U.S. stocks extended upon Wednesday’s losses, but did improve from an opening slide as the day wore on.  News from Cisco Systems combined with another bad initial jobless claims report to hold the market back. 

On Wednesday night, Cisco Chairman/CEO John Chambers explained that business-equipment spending is slowing and provided a forecast that trailed expectations (although the company did report great results for the quarter).  That was followed yesterday morning by the Labor Department’s jobless claims report that showed initial claims rose again and emergency benefits surged by 1.3 million, now that Congress has reinstated those bennies.

Telecom, basic material and health-care shares bucked the trend.  The other seven of the 10 major industry groups traded down, led by tech and industrials. 

Market Activity for August 12, 2010

Jobless Claims

The Labor Department reported that initial jobless claims inched closer to the dreaded 500k level last week (when we badly need them to fall below 400K), up 2,000 to 484,000 from an upwardly revised 482,000 in the week prior – initially reported at 479,000.    These are levels that suggest even the extremely mild private-sector job growth of late (51,000 per month) may not be sustainable.

The four-week average jumped 14,250 to 473,500 – the highest level since the week of February 19.

The continuing claims data was mixed.  We saw a meaningful 118,000 decline in standard claims (the traditional 26 weeks of benefits) to 4.452 million.  However, EUC (those emergency benefits that extend out to as long as 99 weeks) exploded by 1.338 million to 4.493 million.   So, here we have the return of emergency benefits (they had expired in March, Congress recently reinstated them) and it shows the decline in the past couple of months was solely due to expirations – job growth had very little, if anything, to do with the previous decline. 

Historically speaking, once initial claims move below the 500K mark they’ve never rebounded back above in the same cycle.  It was only in the double-dip of the early 1980s (the 1980 recession was quickly followed by the 1981-82 recession) in which this occurred, and that 1981-82 was completely Fed-induced as the central bank jacked the fed funds rate to a range of 15%-19% in order to quash a pernicious bout of inflation.  This time the Fed is essentially at zero.  But then there are many things different about this environment – it’s essential for people to realize this, and slowly that may be occurring. 

I’ll be out of the office until August 25.  Either David or Peter will be taking over until then. 

Have a great weekend!

Brent Vondera, Senior Analyst