U.S. stocks rose again on Thursday, helping the S&P 500 erase more of Tuesday’s slide. – a 1% pick up today will compete the circle.  Of the major indices, the NASDAQ gained the most, followed by the S&P500 and then the Dow. 

The German Parliament came to consensus on supporting their $11 billion share of the Greek rescue package, which will prove to be the first in a series of installments over the intermediate term.  Optimism over the corporate-profit story also goosed stocks, along with Federal Reserve Board nominees that are unlikely to put pressure on Bernanke to tighten anytime before the unemployment rate hits 8% -- more on that below. 

Financials, which led the market lower on Monday and Tuesday, was the top-performing sector for a second-straight session.  Industrials and consumer discretionary rounded out the top spots.  Energy and utility shares were the worst-performing groups, but all 10 majors gained ground on Thursday.

Market Activity for April 28, 2010

Jobless Claims

Initial jobless claims fell 11,000 to 448,000 in the week ended April 24 from an upwardly revised 459,000 in the week prior.  Economists had expected claims to fall to 445K from what was believed to be 456K in the previous week.  The four-week average ticked up by 1,500 to 462,500.

So initial claims remain unfortunately sticky, unable to fall to the 400K level that signals at least some consistency in job growth.  We will see job gains in the coming months, but with initials holding at 450K one does question the degree of private-sector improvement – 2010 census hiring will certainly help the headline employment numbers. 

Continuing claims fell for a third-straight week, but the test will begin in two weeks when the extensions are back in play.  Remember, those extensions (extensions to the traditional 26 weeks of benefits) ran out on April 5, but another round was passed again and signed on April 15 – these emergency claims are reported with a two week lag, so we won’t see the renewed extensions show up until early May. 

Steve Liesman, CNBC’s chief economic commentator, stated he’ s not going to make many friends by reporting that the very long periods with which one can remain on jobless benefits is helping to cause the long-term unemployment problem.  Make friends?  Is that what he’s there for, or is it to forthrightly report on the data and inform people of the studies that show this to be the case?  Those paying even remote attention understand that empirical evidence regarding this issue has been present in Europe for decades.  The media is so afraid, or unwilling, to speak the truth.

We’ve spent time on this subject and while the labor market has structural issues, namely within factory and construction employment, when the government provides up to two years in unemployment benefits, you’re going to get a meaningful percentage of the workforce that simply waits before truly looking for work.  More than 6.5 million workers have been unemployed for 27 weeks or more and a study from Pew Fiscal Analysis says 3.4 million have been unemployed for over a year.  That’s not all due to structural issues – why take a less-than-desirable job when the government continues to transfer money from those who are working?  When tax rates move higher, on a slew of sources, one of the programs you can thank is 99 weeks of jobless bennies. 

Skedaddle Hawks – There’s No Will for Your Prudence

President Obama has announced his three nominees for the Federal Reserve Board, an aspect of the Federal Reserve System that has been short its normal seven members since Congress held up President Bush’s nominees.   The board gained a member, Daniel Tarullo, in 2009.  This made for five members but Vice Chairman Donald Kohn is retiring so they’ll need three to bring into full compliance. 

These three nominees include the current president of the San Francisco Fed – Janet Yellen, the most dovish Fed official in the system right now, a professor from MIT – Peter Diamond and from what I understand a full-blown Keynesian (another dove), and a Maryland state regulator – Sarah Raskin, a person I know nothing about. 

So here’s how it works:  When the Board is at full strength you have its seven members and the president of the New York Federal Reserve Bank as permanent members of the FOMC, and a rotation of four of the other regional Federal Reserve Bank presidents that all serve on the rate-setting committee.   The members of the Board are nominated by the President and confirmed by the Senate. 

Since the Board has been short-changed, the regional bank presidents have had more of a say in policy – and these regional leaders are generally more hawkish, meaning they are more watchful of inflation trends.   I know this is difficult to believe since the FOMC continues to implement ZIRP, unwilling to remove even the emergency-level of accommodation, but everything’s relative I guess. 

Now with the Board moving to full strength they’ll have more say in assisting Bernanke with regard to policy.  Bernanke is the man, he is the decision maker, but being surrounded by at least two more doves the Fed is going to err on the side of inflation and in favor of its other mandate: maximizing employment – let’s hope with don’t get both high inflation and continued high unemployment ala the 1970s.  (I won’t get into this dual mandate, which was invoked in 1978, but I’ll just say the Fed will have to be changed back to just the single mandate of price stability if we’re going to get things right again.) 

The hawks will become increasingly isolated, thus the FOMC will remain the market’s obedient dog.  Of course, the longer they keep the emergency-level of accommodation in place the harsher the unwind will be to the market and the economy.  But for now, few people seem to be surveying the road ahead; the Fed is the market’s best friend.   Maybe we should change the acronym from FOMC (Federal Open Market Committee) to FIDO (Fed’s Intentionally Dovish Organization).    Good dog.

Have a great weekend!

Brent Vondera, Senior Analyst

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www.acrinv.com