U.S. stocks rallied after Fed Chairman Bernanke penned a little Op/Ed in yesterday’s Washington Post in which he explicitly stated a main focus of QE is to boost stock prices – something we’ve talked about in this letter for a long time now, but never before has a sitting Fed Chairman explicitly stated the goal.  The way Bernanke sees it is that higher stock prices boost confidence, leading to more spending, which would then keep the profit cycle going; the hope is this “virtuous cycle” leads to a lasting expansion. 

These explicit comments were all traders needed to get in on some more of what our central bank is manipulating – my what a state we’ve digressed to; I’m not sure people fully grasp what all of this means outside of the very short term.  (As I stated yesterday, one wonders just how bad Bernanke sees the current economic state of things.  Not only is the FOMC unwilling to remove the emergency level of accommodation but they choose to progress further down this unprecedented policy path.  But few people concern themselves with such things, not when the market carries on and pushes higher.)

Anyway, after yesterday’s rally the broad market has eclipsed what was the post-crisis closing high of 1217 on the S&P 500, which was hit on April 23.  The market summarily tumbled 16% after hitting that mark, but now six months later we’ve erased that correction.   The next stop is 1250, as that’s the closing level on the Friday in front of the weekend that Lehman went down (9/12/2008). 

Also helping the rally was word that President Obama would be willing to negotiate on current tax rates, which are set go higher on Jan. 1.  You know, I’ll believe it when I see it – oh, and Republicans are going to be in no mood to compromise after the biggest House sweep since 1938.  The president doesn’t want to make the two top rates permanent, but Republicans are going to push for full permanence – you could see the whole thing breaking down; we do have textbook gridlock.  And please, these are not tax cuts, this is simply about keeping the rates that have been in place for over seven years – this is about blunting tax-rate increases. 

Commodities had their best day in quite a while (actually the second-best daily performance in nearly a year); the CRB is up 20% since we received the first real signal from the Fed that QE2 was coming, that was on August 26.  Silver, sugar, coffee, gold, cotton and copper led the index higher. 

The dollar got torched -- big surprise -- as this is part of the Fed’s objective, and it on its way to the level that delivered us $145 oil.  I wonder what finally puts a halt to this QE stuff -- yeah, it’s driving stocks higher, but it’s likely to drive commodity prices even more, crushing profit margins.  It’s also going to spark trade tensions as trading partners are surely fuming over this U.S. dollar level.  This, a trade war invoked by currency tensions, is certainly more than just within the realm of possibility.  Look at the Asian countries putting on capital controls so to keep their currencies from rising too much and crushing their export-driven economies.

Market Activity for November 4, 2010

Jobless Claims

The Labor Department reported that – yep, as if we should be surprised – initial jobless claims jumped back above the 450k level.  Initials rose 20,000 for the week ended October 30 to 457,000 (expected to come in at 442K) from an upwardly revised 437,000 for the week ended October 23 – the figure has been revised up 27 of the past 28 weeks. 

This latest increase in initials marks the sixth time we’ve bounced above 450K and the sixth time that optimism has been deflated that the previous move below this mark would be followed by a slide to the key 400K level.  But the market has Bernanke, so stocks don’t have to worry about labor market problems. 

The four-week average of initial claims rose 2,000 to 456,000.

Continuing claims were mixed as the standard issue (26 weeks of benefits) fell 42,000 to 4.340 million, while emergency claims (which extend benefits out to as long as 99 weeks) jumped 357,713 to 5.012 million.  What this shows is that standard benefits fell due to the expiration of benefits rather than substantial job growth.  These people rolled into the emergency extension of claims.

But this jig is about up as the 99ers are soon going to find themselves pushed off of the government dole – sounds harsh, but give me a break; many of these people would be accepting jobs (yes, likely less-than-desirable positions) if not for the ridiculous length of this support.  Maybe the lame duck 111^th Congress extends these emergency claims yet again – they are scheduled to expire at the end of the month – but that will be it, game over for French-like jobless benefits, as the 112^th isn’t going to extend (unless that’s what it takes to get full permanence of current tax rates).

Q3 Productivity

The Labor Department also reported that nonfarm productivity (output per hour worked) rose 1.9% in the third quarter, following Q2’s 1.8% decline.  The reading was boosted by the inventory rebuilding we saw via that latest GDP report as output rose 3.0% at an annual rate, while employee hours were up just 1.1%.  (I wouldn’t be surprised to see this reading revised down, just as the previous quarter’s reading was – when you’ve got inventory accumulation accounting for so much of economic growth the chance of revision rises as those inventories are more often revised down rather than up.)

In any event, 1.9% at an annual rate for the quarter is a healthy improvement, but it is being helped by an unwillingness of firms to add jobs – a justified unwillingness in my view.   Oddly, these productivity rates are not what the Fed wants to see right now, illustrating the strange environment we currently find ourselves.   This rate of productivity is sufficient to push labor costs down (fell 0.1% for the quarter) but Bernanke wants them to rise, stoking inflation and thus pushing real interest rates lower so people do more spending. 

I’ll just keep this comment quick:  Too bad Bernanke is lost in the wilderness of his Keynesian textbooks, because inflation is not only a function of wages.  There is also something called “cost-push” inflation and unless we’re in a state of economic depression then what the Fed is doing will continue to drive commodity prices higher and that will flow into overall prices over time.  Again, Bernanke will get his inflation unless we are actually in some sort of depression, and this weak recovery we’re seeing right now is merely a respite from a more secular economic malaise. 

Chain Store Sales

The International Council of Shopping Centers (ICSC) reported that same-store sales rose 1.6% in October (expected to rise 2.8%), based upon year-ago results.   This is a very weak retail result for a month that is almost always boosted by Halloween. 

In fact, outside of the financial crisis of 2008 (fall/winter 2008 saw a complete collapse in consumer spending), this is the weakest October result since 2001, which of course immediately followed the 9/11 attacks.  Going back to 1993 – when ICSC began collecting this data – there are only three October readings that were worse (2008, 2001 and 1995) and never when the year-ago comparison was so easy. 

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Have a great day!

Brent Vondera, Senior Analyst