U.S. stocks took a pretty good beating (but not as bad as portrayed by the media; remember the broad market had romped 17% since late August prior to this seven-session pullback) as traders are beginning to ponder that the European debt problems may have more of a domino effect rather than an issue contained to the worst of the peripheral economies.  

Concerns over how much the Chinese will curtail economic activity also hit the market.  But thanks to a little rally in the final minutes of trading losses were pared; the broad market was on pace for a 2% loss. 

The Shanghai Composite got wacked by 4% Monday night (down another 2% last night) on concern higher interest rates and limits on real estate purchases will hit growth; European bourses endured a 2% beat down across the board (but have bounced a bit last night and into this morning).  This is simply not an environment by which the U.S. economy is anywhere near normal and thus our equity markets have to follow overseas bourses rather than enjoying our more typical level of resilience. 

The European story is getting interesting again as there is talk Ireland will accept the EU/IMF bailout.  Heretofore, that government has been reluctant to do so, even as their borrowing costs jumped, simply because this means they’ll cede decision-making power to the IMF -- if the IMF has its way the Irish can say goodbye to the 12.5% corporate tax rate.  

This bailout will pump money into Ireland so that they can refinance their debt and recapitalize their banks without having to rely on the capital markets and thus pay that higher cost of money.  What makes the story increasingly interesting is that one EU member – Finland – was opposing aid to the Irish yesterday.  And regarding that other dysfunctional EU peripheral, I’m of course referring to Greece, the Austrians are threatening they won’t contribute to the next bailout payment for that country.  This would cause the EU bailout package to collapse if indeed they weren’t bluffing; but Austria will cave because their banks hold too much Greek debt. 

Consumer staples and utility shares were relative winners for the day.  Basic materials (wacked by 5.2% over the last three sessions) and energy were the biggest losers.

The U.S. dollar continues to rebound, as has been the case when the safety trade rolls, and commodity prices declined as a result – and it’s not simply a function of the dollar up scenario, but also fear of lower Asian demand.  The CRB got hit by another 3% (its second 3%-plus decline in three sessions) and has moved back below that 300 level we’ve been talking about for the past three weeks. 

Market Activity for November 16, 2010

Producer Prices

The Labor Department reported that the headline producer price index (PPI) rose much less-than-expected in October, up 0.4% and half of the 0.8% that was expected.  Excluding food and energy, what’s known as the core rate (and a completely ridiculous way to look at the figure, but it’s there so I’ve got to report it) producer prices fell 0.6% -- this ties for the second largest monthly decline over the last 35 years.

The main contributor to the headline increase came from the gasoline component, which jumped 9.8% -- up 18.1% over the past 12 months.  Most other components showed declines for the month, led by a 3.0% drop in car prices and a 2.2% decline in residential gas.   And food prices were down 0.1%, but this did follow a 1.2% jump in September. 

The above figures are for finished goods prices to producers.  Within the crude goods segment of the report -- which tracks base input costs, or prices paid by manufacturers -- prices jumped 4.3% in October and are up 17.0% over the past year.  Energy was up 5.4% for the month and the food component was up 4.2%.  Again, this is food and energy before processing – and it also includes feedstuffs (food for livestock).

Industrial Production

The Federal Reserve reported that industrial production (IP) came in flat – no change – for October after the September reading posted the first monthly decline (-0.2%) since the economy rose from recession.  For October, IP was expected to come in at 0.3%.

Unlike September though, which was held back by a paltry 0.1% increase in manufacturing production, manufacturing output expanded at a strong 0.5% rate for October.  What held overall IP flat was another large decline in utility output, down 3.4% for October – this marks the third-straight monthly decline. Some of this can be explained by mild weather, but we’re talking about three months so you’ve got to figure some of this is also due to a labor market that remains too weak to foster the job growth we need.    That is, high commercial and residential vacancy rates.

For the third and final component of IP, mining activity slipped 0.1% for the month.  Manufacturing accounts for 78% of the total IP index, with utility and mining each accounting for roughly 11%. 

Capacity utilization (CU) rates – the amount of plant and equipment that’s being used -- remain well-below the long term average of 80.4%, as the figure was unchanged in October at 74.8%.  The Fed keeps close eye on this measure and has stated that they’ll continue to ease so long as this rate remains below normal.  Here are the charts for CU within the three components:

NAHB Housing Market Index

The National Association of Home Builders’ reported that their survey of housing market conditions ticked up a point to a reading of 16 for November.  As the chart below shows, the measure remains at a pathetically low level.  As a result I’m not sure why I even bring it up so we’ll make it quick.

The measure of present home sales was unchanged from the prior month, coming in at 16 – the average, going back to the inception of the index in 1985, is 53.  The measure of sales expectations six months out rose two points to a reading of 25 – the average is 58.  The measure of prospective buyers traffic (which measures not just the traffic but how serious those who walk through display homes appear to be about buying) ticked up one point to 12 – the average is 39.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900