U.S. stocks were unable to build upon Monday’s powerful snap-back as concerns that the Chinese will further tighten lending requirements weighed on the basic materials and energy sectors and doubts began to surface over the effectiveness of Europe’s bailout plan.

Commodity-related (basic materials and energy) have been a play on both massive monetary easing and Chinese stimulus, and now that one seems to be going by the wayside these sectors were yesterday’s worst-performers.  Of the 10 major sectors, utility and consumer discretionary shares were the only groups up on the day.

The $38 billion 3-yr auction went very well as buyers stormed in. The bid-to-cover (measure of demand) came in at a near-record of 3.27, and all for 1.41%. 

The Chinese stock market is worth watching as it has been a leading indicator for the direction of the S&P 500 over the past two years (only exception being a six-week period last summer).  That market is now officially in bear market territory again as the Shanghai Exchange is down 20% from its most recent peak. 

So the Shanghai has had two cyclical bull markets (in a secular bear) over the past 18 months – the rallies incited by the government’s very aggressive stimulus package, and the reversals on the talk of and now actual reining in of that policy.  The Shanghai had plunged 72% from October 2007 peak to the November 2008 trough.  Currently, the index remains 56% below its record high.  We’re watching the folly of the most aggressive Keynesian experiment in history and insaniac monetary policy.

Market Activity for May 11, 2010

NFIB Small Business Optimism

The National Federation of Independent Business survey on small biz optimism rose in April to the highest level since September 2008, yet remains below levels associated with past recoveries.  We’ve been watching for this reading to make it above 90, not because 90 is a good level but simply because the survey remained stuck below this mark for longer than any time in its history, which goes back to 1976.

So, the survey came in at 90.6 for April from 86.8 in March.  Nine of the 10 index components rose and one was unchanged.  The best aspect of the report was the climb in the expect higher sales component.  The worst was the plans to hire component, which improved slightly but remained negative for the 17 time in the last 18 months. 

The expect higher sales reading rallied nicely to a net 6% from -3% in March.  (The survey’s net figures are calculated by subtracting the percentage of owners giving negative responses to these questions from those giving positive responses.)  This is probably the most important component, but it will take several months of improvement before it funnels into hiring from the smalls. 

(Unfortunately, these individual component charts don’t go back very far; I’ve run them back as far as they’ll go.) 

And speaking of which, the plans to hire reading, while up from the previous month, remained depressed at -1% after -2% in March.  NFIB did state: “There is little enthusiasm among owners to hire more workers.”

Plans to increase capital spending remained unchanged at the fairly low level of 19%.  This is another very important aspect of the report because as firms increase outlays for plant and equipment it fuels jobs growth in the areas that make these goods and facilities.  We need to see it make progress to the 25% level. 

I also noticed the availability of credit component remained depressed, just off its lowest all-time reading. Although, I’m not sure how much this really matters right now as the demand for loans will remain depressed until small biz sales make a substantial comeback. 

Bottom line:  This survey is looking better, but we need the overall reading to make progress and trend toward 100 now that we’ve surpassed the lowly mark of 90 – albeit barely.  Small business is vital to our economy and the data NFIB collects, as it is the largest small biz organization, is a great indication of what these owners are thinking. 

Wholesale Inventories

The Commerce Department reported that wholesalers’ inventories rose 0.4% in March, a bit below the 0.5% expected.  Sales were very strong though during the month as they jumped 2.4%, sending the inventory/sales ratio to a record low – a good sign for future production so long as the sales data holds up (and I’ve got a repeat comment on this in a couple of paragraphs).

The report was ever-so slightly mixed.  The sales data was phenomenal, although we already knew that overall sales were strong during March based on other data, but the auto segment didn’t quite match up well.

What really looked good was the 2.3% gain in sales for machinery goods, which has been the case for five months now.  This speaks well for business-spending activity.  The weakness was in the auto segment (a key driver of factory activity, the other being Asian exports) as it recorded a meaningful inventory build even as sales declined in March.  We’ll keep an eye on this segment over the next couple of months.  (As an aside, I noticed an analyst comment that auto inventories are down 11.2% y/o/y, I guess making the case that the recent decline in sales doesn’t matter.  In fact, auto inventories are off by 24% since their 2008 peak.  But, of course, auto sales are 27% lower than the 20-year average. So there.)

Overall, this report sets up nicely for the business inventories data that will be released on Friday.  That data will include sales and inventories at the retail level, which the wholesale data obviously doesn’t include.  From a GDP perspective, I don’t see anything within this wholesale report to really change the inventory component within the first-quarter GDP report – inventories are one of the areas that are estimated within the first look at GDP as the final month of the quarter’s data is not released until after that first look, also calls Advance GDP .  The estimate will probably prove to be pretty accurate when we get the first revision to the latest GDP reading at the end of May, os not much change. 

On sales and final demand, as we’ve talked about for a while now, U.S. corporations currently enjoy large cash positions; they have the resources to enhance demand so long as they have confidence in the future.  The consumer on the other hand is the area that worries me.  Consumer expenditures (70% of GDP) have been strong of late as households spend transfer payments (government cash), tax credits and strategic mortgage defaulters their freed up money.  Alas, there’s a payback to this spending when the intersection that took place in the chart below occurs. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900