U.S. stocks ran into a little trouble yesterday, until things turned around late in the session to end essentially flat. 

The ridiculous back and forth, the completely illogical mercurial nature of this market, regarding growth prospects continues.  One week, day, hour in some cases, the market believes global growth will resemble the normal expansion; the next reality forces a sentiment shift.  Mohamed El Erian of PIMCO famously termed the stimulus-led economic recovery a “sugar high.”  With regard to market sentiment, I think it’s more like a hopium high.  Hope certainly allows people to miss the many challenges this economy faces – but face it we will, just as the latest data on bank repossession is showing; when home prices endure another move down everything from confidence, bank loan quality and a desire to take risk will likely feel the reality.

Things got started on a bad note after the latest retail sales data from the UK showed a weaker-than-expected result – expected to rise 0.3%, but fell 0.5% - and was followed by a FedEx earnings forecast for the current quarter that fell short of analysts’ expectations, and they’ll cut 1,700 positions.  The delivery firm did raise full-year guidance but that forecast is now in question. 

Later we got the jobless claims figure, which came in better-than-expected but remains high – stuck above the 450K level.  That relatively positive event on claims, with regard to expectations, was short-changed though when Philly Fed posted its second month in contraction mode.  Put it all together, in addition to the foreclosure/repossession data for August, and the day’s news was certainly net negative. 

Why did stocks bounce to erase earlier gains?  One can have no clue.  Maybe it was news that the Senate passed the small-business lending program, although I’m not sure how another exercise in Washington micromanagement is going to help the economy.  Maybe it was just more HFT (high frequency trading), some algos hitting the bid – with this sort of program trading accounting for the majority of market activity it’s not a conspiracy theory anymore (you may recall our July 9 commentary “The Machines”).

To add to illogic, the four major groups that gained ground yesterday were a mix of highly cyclical stocks (tech and basic materials) and areas of safety (telecoms and consumer staples).  But not all traditional safe-havens caught bids as utilities led the decliners.  Energy and financial shares were also among the day’s worst performing groups.

Market Activity for September 16, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 3,000 to 450,000 last week (459,000 was expected) from a mild negative revision to the previous week, which came in at 453,000 after previously reported at 451,000.  There was an outsized chance that prior number was going to be revised up by much more due to eight states having to blindly estimate claims as they didn’t file because of the holiday – and three of those states have unemployment rates that range 10.5%-13.5%.  So it’s a big positive that didn’t occur.

The four-week average of initial claims slid 13,500 to 464,750.  Big move down over the past couple of weeks from the high level of 488K, the highest since December, but the current level is no picnic.

Really the best results were on the continuing claims level, which fell nicely on both the standard and emergency benefit levels.  The standard issue of claims (those that last the first 26 weeks) fell 84,000 to 4.485 million.  While these claims haven’t made progress over a multi-week period, they’re just back down to July levels, the move in emergency claims has been striking.

Emergency level of claims slid 508,000 last week and are down 796,000 over the past three weeks.  Part of this is due to the data being distorted from a one million jump when they (which extend out to as long as 99 weeks) were reinstated in early August, but it could be a good sign that more meaningful job growth has occurred in September – maybe I’m reaching for something positive as I’ve been so negative lately. 

We won’t have to wait long to find out as the next monthly payroll report arrives in about two weeks.  I’d have more conviction of something good from the September jobs report if the initial claims number was moving to 400K rather than stuck at 450K. 

Philly Fed

Manufacturing activity within the third Fed district, as measured by the Federal Reserve Bank of Philadelphia, remained in contraction mode for the second-straight month.  The reading on Philly Fed came in at -0.7 for September (expected to come in at +0.5) after -7.7 in August, so it did improve and was barely in contraction mode, but it does show significant deterioration within the factory sector has taken place. 

The internals of the report didn’t offer much by the way of positive trends ahead.  The new orders index worsened to -8.1 from -7.1 in August (worst level since June 2009); unfilled orders fell to -8.5 from -7.1; delivery times improved, although remained in negative territory, up 6.9 point to -4.1; inventories fell to -16.7 from -11.6 (second month of contraction – it’s not always bad when this reading is falling as it may mean more production in the months ahead, but when it’s accompanied by falling new orders then it generally means firms are pulling back for fear of weakness); and the average workweek slid to -21.6 from -17.1 in August and down from +8.3 in March. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900