U.S. stocks began the session higher on some really good profit results, particularly relative to expectations but a couple looked very solid beyond that.  However, when the dollar reversed course and turned positive stocks quickly turned down, off 1.5% from the intraday high at the session’s nadir; a rally in the final 90 minutes helped the S&P 500 finish up a couple points. 

So, the market gives up earlier gains simply on a dollar reversal?  If we’re really in an environment for which the greenback can’t even rally in sub-80 Dollar Index territory (pathetic levels) without stocks selling off, then market activity is sillier than I thought – algorithms  programmed to sell simply on dollar strength. 

Consumer discretionary, industrials and consumer staples were the best performing groups for the session.  Utilities, telecoms and financials were the laggards.  Utility shares are the second-best performing sector (telecoms the best) since the broad market hit a 19-month high on April 23 (a level we still haven’t recaptured but are currently just 3% shy of after correcting 16% by July 2), but the shares have stalled of late.

Yesterday’s earnings results were bang up on the whole, and the quarter is shaping up very well.  I suggest enjoying these profits while they last because the cycle is very likely to prove short-lived. I explained this view in depth a couple of days back but just to remind everyone, when the main element behind these results is cost-cutting by massive payroll slashing don’t expect the profit cycle to exhibit its normal level of durability. 

Market Activity for October 21, 2010

More on Profits…And QE2’s Ironic Effect

There is little revenue improvement that’s occurred, S&P 500 sales per share are expected to be up just 6% for the third quarter compared to the depressed level of a year ago (which was down 15% from the year prior to that).  Without top line growth there’s nothing to keep the cycle going – operational leverage via job cuts provides only temporary enhancement.   There is also the Fed; yeah, that QE thing.  Every additional round of dollar printing drives commodity and other input prices higher, yet due to lackluster final demand firms have little pricing power – the further the Fed goes, the more profits are likely to get squeezed over the ensuing quarters. 

Jobless Claims

The Labor Department reported that jobless claims fell 23,000 to 452,000 last week (expected at 455K) but the previous week’s result was revised up to show claims rose 26,000 to 475,000 (previously reported at 462,000) – so over the past two weeks claims have net risen and the data remains stuck above 450K.  And on the revisions, they’ve been revised up for 25 of the past 26 weeks, so all of these better-than-expected results we’ve seen via the initial reports were actually misses.

The four-week average of initial claims fell 4,250 to 458,000, but without a big move lower next week (particularly since the trend shows this latest figure will be revised up) this four-week average is going higher due to the elevated 475K reading from two weeks back.

Continuing claims were mixed as the standard issue (those that last 26 weeks) fell 9,000 to 4.441 million (down for the fifth week in six), while emergency claims (those that extend out to the French-like 99 weeks) rose 278,500 to 5.073 million – over the past two weeks though these claims are down a net 61,000.

This report continues to show that the labor market is not in a position that engenders solid or consistent monthly payroll growth.  In fact, the initial claims data illustrates layoffs continue even after the huge slashing of positions during the peak of the financial crisis.  

Philly Fed

The gauge of factory activity within the third Federal Reserve District came in below expectations but rebounded from contraction, which it had slumped to over the previous two months. 

The Philly Fed index rose to a reading of 1.0 (expected to hit 2.0) in October, following readings of -0.7 in September and -7.7 in August.  However, the internals of the measure make it tough to see factory activity within the region is actually rising.

New orders improved by 2.9 points but remained in negative territory, coming in at -5.0; unfilled orders fell to -8.9 from -8.5; delivery times improved by 3.8 points but remained just barely in contraction mode, coming in at -0.3; inventories continued to slump, down 1.8 points to -18.6; and the average workweek bounced a big 15.6 points but remained negative at -6.0 (in contraction mode for the third-straight month).

And margins continued to erode as the prices paid measure jumped 21.7 points to a reading of 31.5, while the prices received rose only 4.9 and remained negative at -9.0 (the gap of nearly 40 points is near the survey’s all-time extreme). 

Overall this report does not confirm that manufacturing activity is fully rebounding in October, as Empire (NY factory activity) illustrated. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900