U.S. stocks posted some nice gains on Thursday, but it looked like the morning rally was going to be rejected yet again before the day’s results were official. 

Stocks got off to a terrific start after pre-market activity was fueled by the 13^th month of Chinese manufacturing expansion and the highest Japanese business sentiment reading (known as the Tankan index) since 2008.  However, those gains began to evaporate after our own nationwide manufacturing report came in hotter-than-expected.  That slide continued into the afternoon session as traders possibly began to worry that ZIRP’s day were numbered, but a final hour surge recaptured nearly the entire early-session upturn to thwart what would have been the fifth rejection in seven sessions. 

In the end, the broad market finished higher by a solid 0.74%.  Basic material shares led the advance, up a strong 1.8%.  The group was followed by a 1.6% jump in energy shares and a 1.3% rally in utilities. 

The price of oil closed above $85/barrel level and wholesale gasoline at an 18-month high of $2.33/gallon, which means $3.00 retail is coming unless the wholesale level eases.  This seems to present another challenge for the old consumer, but they keep hobbling along – on what I’m not totally sure – and consumer discretionary shares continue to surge; the group only matched the market’s performance yesterday but has vastly out-performed over the past year.  They’ll be one of the hardest hit sectors when the market corrects. 

And to expand on the gasoline/consumer activity comment.  Look, a couple of years back I was one to state that $3 gasoline wouldn’t hurt this economy, specifically the consumer.  But that was when the official unemployment rate stood at 5%, today it is 9.7%; the rate of under-employment was 8.5%, today it is 16.8%.  This is a different story today and $3 at the pump creates yet another headwind for the consumer.

Stock will be closed today as the Exchange observes Good Friday.  For the week, the Dow gained 0.7%; the S&P 500 rose 1% and the NASDAQ Composite picked up

0.3%.

Market Activity for April 1, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 6,000 to 439,000 in the week ended March 27 after an upwardly revised 445,000 in the previous week.  The four-week average fell 6,750 to 447,250. 

Continuing claims rose as the standard issue of claims (those that last the traditional 26 weeks) ticked up by 6,000 to 4.662 million and EUC claims more than offset the prior week’s decline by jumping 267,012 to 5.894 million.   That’s a new high for EUC, which standards for Emergency Unemployment Compensation; these claims extend continuing unemployment benefits out to up to two full years. 

Neither of these readings point to much by way of private-sector job growth.  Initials remain stuck at this 440K level, we’ll see if we can make it down to 400K this time; the last time the number moved down to 439K (which occurred in the week ended February 5) they bounced back to 485K. 

Claims will fall to that 400K level, but it’s a process that will take more time in my view; firms remain much too cautious because they’re not sure this rebound is sustainable and they’re uncertain as to how the government’s coming desperate hunt for revenue will damage this economic rebound – I’m talking about higher income- tax rates, regulations and the VAT (value added tax) coming to America.

The continuing claims data show the long-term unemployment problem has yet to clear.  Some of this is due to the wild extension of benefits – again, up to two years now.  This is keeping the figure elevated and a significant percentage of the labor force will simply wait, collecting jobless benefits instead of taking on a less-than-desirable job.  Currently four of 10 of the unemployed have been out of work for six months, the prior record going back to 1947 was 26% in 1983. 

ISM Manufacturing

The Institute for Supply Management reported its nationwide manufacturing index and it showed the factory sector is hot.  The measure rose to a reading of 59.6 for March (57.0 was expected), after 56.5 in February.  This marks the eighth-straight month of expansion (a reading over 50) and the second month in three with a reading over 58.0, which is steamy.  The reading for March is the highest since July 2004. 

I’m concerned though that this is mostly due to government stimulus, both here and abroad, and auto assemblies.  I doubt auto sales over the next year are going to support the current pace of auto production (production has bounced 118% from the cycle low, yet sales are up just 29% from their low) and export orders (which rose to the highest level since 1989) are being driven by Chinese stimulus that is likely to be reined in; in terms of domestic fiscal stimulus, just look at the budget and it’s clear we can’t keep this up for long without payback via higher interest rates and economically-harmful tax rates.     

We have seen some business equipment purchasing from U.S. firms but not in a consistent manner; completely driven by the typical year-end buying – we haven’t seen the follow through in the first two months of this year, we only have data up to February thus far.  Maybe March turns out to show strong business spending, we’ll need this catalyst to keep the manufacturing sector going. 

For the current time, the sector looks really good.  The inventory gauge within the ISM report jumped to 55.3 from 47.3, marking its first reading above 50 since April 2006 and suggests we’ll get some actual inventory rebuilding – a big plus for Q1 GDP. 

Now, we need to see this show up in a durable expansion of factory employment.  That would be a game changer that delivers the final demand we need to make this economic rebound something more lasting.  Without it, unfortunately, this rebound will prove acutely transitory. 

Construction Spending

The Commerce Department reported that construction spending fell 1.3% in February, the 15^th decline out of the past 17 months.  All categories registered decline. 

For the private sector,  residential spending fell 2.1% (down 3.8% y/o/y) and commercial was down 0.4% (down a crushing 24.3.% y/o/y).  For the public sector, spending on residential construction slipped 0.9% (down 2.4% y/o/y) and commercial fell 1.7% (down 5.5% y/o/y). 

Have a great weekend and a Happy Easter!

Brent Vondera, Senior Analyst

Phone: 636-449-4900