U.S. dollar lost ground.

Nine of the 10 major industry groups rose yesterday.  Energy was the sole loser.  

Market Activity for March 11, 2010

Foreclosures

Foreclosure filings rose at the slowest pace in four years (on a year-over-year basis) during February as the government has put policies in place to reduce bank seizures.  Still, the number of filings remained above 300,000 per month, coming in at 309,000 last month after January’s 316,000 filings.  This marks the 12^th straight month of 300K-plus filings and keeps the year on schedule for nearly 4 million foreclosures. 

Jobless Claims

The Labor Department reported that initial jobless claims fell 6,000 to 462,000 (about in line with expectations) in the week ended March 6, marking two straight weeks of improvement that has brought the figure down from the 500K level.   The four-week average (the chart below) rose 5,000 to 475,500.  We need this number to fall below 400K, a level that always accompanies some job growth.

Continuing claims were mixed with the standard issue (the traditional 26 weeks of benefits) rising 37,000 to 4.558 million, while the extensions to those standard claims fell 144,000.  It does appear that EUC (Emergency Unemployment Compensation), these are the extensions that Congress has enacted that extend benefits out to as long as 99 weeks, have peaked.  EUC claims do exceed those of standard claims by one million – put the two together and you have continuing claims off the chart at over 10 million.

The question is whether this is a function of some job growth, and thus the easing in the long-term unemployment numbers, or because of benefits expiring.   Congress was arguing over whether to extend benefits yet again a couple of weeks back and that caused transfer payments to lapse for those who have been on the dole for the longest periods.  Earlier this week the Senate passed a bill that included extending these benefits so now it goes to the House, where it will pass.  We’ll see over the next month (as these extensions are implemented) whether this stabilization in EUC is for real or not.  If it is, EUC claims will fall even as benefits are extended.

Trade Balance

The Commerce Department reported the trade deficit for January narrowed 6.6% to $37.3 billion as exports dropped 0.3% but imports slid 1.7%.  Economists had expected the measure to widen to $41 billion, apparently as the consensus believed U.S. business and consumer activity to be stronger than was the case.

The narrowing of the deficit in trade may marginally help first-quarter GDP (assuming the gap doesn’t widen in February and March), but the decline in consumer and business spending will offset that mild boost.

I’ll concentrate on the import numbers, simply because this is the area that obviously illustrates domestic and business consumption during the month.  I wouldn’t make too much of the weakness as it follows a couple of months of meaningful increases in import activity, but it’s worth touching on nonetheless as we need to watch the trend.

On the business side, U.S. imports of capital goods fell 3.0% -- but again this followed four months of solid-to-strong increases. Recall a couple of months back we talked about how firms generally boost spending in the final months of the year, and this was especially so in 2009 as firms were chary with cash for most of the year and found they had unspent budgets in the final quarter.  That’s what we’ll be looking for, to see if that business spending bounce in Q4 was the beginning of a trend of just a transitory event. 

On the consumer side, imports fell 2.3%, led by a hefty 8.1% slide in auto imports – this followed a 9.6% jump during the prior month. 

Crude oil imports fell 10.8% in January as we imported just 245 million barrels – the lowest since February 1999.  This decline more than offset the 1% rise in the price paid for that imported energy.

On the export side, even as they fell during January U.S. produced goods sold abroad are up 15.1% over the past year. 

We’ve heard a lot out of Washington about the desire to boost export activity, unfortunately policymakers generally talk of the need to keep a relatively low dollar value as a way to achieve this – a lower dollar value makes out goods cheaper to international buyers but it also erodes U.S. consumer purchasing power.  The right way to boost exports is to incentivize a revival of our farm industry.  Growing emerging market populations are going to need vastly more food, particularly as incomes grow within these countries, and they show to be quite incapable of producing the needed supply themselveF.  The U.S. is clearly the most efficient crop grower in the world and we should be using this advantage to allow farming to boost our export activity. 

Household Net Worth (fourth quarter)

The Federal Reserve’s quarterly Flow of Funds report includes the status of household net worth, and thanks to rising stock prices the measure improved for the third-straight quarter during the final three months of 2009.

During the recession, the combination of falling home and stock prices caused household net worth to slide $17.5 trillion.  Over the past three quarters, thanks to the rise in stock prices (real estate values slipped 0.3%) the figure has recouped $5.6 trillion of that loss since bottoming in the first quarter of 2009 – declining debt also helped, if you can call it that; the reduction of debt largely came from credit-card lines being cut and mortgage defaults so I’m not sure those people are exactly feeling wealthier. 

The figure now stands at $54.2 trillion.  For perspective, it peaked at $66 trillion in Q2 2007 and the cycle low was put in during Q1 2009.  It’s up $11.3 trillion over the past decade. 

The stock market-led boost to household wealth has been one key agenda of the Fed’s zero interest-rate policy (ZIRP).  Bernanke and Co. understood that they could not force a quick improvement in incomes, but by pushing short-term rates to nothing they believed investors would be lured into riskier assets as returns on safer assets are extremely unappealing – and they were right. 

This is good for now, rising wealth certainly won’t hurt consumer activity.  If the stock market is rallying for the right reasons, because a durable expansion is upon us, then stock prices will hold at these levels, or even continue to rise.  However, if much of this rally is due merely to the Fed pushing people into stocks because relatively safe alternatives are unattractive, then this latest improvement in household net worth is only transitory. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900