U.S. stocks held up well yesterday considering we received three reports that suggest the manufacturing rebound may fizzle out sooner than previously thought – well, at least for those who aren’t living under the illusion that this is a normal economic expansion that has multi-year staying power.  Even the more positive economic news we received, by way of the jobless claims data, had a negative side to it as a jump in continuing claims smothered a nice decline in initial claims.

The broad market was down as much as 1.4% in early trading, but stocks began to recover those losses just after lunch and a 1% surge in the final 30 minutes of trading delivered the S&P 500 into positive territory.  The announcement that BP has temporarily sealed the gusher probably played a role in the rally. 

Nine of the 10 major industry groups were down prior to that late-session jump -- utility shares being the only group in positive territory. But by the close seven flashed green. Still, the main cyclicals – financials, industrials and basic materials – ended lower.

Yesterday’s big news, at least pre-market before the factory data came out, was JP Morgan’s earnings release.  JPM’s results easily surpassed expectations, which has become the trend over the past year.  The consensus believed that trading and the investment banking (which involves trading) division would hurt overall profit as the May 6 flash crash abused investor complacency.  And lower activity did drive trading revenues lower, but credit more than offset this drag as loan quality improved.  Delinquency rates remain at “extremely high” levels, but improved nonetheless.  The bank released $2.1 billion in reserves and that boosts profit.  I think the industry-wide decline in loan-loss reserves will come back to haunt the banking sector, and thus the economy, a couple of quarters down the road.  They seem to be managing things as if improvement will continue in a consistent manner.

Yesterday’s big news, at least pre-market before the factory data came out, was JP Morgan’s earnings release.  JPM’s results easily surpassed expectations, which has become the trend over the past year.  The consensus believed that trading and the investment banking (which involves trading) division would hurt overall profit as the May 6 flash crash abused investor complacency.  And lower activity did drive trading revenues lower, but credit more than offset this drag as loan quality improved.  Delinquency rates remain at “extremely high” levels, but improved nonetheless.  The bank released $2.1 billion in reserves and that boosts profit.  I think the industry-wide decline in loan-loss reserves will come back to haunt the banking sector, and thus the economy, a couple of quarters down the road.  They seem to be managing things as if improvement will continue in a consistent manner.

Market Activit for July 14, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 29,000 to 429,000 in the week ended July 3.  This is a nice move below the 450K level and we’ll watch for further improvement over the following weeks as we need this figure to move below 400K.  The four-week average of initial claims fell 11,750 to 455,250.

Continuing claims told another story though as the standard issue of claims (the traditional 26 weeks of benefits) jumped 247,000 to 4.681 million, more than erasing the 204,000 decline in the previous week.  This puts the standard issue of continuing claims to the highest level since the first week of April.  EUC claims (those emergency extensions) fell another 250,000, but this is because Congress has not extended these benefits again, so the long-term unemployed see their benefits expire. 

The Labor Department stated something like the initial claims data was distorted by seasonal adjustments.  Automakers normally shutdown and retool plants to roll out new models, but the shutdown didn’t occur in the week ended July 3.  I don’t know if this has much merit or not.  What I do know is that we’ve moved below the 450K mark three times now over the past six months only to jump back to around 480K.  So, the watch for a move to 400K continues. 

The jump in the standard issue of continuing claims last week was disturbing. 

Empire & Philly

Empire Manufacturing, the gauge that tracks factory activity within the second Federal Reserve district, missed expectations by a wide margin.  The reading came in at 5.08 for July (expected to hit 18.0) after 19.6 in June.  The measure hadn’t recorded a reading below 15 this year and had averaged 22  before this reading.

The new orders gauge fell seven poinst to the lowest level since February and, delivery times, unfilled orders and hours worked all plunged to negative territory.  The inventories reading looked good, back to expansion mode after a blip to contraction in June.  However, with the degree of decline in these other readings, I doubt the inventory building situation has much juice left. 

Philly reported a similar reading, falling to 5.1 in July (expected to be 10) after 8.0 in June and an average of 16.8 prior to this reading.  New orders plunged 13 points to slide well into negative territory – first move to contraction in 12 months; unfilled orders slid 8 points, also to contraction mode; delivery times slid 15 points to contraction.  Yet the number of employees and hours worked improved. 

Industrial Production (IP)

The Federal Reserve reported that industrial production rose 0.1% in June (beating expectations for a 0.1% decline), marking a full year without IP contraction – has advanced for 11 months with a flat reading in February.

A 0.1% increase is nothing something special, but things were even weaker than the headline figure suggested.  Manufacturing production (by far the largest component, accounting for 78% of the overall index) fell 0.4% in June – the largest decline since a 0.8% drop in May 2009.   The overall reading was boosted by hot weather in June, driving utility production (roughly 10% of the overall index) up 2.7%.

Is this the beginning of the falloff in factory activity now that the inventory cycle has largely run its course – assuming significant job growth fails to present itself and drive organic demand?  I still believe we won’t totally see this weakness come to fruition until the fall, but the readings from Empire, Philly and the manufacturing segment of IP may be signaling the weakness will occur sooner.

Foreclosure Filings

Home foreclosure filings came in at 313,841 during June, marking the 16^th straight month in which monthly filings have come in over 300K.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900