U.S. stocks closed higher for a third session thanks to a 1.1% rally in the final 90 minutes of trading.  The three-day upswing follows a two-week slide that brought the market down 8.4%; we’ve recouped half of those losses since Monday.  The S&P 500 is now 12% below the April 23 high (which interestingly coincides with the Deepwater Horizon explosion and the ensuing oil gusher) -- a week ago the degree of that pullback was 16%.

I’m not sure what pushed stocks higher late in the session.  It sure didn’t appear to be the retail same-store sales data, which we touch on below, as stocks gave back opening gains after that data was released.  And it probably wasn’t the initial jobless claims data, which remain obstinately stuck above the 450K mark.  Maybe it was a much worse-than-expected decline in consumer credit, released late in the day.  Could this market have become more rational, finding reason to rally in the fact that household de-leveraging continues to play out – even if much of this is involuntary due to credit lines being cut, an automatic adjustment based on delinquency rate models?  Are investors looking beyond the here and now to what actually helps to build longer-term fundamentals? 

I’m doubting it, because according to equity fund flows it appears that activity is being run by trading programs more than longer-term investing strategies.  I’m talking about algorithmic trading, computer-driven orders that kick off when certain things occur, like a decline in the U.S. dollar.  Check out the chart below, you may recall we’ve posted this on a couple of occasions now. 

A strange duo of basic material (risk-on cyclical stocks) and consumer staple (risk-off safety) shares led the broad market’s advance.  Tech shares brought up the rear, but all 10 major groups gained ground for a second-straight session. 

Market Activity for July 8, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 21,000 to 454,000 in the week ended July 3 from a revised 475,000 in the prior week, previously estimated at 472,000.  The four-week average of initial claims fell 1,250 to 466,000.  So, claims fell but we remain stuck above the 450K level.  I’ll repeat: These claims need to fall below the 400K mark to offer concrete evidence that the current month’s job prospects have improved markedly.

Continuing claims moved lower as well.  The standard issue of claims, those that last for 26 weeks, fell a large 224,000 to 4.413 million.  This certainly suggests job growth resumed to a higher level of late, we’ll see if this can build into a trend next week.  On those EUC claims, the extensions that had brought benefits out to as long as 99 weeks, they plunged 333,197 to 4.576 million.  This follows a decline of 374,000 in the prior week and is surely a result of these benefits expiring.  With the election coming up, the Congressional majority will likely attempt to restart the EUC (Emergency Unemployment Compensation) claims.  I guess they don’t get that such action actually keeps the unemployment rate a bit higher than it would be otherwise.  This occurs for two reasons:

One, a percentage of those on benefits will not accept less than desirable work. 

Two, to qualify for benefits one must say they are looking for work, which means they’re counted in the workforce (which boosts the unemployment rate).  When benefits expire, an unemployed person may respond that they are not currently looking for work, removing them from the workforce and sending the jobless rate lower even in the absence of jobs gain in any given month.

Another thing to think about is that this entitlement spending has helped to buoy consumer spending – not in a lasting manner as there’s a payback, but in the short term yes.  Government transfer payments have been at record territory in terms of the percentage with which it accounts for overall personal income.  Now that is changing as the EUC has expired.  If these people do not find work fast, the expiry of these benefits will have a marginal effect on spending.  I’m not advocating an extension of these benefits, as most readers surely know, but I’m just explaining that this will have some effect on spending at the margin in the short term – the benefits had artificially boosted activity.   Without an extension, more than three million people will be pushed off the dole by the end of the month.

ICSC Chain Store

One of the news headlines describing why the International Council of Shopping Centers latest reading on same-store retail sales rose 3.0% over the past 12 months in June was that hot weather drove shoppers into air-conditioned malls.  That’s such a typically weak commentary I just had to share that with you.

No, the reason sales rose in June from the year-ago period was largely because results are off of very easy comparisons – last June recorded one of the largest declines on record (the history of this data only goes back to 1993, but you see the point). 

ICSC reported that apparel-store sales rose 2.7%; department-store sales increased 5.9%; luxury store sales jumped 8.8%; discount was up 2.0%; drug stores inched up 0.8%; and wholesale clubs excluding fuel sales saw sales rise 4.0%.

The aspect of the report I found most surprising was the jump in luxury store sales.  Sure, they were off of depressed levels as the segment fell 12.2% in June 2009 but still I was expecting weakness due to the latest decline in stock prices.   But then MasterCard SpendingPulse surveyed things differently, showing the luxury segment declined 3.9%. 

Below are the results for all segments from MasterCard, the light blue bars show sales relative to June 2007 – retail activity peaked out in November 2007.  For the first time this year internet sales failed to record double-digit growth, but as you can see they continue to thrive. 

Consumer Credit

The Federal Reserve reported that consumer credit slid another $9.1 billion in May -- was expected to decline just $2.3 billion.  The April figure was revised down big time to show contraction of $14.9 billion, the second-largest decline on record (goes back to 1943) after being reported as just a $1.0 billion drop last month. 

Revolving credit (credit cards) continues to plunge as households voluntarily choose to pay down debt, but the means of de-leveraging are also involuntary as lenders are still slashing credit lines due to elevated delinquency rates.  The figure fell $7.3 billion, or 10.5% at an annual rate.  This marks the 20^th straight month of decline, down 15% from the September 2008 peak.

Non-revolving credit (largely auto loans) fell $1.8 billion, or 1.4% at an annual rate.  This segment is down just 1.5% from the July 2008 peak as low interest rates along with government and automaker incentives have kept these loans from plunging.

Have a great weekend!