U.S. stocks spent most of the session bobbing around the cut line (the opening price for new readers), but slid in the final 90 minutes to make it two up and two down for the week thus far.

The fact that regulators have moved beyond Goldman Sachs and are now scrutinizing eight banks with regard to their mortgage-bond deals certainly didn’t help investor sentiment. 

Also, a couple of retailers forecast weak same-store sales results for the second quarter, which led to some worries about today’s retail sale report for April. 

Finally, more people seem to be talking about what we mentioned yesterday: a European economy that has become heavily dependent on government spending isn’t going to respond well to the necessary austerity plans coming from EU members.

Consumer discretionary shares led the declines (been a while since that happened as performance-chasing behavior in the sector has been running wild), with financials not far behind.  Of the 10 major industry groups, only telecoms gained ground for the session.

Market Activity for May 13, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 4,000 to 444,000 (expected to ease to 440K) from an upwardly revised reading for the previous week.  So, the figure remains sticky at that 450K level.  For umpteenth time, and I’m sure this doesn’t need repeating but it’s important  to keep in mind, we need this number to fall below 400K to offer clear evidence that a consistent jobs rebound has begun. 

Yes, we’ll see big numbers over the next couple of months, but that’s a known because census hiring peaks in May and June.  As early as October 2009 we offered the notion that jobs should begin to go positive by March, but estimate was for 100K-125K in private sector jobs.  We’ll need 300K-plus every month for 12-18 months just to get he official jobless rate down to 8.0-8.5% over this time frame.

The four-week average of initial claims fell 9,000 to 450,500.

Continuing claims were mixed as standard claims (those that last the traditional 26 weeks) rose 12,000 to 4.627 million, while EUC (the extensions to those standard length of benefits) fell 200,000 to 5.137 million. 

I want to call this a good report on the continuing side, but I’m just not sure the recent extensions Congress passed have shown up yet since there’s a two-week lag to the EUC claims.  That is, have these claims declined because of the expiration of benefits (until the recently passed extensions show up again) or is this decline a result of an improvement in the long-term unemployment situation?  If continuing claims do prove to be trending lower, we still have this problem with the initial claims – new net firings are still too high.  One can’t have conviction that meaningful jobs gains will become consistent until initials get down to 400K with continuing trending lower, even if it’s mildly lower.

Import Prices

The import price index jumped 0.9% in April, boosted mostly by the fuels components, but not totally as the ex-fuels figure rose 0.5% for the month.  On a year-over-year basis, import prices remained in double-digits at 11.1% -- been stuck in the 11% handle for four months now. 

Import prices should chill out a bit with the dollar’s rebound over the past month; a higher dollar level makes our imports cheaper.  Still, we’ve seen quite the resurgence within this inflation gauge.  The 30-year average, even when we adjust for the collapse in the index that occurred when the economy all but shut down 12-15 months back, is just 1.9%.  So even if the y/o/y reading eases back to 7-8%, it presents a problem.

That said, I have to make some comments on overall inflation – and I’m talking about the official data readings, not the prices consumers have to actually confront on a day-to-day basis (I don’t believe the official data fully reflects what’s going on out there but it’s all we have to go on). 

The broad consumer price gauges, such as CPI, show inflation remains very tame.  I’ve expressed concern about future inflation over the past year, but there is a possibility overall consumer prices will remain low as housing has additional headwinds that must be faced and this will further erode bank assets – and thus continue to delay credit expansion.  If banks are afraid to lend money, or small businesses don’t find reason to increase the demand for loans, the money the Fed has pumped into the system remains somewhat fallow.  However, the Fed is hell-bent on sending inflation higher; they see this as the lesser of two evils right now as the economy remains fragile -- even if they will never admit it.  (Bernanke & Co. will also continue to capitalize the banks, by subsidizing their income at the expense of the saver; they must do it because of the junk assets banks own.) It’s only a matter of time before inflation becomes a problem, but it appears to be further down the road as it will take a credit expansion to trigger the inflation gauges higher.

ABC Consumer Confidence

This survey from ABC News, not the confidence figure I focus on but many do, came in unchanged for May and remains at depressed levels.  This report was out late Tuesday, but I ran out of room to discuss it in the past two letters. 

The overall ABC confidence index remained at -47.  The overall measure is based on three questions:  The state of the economy; your personal finances; the buying climate.  A reading below zero means that the number of negative responses were greater than the number of positive responses, so -47 is pretty ugly. 

The overall index:

The state of the economy:

Personal finances:

The buying climate:

The personal finances and buying climate measures seem to be awfully disconnected from the actual consumer activity that has occurred of late.  One in eight Americans on foods stamps, according to the Agriculture Department – just the latest in a series of records that keep coming; not to worry.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

www.acrinv.com