U.S. stocks gained a little more ground Thursday, extending the winning streak to six sessions, as strong regional manufacturing reports and an upbeat earnings pre-announcement from UPS offset troubling jobless claims figures, the rolling concern over European sovereign debt, and the lowest UK consumer confidence reading since July 2008 that had pre-market trading lower.

The numbers out of the manufacturing sector are really very good, but that’s about all we’ve got right now.  If we’re going to pass this ball off from government stimulus to something that can achieve just mild economic growth without all of this support then we’re going to need big employment gains. 

The UPS report was a good one, at least in relative terms as we’re coming out of two years of depressed package volume, but it showed domestic activity remained weak.  Package volumes rose 24% within countries outside of the U.S., and make no mistake this is driven by China’s huge stimulus efforts, but U.S. shipments rose less than 1%. 

Just three of the top ten industry groups closed higher on the session, led by industrials shares.  Information technology and consumer discretionary shares were the other two winners.  Financials led the seven industry groups that fell, health-care yet again was near the bottom of the list as it held the penultimate spot.  Regulation that will cap health insurer profits have obviously led to investor unease.

Market Activity for April 15, 2010

On the EU government-debt front, as we discussed on Monday following the weekend developments that laid out some specifics of the bailout plan, the Greek government will go running into the arms of this rescue even as they can raise money from the capital markets – although at rates in the 5-6% range for short-term debt and 7-8% at the long-end of the curve. 

Frankly, based on this budgetary basket case, the Greeks should be happy that yield-hunting investors are willing to accept yields in the single-digits – well, check that, they are thanking Dr. Zero for creating an environment that has investors willing to accept returns that do not appear to compensate for the risks in the marketplace today.  But why do they have to even deal with high-single digits when they can forget about pride and responsibility and take a handout, increasing the way of the world.  The German populace must be fuming – they’ll be on the hook for most of this.  They should relax though, this is just the tip of the iceberg; they’ll have much more to get angry over down the road as problems within other EU countries will eventually drive Germany’s cost of money up too. 

Jobless Claims

The Labor Department reported that initial jobless claims rose 24,000 to 484,000 in the week ended April 10.  This marks the second week of increase and the third time now that initials have either approached the 450K level or dipped below, only to jump back up to 485K-490K.   The four-week average rose 7,500 to 457,750.

Continuing claims also rose as the standard issue (those lasting for the traditional 26 weeks) increased 73,000 to 4.639 million and EUC (which extends benefits up to 99 weeks) jumped 160,000 to 5.85 million. 

I was really expecting the continuing number to fall, at least for the next couple of weeks as Congress wrangles over extending these benefits extension – they’d then jump again when the extensions are eventually passed, which occurred last night.  But they rose even as many people saw benefits expire, which means we have both new entrants  into standard continuing claims and more people moving into the extensions as those traditional 26 weeks of benefits run out yet the recipient has not found a job – or isn’t willing to take one before their money-for-nothin’ runs out. 

Empire & Philly Manufacturing

Both of these regional factory activity surveys showed the manufacturing sector remains hot, and is getting hotter.  Empire, which covers the second Fed district, rose to a reading of 31.86 in April from 22.86 – this a reading that nearly matches the most robust activity levels (hit in 2004) in the survey’s history (although it’s a short history – only goes back to 2001).  Philly, which covers the third Fed district, printed a reading of 20.2 in April from 18.9 in March – this measure is still a ways from the 2004 levels but strong nonetheless.

Both of these gauges show new orders are robust and the inventory readings show that at least large businesses are beginning to actually rebuild stockpiles – until recently inventories were just falling at a slower pace, which does add to GDP but doesn’t necessarily boost production.

The two gauges also printed substantial improvement within the employment readings.  Now we need them to show up in the labor statistics.   Over the previous three months, the employment reports have shown the manufacturing sector is adding jobs but the results have been weak – averaging just 15K per month.   

We’ll need better than that as 1.9 million factory jobs were slashed since 2007 and 2.9 million since 1993.  A main issue here is that the sector has become incredibly productive, which means we can produce vastly more goods with less workers.  

Of course, there is the global labor market situation as factories have set up overseas to take advantage of cheaper labor over the past 15 years.  But these overseas factories largely produce low-quality goods.  The high quality stuff is still made here in the U.S.  During 2007, the U.S. produced more manufacturing goods, on an inflation-adjusted basis, than ever before –most people are not aware of that.  The manufacturing employment situation is largely a function of productivity gains.  This is why we need to increase our breadth of manufacturing, which means a large-scale effort to produce more domestic energy.  Remove the restrictions and watch high-paying factory jobs grow. 

Digressing a bit for the moment:  With these hot manufacturing readings, and so many people running around saying this expansion is for real, there’s only one way to find out.  If we want to know how much of this, and this goes for stocks too, is for real and how much is artificially pumped up by easy money then let’s get that fed funds rate up to just 1.00-1.50%.   If this expansion can stand on its own, then certainly it won’t be affected in the least by removing just the emergency-level of accommodation. 

Of course, the Fed isn’t about to do this right now, not with the jobless rate where it is.  But I just like to remind everyone of the realities – there are several reasons Dr. Zero is keeping ZIRP in place.  I might agree with his view that the economy won’t withstand even mild tightening, but I definitely disagree with the existence of ZIRP for this extended period.  At some point you have to get to it and see just what is real and what isn’t. 

Industrial Production

The latest industrial production (IP) reading was a disappointment as it showed a 0.1% increase in March (0.7% was expected), which barely kept the nine-month streak of increase alive.  However, the soft number was all due to a huge 6.4% decline within the utility segment.  The manufacturing segment (by far the largest component) posted a strong 0.9% increase for the month.  IP is up 4% from the depressed level of a year ago.

This slide in utility output is of course partially due to commercial and residential vacancies, but it is more a result of the weather – very mild weather will do this.  This is a sort of payback from when the December surge of 7.6% in utility output kept the IP streak going even as manufacturing output declined – as we discussed back in January when the December number was released, IP would have declined if not for harsh weather.  Now for March it was soft, but it’s just a weather thing. 

NAHB Housing Market Index

The National Association of Homebuilders sentiment survey bounced nicely in April to a reading of 19 from 15 in March.  However, a number below 50 illustrates that the number of builders who believe the sales environment is “poor” exceeds those that believe it is “good,” so we’re far from an upbeat scenario. 

Builders were a little more encouraged as buyers come in to take advantage of the tax credit, which expires on April 30 (in terms of having a contract signed). 

Anyway, whether the housing market indicators go up or down at these low levels is pretty much meaningless.  It will ultimately take sustained job growth to revive housing, until then those who think sales and prices will consistently move higher are, unfortunately, kidding themselves.  

I don’t think this is something to necessarily fret over; it’s going to take time.  The important thing is to realize this.  It will take time to repair the damage done from too many mortgages written to too many people who either thought they’d make a quick and substantial profit from this endeavor or to people who had no business buying the house they did.  The government can make every attempt under the sun to boost sales and prices in short order, but it only delays the inevitable.  Only time and job growth will right this ship.  Sorry, I know wonderland-laced commentary is more pleasant to read, but there’s no place for wishful thinking in this environment.   

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com