Stocks got off to a good start Friday morning after the latest Chinese manufacturing survey showed activity accelerated to the fastest level in four months and NY Fed Bank President Dudley stated that economic growth and jobs need another round of QE.  That’s bad news for the prospect of growth, but good in terms of more easy money flowing to the primary dealers.  Stocks gave back all of those early gains following the latest U.S. manufacturing data, but bounced back to close positive.

Highly cyclical stocks led the broad market higher as energy, basic materials and financials were the top performing groups – when you’ve got a major Fed official explicitly stating the next round of QE is on the horizon it’s no wonder commodity-related stocks like energy and materials led the way.  The price of crude is back above $80/barrel.

Tech was the only of the 10 major industry groups to close lower, a pretty clear signal the rally in commodity stocks was not about optimism over growth prospects but simply the easy money/dollar down trade.

Market Activity for October 1, 2010

Personal Income & Spending

The Commerce Department reported that personal incomes rose 0.5% in August (beating expectations for a 0.3% increase) and spending was up 0.4% (expected to be up 0.3% as well). 

On the surface this looks like a good number, and indeed I’ve explained a couple of data sets this way over the past several months.  But you know, analysts really need to take more time viewing the internals of these reports (not economists, as they certainly have, but analysts).  Maybe it’s just easier to say everything is fine – Wall Street after all desperately needs people to return to the market; investment banks are going to report weak results for the third quarter on weak volume, but that’s another discussion.  A look into the report revealed that income excluding government transfer payments was flat in August – and has barely bounced off of the cycle low.

While private-sector incomes looked ok as wages & salaries increased 0.3% for the month on a strong 0.6% gain in manufacturing wages, personal income via assets fell again as it was pressured by a 1.0% decline in interest income. 

What drove the figure above expectations was a huge bounce in government transfer payments after four months of decline, as emergency unemployment benefits (those that extend past the traditional 26 weeks out to as long as 99 weeks) lapsed in April, May, June and July.  But they were reinstated in August and, voila, unemployment insurance jumped 21.9%. 

And speaking of government assistance, after Wal-Mart’s CEO recently explained that sales are substantially and significantly higher on the first day of the month when EBT accounts are debited (that’s the modern day food stamp), I decided to go check it out for myself.  Wal-Mart’s Mike Duke explained that it was interesting to watch customers arrive just before midnight on the final day of the month and hit the register at midnight when the funds hit EBT accounts. 

So, on Thursday night (last day of the month) I carted myself over to a Wal-Mart Supercenter and it was indeed interesting to watch the parking lot fill up at 11:30.  I must say though, it didn’t look like families in need so much.  That element was there, of course. What was more prevalent, however, were younger people -- early 20s, and in two-three people groups, mostly males ( likely roommates).  I guess it’s easier to party all day rather than go out and find an undesirable job when the government makes living on the dole so easy.

But this kind of thing is not organic, and can’t go on in a lasting manner.  So while some areas of private-sector wages are holding up nicely in this environment (yet still down 3.4% from the previously cycle’s peak, which is very unusual), the headline number is certainly still getting a boost from the redistribution of income. 

ISM Manufacturing

The Institute for Supply Management’s manufacturing survey for September came in at a solid 54.4 (market expected 54.5) after the strong 56.3 in August.  Both of these readings are confounding as the regional surveys (exception being Chicago) showed deeper levels of deterioration.  I think people sometimes forget just how good of a reading of 54 is after the unprecedented string of 60s in the prior cycle – the 50-year average is 52.8. 

But as everything else these days I’m finding trouble in the internals of the report.  First, new orders fell for a fourth-straight month, falling to 51.1 -- just barely above the line of demarcation.  And inventories jumped more than four points to 55.6.  Thus, the difference between new orders and inventories continues to slide, negative again for the first time since February 2009.  This means the inventory building of late has been at least partially unintended. 

Further, the vital backlog of orders reading slid to contraction mode, down five points to 46.5.  The inventory cycle is done and that means manufacturing activity will continue its slide back to contraction mode, although possibly a month or two later than I had previously expected.  

University of Michigan Sentiment

The best news of the day came from the UofM’s confidence reading, this release being the revision to September’s initial estimate.   The measure was revised up to 68.2 from 66.8, yet this was still lower than the previous month’s 68.9 and a level that in the past has only been touched in recessions.

ECRI’s WLI

The latest from the Economic Research Institute’s Weekly Leading Indicators showed improvement for the fourth-straight week.  It came in at -7.8 for the week ended September 24 from -8.7 in the prior week – which means the index fell at a 7.8% annual rate.  The stock prices and yield curve (stock prices and the slope of the yield curve are major components in all leading indicators indexes) segments both rose.  The index has stepped away from the dreaded readings of -10, but after eight weeks below that mark I think odds are stronger than most bet that the economy will contract again.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900