U.S stocks gained ground on Friday despite the fact that job growth remains insufficient to push the jobless rate lower.  Further, the latest inventory report showed the build in stockpiles outpaced sales growth for the fourth-straight month in August – not exactly good news for those betting the inventory cycle has legs.  The broad market rebounded from a move into negative territory immediately following that 9AM inventory report as traders remembered the Fed is there to backstop asset prices – as long as it can that is.  Even though it means lower prices in the intermediate term, I yearn for the return of a relatively free market.

So we’re above the psychological 11K mark again.  Is it still an exciting level after already spending a month above this mark back in April, only to see a 14% slide follow that sent the Dow back below 9700?  Probably so, merely because it means the more affluent consumer will remain in the game.  It appears the higher-end consumer is happy to spend in a 10K-plus environment. 

I mentioned that 14% slide from the April 23 20-month high, the correction was actual 16% for the broad market.  But now stocks are pricing in another round of Fed intervention, roughly $1 trillion in additional asset purchases – circling the round-a-bout. 

The here-comes-the-Fed trade led the broad market higher on Friday as basic material and energy shares were the top-performing groups.  Telecoms and financials were the laggards, the former being the only one of the top 10 industry groups that failed to close higher. 

Moving on to other things, the foreclosure chaos continues with Bank of America halting foreclosures in all 50 states as Washington pushes to get banks to examine documentation.  The charge is that the wrong people signed the document that gets the process started, but the fact is these borrowers are still very delinquent – 470 days on average.   This situation started off due to the problem of banks being inundated with foreclosures and has intensified as state AGs have played politics.  Now Washington is in the game. 

Bottom line:  When you haven’t made a mortgage payment in 18 months you need to go and that house should be on the auction block.  The costs will be borne by the securitization market and the taxpayers as Fannie, Freddie and the FHA guarantee 90% of mortgage originations.  Oh, and the housing market will not heal as this chaos inhibits the process of finding the market clearing price.

Market Activity for October 8, 2010

September Jobs

The Labor Department reported that nonfarm payrolls fell a greater-than-expected 95,000 in September (forecast to fall just 5K) following a downwardly revised 57,000 loss in August (previously estimated at -54K).

But that’s all payrolls, which includes government jobs – so some of this is due to continued Census firings.  Not all though, and that means paying attention to the total number is more important for this reading, even if it is a Census year, because more than half of the 159,000 decline in government payrolls was due to state and local government firings – the largest slashing in 28 years.  The number is even more dramatic in an environment with which states continue to receive emergency funds from the federal government.  When this assistance ends, we’re looking at a trend of big state and local employment losses. 

For private-sector payrolls, they rose a less-than-expected 64,000 (expected to rise 75K), but that was off of a higher revision to August (up 93K vs the 67k reported last month).  But a miss this month and a higher revision to last month, no matter – bottom line, average the two months and we’ve got 79K, which is about half of what we need just to keep the unemployment rate steady.  In fact during this nine-month streak of private payroll increases the monthly average is 95K, insufficient to absorb re-entries into the job market, college graduates and population growth.

Goods-producing industries cut 22,000 positions, led by a 21,000 decline in construction payrolls.  Manufacturing payrolls fell 6,000 after the 28K decline in August – these back-to-back declines follow zx months of increase.

Service-providing industries added 86,000 jobs, led by leisure & hospitality position, which were up 38,000 – not exactly the most high-paying employment in this economy. Education & health added 17,000 (a bit below the 23K that is the three-month average and would have been worse if not for a pretty large 38K increase on the health-care side); trade & transport added 16,000 (in line with the three-month average); retail added 6,000 (three-month average is 5K); business services added 14,000 (in line with the three-month average of 12K)

Temporary employment rose 17,000, better than the three-month average of 9K but that averaged has waned significantly from the 30K it was averaging several months back.

The unemployment rate rose fell to 9.6% from 9.7% as household employment rose 141,000 and those re-entering the labor forces increased just 48,000. 

U6 unemployment -- capturing the marginally attached (those not looking for work as they’re discouraged) and those working part-time because they can’t find full-time work) rose to 17.1% from 16.7% -- the high is 17.4% hit in October 2009 and shows virtually no improvement over the past year.   

The long-term unemployment situation improved in September.

Those out of work for more than 27 weeks, as a percentage of the total unemployed, fell to 41.7% from 42.0% in August and has declined for four months now – down from the record 46.0% in May.

The average duration of unemployment slipped to 33.3 week from 33.6 weeks in August. 

Average hourly earnings were unchanged in September and this doesn’t help the argument that we’ll see 3.0%-plus economic growth much less the 2.5%-3.0% the Fed currently estimates – their estimates are going to be revised lower yet again.  Weekly hours worked were also unchanged in September. 

ECRI’s WLI

The latest from the Economic Research Institute’s Weekly Leading Indicators showed improvement for the fifth-straight week.  It came in at -7.0 for the week ended October 1 (meaning the index fell at a 7% annualized rate) from -7.8 in the prior week.  Stock prices continue to pull the index from the dreaded level of -10.   Initial jobless claims, which remain at high levels but have pulled back from the 504K hit seven weeks ago, has also helped.  Notice what we’re calling improvement though.  WLI has never hit -7.0 outside of recession over the past 40 years, save this occurrence. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900