As everyone knows, U.S. stocks got hit hard yesterday, extending the latest losing streak to three sessions but the weakness has really been in play for three weeks, hitting a crescendo since the so-called “flash crash” two weeks back.  Yesterday’s open to close decline was actually larger than the May 6 (flash-crash day) move.

Stocks looked ready to stage a comeback on a couple of occasions yesterday, a rally late in the morning session and then again about mid-way into afternoon trading.  But a late-session slide, which coincided with news that the Senate came up with the 60 votes necessary to end cloture and clear the way for passage of financial regulation legislation -- which they ultimately passed last night, slammed the market back down to close at the intraday low.  The Senate version will have to be reconciled with a House plan passed in December.  After that it gets signed.

To no surprise, financials led the market slide.  Industrials, energy and basic materials (all the most cyclical industries that are having trouble now that the state of the global economy are in doubt again) weren’t far behind.  Telecom, consumer staples and utility shares were the relative winners, but even these were off by roughly 3%. 

The broad market – as measured by the S&P 500 -- is now off its recent high by 12%, a decline of more than 10% is considered a correction, as markets follow the Shanghai Composite lower.  The Shanghai exchange is down 18% since April 15 and 25% off its near-term peak.  The trend of Shanghai leading has been in place since late 2008.  I’m not saying this trend is in place for the long term, but it’s tough to ignore for now.  As China continues to rein in its stimulus, which has provided a kick to the entire Asian region, commodity-rich economies and technology & certain industrial firms, the market may continue to pull back from the risk trade.  Of course, concerns over Europe and the drag those economies will have on global growth are also part of the problem.  But Shanghai has been quite the indicator.

Market Activity for May 20, 2010

Jobless Claims

The Labor Department reported that initial jobless claims rose 25,000 to 471,000 in the week ended May 15 (was expected to fall 4K to 440K).  This is always an important report, but this one even more so as it coincides with the survey week for the May jobs data; the meaningful jump above the 450M mark does not suggest we’ll see a jobs number for May like we did for April. The headline reading should be strong as May is traditionally when the decennial census hiring shows up, but I’m talking private-sector hiring. 

The four-week average of initial claims rose 3,000 to 453,500.

Continuing claims posted a second-straight week of decline – the easing in continuing claims isn’t substantial, but they are trending lower.  Traditional claims (those that last for the first 26 weeks) fell 40,000 to 4.62 million and EUC (the extensions to the traditional period of jobless benefits) fell roughly 95,000 to 5.10 million.  The problem is the stickiness of initial claims, new net firings, don’t suggest that continuing claims are falling because the labor market is truly healing, but rather because benefits are running out. 

Philly Fed

We received our second look at factory activity for May via the Philadelphia Federal Reserve Bank’s gauge of manufacturing activity within the third Fed district.  The gauge came in at a strong reading of 21.4 for May (right in line with expectations), up from 20.2 in April, but the internals of the report suggested that activity may be weakening.  The Empire Manufacturing survey (New York Fed district), which we received earlier in the week, is the first regional we receive for a given month, also illustrated future weakness.

New orders slid 7.8 points to 6.1; unfilled orders remained in contraction mode, falling to -3.0 from -0.9; delivery times fell back to contraction mode, down 6.6 points to

-1.2; inventories returned to contraction mode, falling to -7.9 from 2.0 (and the six-month outlook for inventory building fell to contraction mode for the first time since December); the number of employees fell 4 points to 3.2; and the average workweek slipped to 7.0 from 8.3 (but still positive for the seventh-straight month).

Bottom line: New orders, employees and average workweek remain in positive territory, but the direction isn’t looking good and the inventory gauge may be suggesting that one of the main catalysts to GDP right now is waning.  Also, respondents pointed to uncertainty about product demand and the cost of hiring workers. 

For All the Wrong Reasons

We were just talking about rising oil and gasoline prices three weeks back as crude was approaching $90/barrel and wholesale gasoline at $2.45/gallon suggested $3 at the pump was right around the corner.  Now, the opposite has occurred as both are falling, and right ahead of Memorial Day – when’s the last time that happened?  (While you don’t yet see it at the pump, wholesale gasoline has slid 20% over the past 18 days, so it will show up at the retail level over the next couple of weeks.)    This decline in energy prices is not occurring because goods things are happening.

Look, one wants to be happy that energy prices are on the decline, particularly after the jump over the previous six months.  I’ve heard people talk about this decline as a sort of tax cut for the consumer, and indeed that’s a correct view.   But when these reversals occur because of global economic weakness/uncertainty/maybe even tumult, then it doesn’t seem to justify quite the celebratory event.  If economic troubles are leading energy prices lower, then the benefit the consumer sees at the pump is of little consolation when renewed economic hardship returns.

Real Time

The German lower house of Parliament has approved their share of a $1 trillion bailout to Greece (actually a bailout of European banks).  But stock-index futures have turned down on the news and European stocks, which were up, are now also down. 

At some point, intervention no longer has quite the quelling effect it once had when a new government “fix” occurs every six months.  Why holders of Greek bonds will continue to receive interest payments and full principal makes zero long-term sense and has moral hazard written all over it.  But you know what, if the market’s take another dive even close to what we saw yesterday, you can bet your declining euro that the ECB will come up with a shock and awe intervention sometime very soon, maybe even over the weekend.  It may ease concerns in the short-term, maybe not.  Over the long-term, it will increase the probability of more chaos. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900