U.S. stocks lost ground for a second-straight session on Tuesday.  After an initial move to the upside, the broad market fell into negative territory shortly after the latest inventory data showed there may be a little involuntary build going on as the increase in stockpiles has overwhelmed sales for a fifth-straight reporting month.  The losses accelerated late in afternoon trading but a bounce in the final minutes saved us from the worst of the session.

All 10 major industry groups fell for the session.  Telecoms, tech, energy and consumer staples were the relative winners. The worst hit being financials and basic materials. 

The dollar gained ground as the euro took a pretty good beating on renewed debt troubles in the Eurozone – as we’ve said for a long time now, this issue will ebb and flow but it’s not going to magically evaporate without additional rounds of trouble.  Right now it’s Ireland driving the concern as their commercial real estate troubles give way to residential mortgage defaults, increasing trouble for their banking system and raising the cost of government intervention – Irish government bond yields continue to blow out, up 325 basis points (3.25 percentage points) on their 10-year issue since August; the spread between the Irish 10-year and the German bund (Eurozone’s benchmark) is now 440 basis points. 

The CRB rose for a ninth-straight session even as gold pared gains late in the session and silver prices pulled back – the Commodity Mercantile Exchange raised margin requirement on silver futures, which caused the metal to reverse course midday.  The agricultural components delivered the overall index to positive territory. 

Yesterday via a CNBC interview I heard a market analyst state that instead of an economic double dip we’re going to see a “double recovery.”  I’m still trying to figure out what that means, but it sounds sweet.  It was far and away the quote of the day. 

Market Activity for November 9, 2010

NFIB Small Business Survey

The National Federation of Independent Business reported that their small business confidence survey rose nearly three points to 91.7 in October from 89.0 in the previous month.  This remains a recessionary reading; we’ve only improved to the low point hit in the 1990-91 recession.  

It was really the readings on expectations that drove the index higher.  The expect a better economy reading jumped 11 points to 8 from -3 in September – close to the 10-year average; expect higher sales rose to 1 from -3 – still well below the 10-year average of 14; and these improvement feed into hiring expectations as that measure rose to 1 from -3 – but still much below the 10-year average of 11.  While two of these three readings remain well below a longer-term average, it’s important to notice that they all made it to positive territory.

The somewhat negative aspects of the report were within the inventory, business spending and higher selling prices measures.  Plans to increase inventories slipped to -4 from -3 – the longer-term average is roughly zero; business spending slipped to 18 from 19 – the 10-year average is 28; and higher selling prices improved to -5 from -11 – the 25-year average (we’ve got a longer look at this one) is 8. 

Thus we’ve got some mild improvements on the expectations side, but not much to speak positively about within the current conditions measures.  Further, the inventory reading shows that the cycle must still manage without help from small business stockpile accumulation and capital spending plans.

Overall, this vital measure of small business conditions has popped above that 90 mark again, let’s hope we can make progress from here.  (Remember back in April-May the index hit 90.6 and 92.2, respectively, only to fall back to the 88 handle.)  I think the survey has a chance to show mild improvement from here as the election is helping to ease concerns regarding tax rates and health-care – higher tax rates and health-care mandates hit small businesses the hardest.  However, any improvement is likely to be short-lived as higher input costs cause additional trouble for small firms.

Wholesale Inventories

The Commerce Department reported that wholesale inventories rose twice the rate expected in September, up 1.5% vs. the 0.7% that was expected.  The previous month’s reading was revised up to show an increase of 1.2% after previously being reported at +0.8%.  Everything else equal, this is going to push the revision to third-quarter GDP higher (initially reported at a 2.0% annual rate of growth).  But all else equal (or ceteris paribus as the textbooks choose the Latin phrase) only works in a classroom.  If today’s trade figure for September comes in at a wider deficit than expected it will negate this higher inventory data.

While this inventory figure showed the inventory cycle remained in full force during the previous quarter, the accompanied sales data shows the cycle is losing steam.  Inventories have outpaced sales for five months now and shows some of the stockpile build may be a bit involuntary – a little unwanted accumulation as sales growth has lagged.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900