U.S. stocks bounced between gain and loss on several occasions yet again yesterday, but eventually rallied to end a two-day slide that had sent the S&P 500 to a seven-month low. 

Comments from Fed Chairman Bernanke reportedly put the brakes on an early-morning rally with his comments on the labor market.  The Fed head stated that the unemployment rate is likely to remain “high for a while.”   But you can’t keep a good market down, most stocks pulled a reverse of what’s played out over the past couple of sessions and rallied late in the day to close at the session high. 

In Monday’s letter, following Friday’s loss that brought the S&P 500 back down to the 1060 handle, we mentioned that it wouldn’t be long before a retest of 1040 occurs – that is the intraday low hit on May 25 and the lowest closing level since last November.  We came close to that mark yesterday morning, hitting 1042, and rallied from there; although not in a straight line. 

Basic material shares enjoyed a really nice day, jumping 2.49%.  These shares, which were among the top-performers when the market was in rally mode, had been hit hard, falling 18% since April 26.  Technology shares were the laggards, but all 10 major industry groups did rise for the session.

I did notice commentary suggesting that the market rebounded on speculation the Swiss National Bank (SNB) has intervened to support the euro.   Speculation?  They have been intervening for a while, as we’ve been discussing.  The Swiss Franc has plunged 9.5% over the past six weeks due to the SNB selling the heck out of it to support the euro – yeah, euro would probably be down to that 1.15 USD/EUR level (the all out intervention level) without the SNB’s actions. 

Market Activity for June 8, 2010

What’s a Keynesian Central Banker to Do? (as if there were another kind)

And while we’re on the financial press missing what’s really occurring, I’m not quite sure it makes sense to blame the Bernanke comments on the market’s morning reversal since his statements were made the previous night in a question-and-answer session; it’s not like the market was suddenly caught by surprise -- but I guess it does get old stating that Chinese, European and overall global growth concerns continue to plague the risk trade.  (And on Chinese growth, last night it was reported that China exports jumped 50% from the year-ago period.  In a month those very easy year-ago comparisons will disappear and the widening in European credit spreads will put additional pressure on China as the euro-zone is a vital aspect of their export markets.)

Bernanke also stated that the recovery is “moderate” based upon the degree of the downturn (it sure is, I wonder if the Fed is going to revise their economic estimates for fourth time in about a year?) and that the banking system hasn’t fully healed and lenders remain cautious. 

As I’ve expressed a couple of times now, I think we get into 2011 and find the Fed engaged in a massive quantitative easing campaign.  What defines massive?   Don’t know, but the first round of QE involved $300 billion in Treasury security purchases and $1.25 in mortgage-backed securities – massive to me means much more than that, probably concentrating more on Treasury purchases this time.  This is when the hole is irreparably blown in the strong-growth camp.

NFIB Small Business Optimism

The National Federation of Independent Business reported that their survey of small-business conditions improved in May but remained weak by historical standards.  Recall we’ve been talking about how this gauge remained below a reading of 90 for the longest stretch in the survey’s history, which goes back to 1976.  Well, finally in April (reported in May) it moved past that mark and has made more progress as of May -- but barely as small-business owners remains cautious. 

In May the reading rose to 92.2 from 90.6 in April, so we’re above 90 for the second month after a record 18 months below that mark – a reading that was never even hit during the previous two recession/downturns. 

Most of the individual sub-indices (questions to respondents) within the overall survey improved, but only the expect a better economy reading showed marked improvement.  That figure jumped to 8% from 0 in April – 9% is the longer-term average, so this is a good number.  The plans to increase inventories reading also rose to a level that is above the longer-term average, but this gauge wasn’t one of the more depressed figures – although inventory satisfaction fell to 0 from 1% so this may suggest trouble for production over the next few months. 

However, the other improvements were muted and remain at fairly depressed levels.  Plans to hire rose to 1% from -1% -- the longer-term average is 11.6%; increased capital spending rose to 20% from 19% -- the average is 27.9% and should be around 30 at this stage; the availability of loans gauge improved but remains low at -14% -- the historic average is -8% but that average is not all that meaningful as NFIB just started asking this question in 2005; good time to expand rose to 5% from 4% -- well below the historic average of 15.1%, which doesn’t suggest the small business community is about to start hiring in earnest.

The higher selling prices gauge fell to -15% from -11% -- the longer-term average is 7.4%, which suggests hiring will be muted because such cost increases will hamper profits.  Positions not able to fill slipped to 9% from 11% -- the historic average is 21.3%.  We know that with roughly 10% official unemployment and 17% underemployment there is no problem finding workers in general, but we also know that skilled employment has remained somewhat tight, so I’m surprised that this figure remains floored. 

So overall the gauge shows some improvement at depressed levels, but we should be above readings of 100 at this stage in the business cycle (as the chart above illustrates).  As we pointed out yesterday, and for nearly a year now, this should not be of great surprise as this is not the normal recovery. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900