U.S. stocks erased an early-session slide as strong same-store sales results offset a disappointing initial jobless claims reading.  Those retail sales figures also calmed investor concerns about the pace of future consumer activity that had followed through from Wednesday after that deep decline in consumer credit was reported. 

Naturally, consumer discretionary shares led the way, with telecoms (whoa! first time in a while we’ve seen those shares at the top) and financials rounding out the top performers.  Utility and health-care shares were the only sectors to close lower. 

European sovereign debt concerns led stocks lower at the open, but comments from European Central Bank President Trichet appeared to calm worries, at least outside of the Greek market, as he said the debt issues would not be a problem.   I watched as stocks rose from the early session lows on the heels of those comments; the retail numbers kept that momentum going. 

But as I keep saying, this government debt problem isn’t going away, and that goes for here at home as well.  Politicians/policymakers can make comments that calm concerns on a day-to-day basis, but they cannot ultimately talk this problem down.  In the end, it’s going to take tough choices; structural changes to western-economy fiscal policies that gets spending in line with at least some level of common sense.  Whether governments choose to do this voluntarily (and I wouldn’t hold my breath on that one) or are forced to by the market, it doesn’t matter; it will occur because it needs to occur.  The fantastic dreams that Europeanized socialism is a lasting model are crumbling. 

Market Activity for April 8, 2010

Jobless Claims

The Labor Department reported that initial jobless claims rose 18,000 to 460,000 in the week ended April 3 after an upwardly revised 442,000 in the previous week.  So the figure remains stubbornly sticky at this 450K level and until this figure makes progress down to the 400K mark, which I repeat each week, one cannot be confident that private-sector employment will trend higher.  The four-week average rose 2,250 to 450,250.

Continuing claims fell as both the standard issue of claims (those that last the traditional 26 weeks) and the French-style EUC (the extensions that bring benefits out to as long as two years) both declined.  Standard continuing claims fell 131,000 to 4.55 million and EUC (Emergency Unemployment Compensation) dropped 223,400 to 5.59 million.  That drop in EUC came close but didn’t completely erase the 265,000 increase in the week prior. 

Nice to see continuing fall, but we’ve seen this back and forth play out for several weeks now.  EUC claims have been range bound, running 5.5-5.9 million since January.  This continues to illustrate that the long-term unemployment problem has yet to dissipate – and indeed this issue is at least partially a function of Congressional efforts that keep extending these transfer payments; they’re in the process of working on yet another extension as we speak. 

Chain Store Sales

The International Council of Shopping Centers (ICSC) reported that chain-store sales, which tracks sales at stores relative to year-ago levels, jumped 9.0% in March.  This is a function of a number of variables:

- There is pent-up demand as consumers shut down during most of last year. 

- We all remember what was going on in March 2009 when the stock market hit its lows and consumer confidence was floored at its record low.  Thus, the comparison to that period is by far the easiest it has ever been in the data’s 17-year history.

- Easter fell early this year so a good degree of related purchases occurred in March, unlike last year when Easter was in the middle of April.

- New home buyers spend those refundable tax credits, either as they come in or in anticipation of arrival – something we first mentioned back in October that would temporarily goose spending by the spring. 

- There are stories from lenders, as the CalculatedRisk blog http://www.calculatedriskblog.com/2010/03/hamp-applicants-tanned-and-juiced.html has recently presented, touching on what bank statements look like for applicants to the HAMP (a government’s program to modify delinquent mortgages).  These delinquent borrowers are not making payments as they wait for the government-directed modifications and there is evidence that they are spending the funds that would otherwise go to making the mortgage payment.  (HAMP requires recent-month bank statements to substantiate that the borrower is truly distressed.)    According to this story, the very first application that this lender pulled showed various non-essential purchases, including $1,700 in spending at Best Buy, Bed, Bath & Beyond, Pac Sun and Footlocker, among other seemingly non-essential retailers.  Now, this is just one application, but based on the way people have behaved over the past several years, it’s not beyond reason to believe that many delinquent home-borrowers are acting this way.

- Financial industry incomes have come roaring back and this is the primary determinant of the luxury segment.  This segment was the worst hit during the financial crisis and has staged some of the best results over the past four months – Wall Street loves Ben!

On the specific segment, apparel-store sales jumped 12.8%; luxury-store sales rallied 14.2%; discount-store sales gained 10.7%; and wholesale clubs (ex-fuel sales) added 3.5%.

This is a great report, even if it is off of extremely depressed levels – and this will remain the case through July as chain-store sales plunged 4.8% per month on average during the 10 months ended July 2009. 

But you know, 10% unemployment does matter; higher energy prices do matter; high household debt levels do matter – and the latter two matter all the more when incomes are flat, as they have been since Q4 2007.  I would be careful in expecting consumer activity to trend higher over a multi-year period as is typically the case; the consumer will have plenty of headwinds to confront over the next couple of years and the main confidence measure illustrates labor-market concerns remain in focus.

Have a great weekend!

Brent Vondera, Senior Analyst