U.S. stocks fell for a fourth-straight session, and for the week we’ve now erased all of the prior week’s gains including most of the rally from the seven-month low hit on June 7.  So circling the roundabout we go – Big Ben, Parliament.   By the looks of it, we may retest that 1040 mark on the S&P 500, the level we bounced off of intraday on June 8 that got the mid-month rally going.

Consumer discretionary shares led the market lower after Bed Bath & Beyond missed earnings estimates and Nike reported sales that trailed expectations.  Basic material stocks were the next worst-performing group as renewed European debt worries hit global economic expectations – it’s pretty amazing how quickly sentiment shifts these days, but we’ve talked about how this will ebb and flow. Financials were also among the worst-performing groups as House and Senate lawmakers came closer to agreement on financial-industry legislation, creating additional uncertainty regarding bank profits – and last night they finalized the deal. 

(So looky there, President Obama and Treasury Secretary Geithner can take this wonderful piece of work in hand straight to the G-20 meeting in Toronto this weekend.  Sorry to say, the consumer will get the shaft on this one -- talking about the supposed consumer protections part of the law; the banks will find ways around the legislation, as is always the case.)

Utility, health-care and consumer staples – the traditional safe havens – were the relative winners yesterday, but all 10 major industry groups closed lower for the session.

Market Activity for June 24, 2010

Other Musings

There certainly appeared to be some central bank intervention going on with regard to the euro yesterday.  The currency rallied even as European debt woes was the heaviest drag on the market – doesn’t make much sense for the currency to rally on that news.  The cost to protect against Greek government debt jumped to match the record hit in April – it currently costs $1 million to protect $10 million worth of Greek bonds.  This increased concerns that the euro zone’s debt crisis is worsening. 

BP hit a new seven-year low as the U.S. government will reportedly examine their drilling project off the coast of Alaska, as if their massive screw up in the GofM isn’t enough for the troubled (for now) energy giant.  Also there’s a tropical storm is brewing in the Caribbean, and while it doesn’t look like it will amount to much just the thought of a storm sloshing all that oil around and sending it who knows where is disturbing enough. 

Mortgage rates continue to decline as the average 30-year fixed rate fell to 4.69% for the week ended yesterday – and with the Fannie commitment rate hitting 4.24% (the rate at which they’ll buy originated loans) the 30-year fixed mortgage is going even lower next week.  The spread between the commitment rate and the actual rate is about 35 basis points right now. 

Jobless Claims

The Labor Department reported that initial claims for jobless benefits fell 19,000 to 457,000 for the week ended June 19; the previous week’s reading was revised up to show claims came in at 476K vs. the 472K initially estimated.  The four-week average fell 1,500 (thanks to this latest decline) to 462,750.

Continuing claims (those on the dole for at least two weeks) were a wash, halting a multi-week downtrend as the traditional period of benefits (26 weeks) fell 45,000 to 4.548 million and EUC claims, and its various extensions that bring benefits out to as long as 99 weeks,  rose 45,000 to 4.849 million.

So, initial claims fell and continuing claims held constant. This marks the first time since mid April in which initials have fallen without continuing claims rising.  I’ll note, that was also the last time initial claims had fallen from the 480K level back down to the 450K handle.  As we now know, claims made another run to 480K as they hit 474K in mid May and then again in the week that ended June 11 as initials hit 476K.  So we hope for initial claims to finally make it below the 450K mark this time, but the trend isn’t helpful – and ultimately we need to get initials below the 400K mark, a level that will offer real evidence that substantial and durable monthly job growth will occur.  Until then, one cannot have conviction in this occurring – and again, I’m talking about durability, or consistent job gains. 

On continuing claims, recall that exhaustion rate chart we’ve presented on several occasions.  That reading has come off of its record high ever-so-slightly (which is the first time it hasn’t made a fresh record high since March 2009), but it must be accompanied by a move in initial claims to that 400K mark.  Until then, one has to assume that continuing claims are declining mainly because benefits have expired rather than some new job creation occuring.  If so, that spells trouble for retail activity as government transfer payments have certainly helped to buoy consumer spending. 

Durable Goods

The Commerce Department released durable goods orders results for May, and even as the headline figure fell 1.1% the report actually looked pretty good. 

The 1.1% drop (estimated to decline 1.4%) in overall durable goods orders follows a 3.0% increase for April (revised up from 2.9%) and most of May’s decline was due to the transportation segment.  Excluding transportation orders, durable goods rose 0.9%, which follows a 0.8% decline in April (revised up from -1.0% initially estimated).

Commercial aircraft orders slid 29.6%, which is an extremely volatile component – for instance, those orders rose 215.7% in April and were down 71.1% in March. Also a mild 0.1% drop in orders for electrical equipment, which followed a 6.1% slide in April, rounded out the weakness within the report. 

However, machinery orders looked good, up 5.6% in May after April’s 5.5% decline – over the past year these orders have jumped 23.8% from depressed levels.  Computer & electronics orders ticked up 0.1% after April’s 1.7% increase. Primary metals were up 0.8% and auto & parts were up 0.7%.

The most important figure, non-defense capital goods ex-aircraft (proxy for business spending) rose 2.1% after April’s 2.7% decline.  This number looks really good over the past year, up 18.4%, but again this is off of depressed levels – record declines in business spending, this data goes back to 1947. 

Overall, this is a good report, but we’re not really concerned about what occurred in May, or really June and July for that matter.  It’s the back half of the year and into 2011 that has concerned me.  We’ll see what the year-over-year business spending measures look like on a y/o/y basis when the comparison becomes harder to beat by December – this segment of the economy is not just important for overall growth, but particularly for job creation. 

As we mentioned over a year ago, the economy will grow as it’s boosted by massive levels of government spending and an unprecedented easing campaign by the Fed.  But this sort of goosing, if you will, can only enhance economic activity in the very short term.  There is always a payback period to such Keynesian-type measures and I believe we’ll see that in a few months time.  Again, things will become clear in the back-half of 2010 and into early 2011.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900