U.S. stocks rebounded on Thursday as the EU drew closer to implementing a bail out of Irish banks and the day’s economic data beat expectations – and by a huge margin with regard to the latest regional factory survey. 

Oh, we also had the GM (sorry the “New GM”) IPO, which had the market pre-juiced before the bell – no need to expand on this event as CNBC has turned into GM TV and thus already exhausted any discussion.   (This is not to take away from Peter’s nice commentary on the subject via the Market Minute on our website.)

Basic material and energy shares led the rally.  Utility and consumer discretionary shares were the relative losers but even these groups posted gains. 

The CRB (commodity index) snapped back above that 300 level, led by the agriculture and metals components – sugar, coffee, soybeans, cotton, silver, nickel and copper.  In fact, there wasn’t one component of the index that was down for the day.

There were reports Wednesday night that German is on high alert as they’ve supposedly been tipped off regarding a commando-style terrorist plot to hit a government building or a large hotel – ala the Mumbai attack in 2008.  The market ignored the warning obviously, or is it that we’ve just become conditioned to only react to events rather than warnings.  I’m sure to some degree this is the case.  Let’s hope the Germans are on top of this as the French were with the Eiffel Tower plot and we were with the cargo bombs – thanks to tips from the Saudis. 

Market Activity for November 18, 2010

Jobless Claims

The Labor Department reported that initial jobless claims rose 2,000 to 439,000 last week (expected to rise to 441K), marking the second-straight week that initials have held below that elevated 450K level.  The previous reading was revised up by 2,000, the 29^th out of the last 30 weeks by which the revision has gone in the wrong direction. 

This is the first time of the six occasions in the past nine months in which these claims have held below 440K for two straight weeks and is likely signaling we’ve finally moved to a lower level of this trend.  The caveat is that we had the Veterans Day holiday last Thursday so unemployment offices were closed.  There is always some question over how well the seasonal adjustment accounts for a holiday.

The four-week average of claims declined 4,000 to 443,000.

Continuing claims were mixed as the standard issue (those that last for the traditional first 26 weeks) fell for a fourth-straight week, down 48,000 to 4.295 million.  The emergency level of claims (those that extend out to as long as 99 weeks) rose 121,238 to 4.931 million – although the increase didn’t offset the 201,800 decrease in the previous week; so there was a net decline over the past two reports, which is nice.  These emergency level of claims will expire November 30.

Overall this is a good relative report due to initial claims remaining below 450K (and below 440K for two weeks, the first time since the recession began).  Now we must see progress to that 400K level -- the mark that historically signals more substantial and durable job creation has begun. 

Until jobs really begin to fire up (and we have see an average of 136K/month in private payroll growth over the past three reporting months but we need twice that) there will be a challenge for personal consumption – the largest component of GDP – as the emergency level of extended benefits is set to expire at the end of this month.  While the current 111^th Congress is talking of extending these jobless benefits yet again, when the 112^th rolls in on January 3 there will be little desire to keep these extensions going.  In fact, they’ll have about zero chance of extension by that time.  While we wait for jobs to pick up, a major artificial stimulant to consumer activity will no longer be around. 

Philly Fed

The Philadelphia Fed index showed that factory activity in the Fed’s third district destroyed expectations, jumped to a reading of 22.5 for November (expected at 5.0)  after posting a reading of 1.0 for October and coming off of two months of contraction prior to that.  This number is especially surprising, not just because a reading over 20 is robust but after what we saw via Empire Manufacturing on Monday, which slid the most since the 9/11 attacks.

The internals of the report looked good across the board.  New orders rose to 10.4 after four months of negative readings; unfilled orders came at 3.7 after six months of contraction; inventories remained negative, but improved by 12.7 points from the October reading; and the average workweek jumped 16.9 points to 10.9 for the first positive reading since July.

Now, the Philly Fed factory index is not calculated based upon the sub-indices of the report – the internals touched on above – unlike the other regional surveys.  It is simply a gauge of sentiment among manufacturers, and since the measure has posted a string of weak reading over the prior three months it didn’t take a huge shift in sentiment to deliver a big increase.  Nevertheless, I am confounded by the result.  The manufacturing sector has remained resilient over the previous couple of months but has shown meaningful deterioration.  Yet, this is a very strong number for Philly, and even after Empire slid to -11.14.

The bad news of the report was evident in the price measures as prices paid rose 3.5 points to 34.0, while the prices received rose 6.9 points but remained negative at -2.1.  Margin compression remains in full force. 

Mortgage Delinquencies

The delinquency rate for mortgage loans decreased to a seasonally-adjusted rate of 9.13% of all loans outstanding as of the end of the third quarter – down from 9.85% in Q2 and the high of 10.06% in Q1.  All segments showed improvement with the exception of subprime adjustable-rate mortgages loans. 

On an unadjusted basis the delinquency rate was essentially unchanged from the prior quarter – 9.39% vs. 9.40%. 

The percentage of loans in which foreclosure was started came in at 1.34%, up 23 basis points from the prior quarter.  The percentage of loans in foreclosure was 4.39% for Q3, down 18 basis points from the prior quarter.  Combined with the figure above, the number of mortgages either delinquent or in the foreclosure process came in at 13.78% on an unadjusted basis, down 19 basis points from the prior quarter. 

I don’t want to put a negative spin on the decline in foreclosures, but any improvement is drawn into question these days when half of loan modifications (actually I think it’s closer to 60% but I don’t have the number in front of me right now) return to default status within a year.  (That is, the servicers begin the modification process because the government is paying them to do so.  They know many of these loans have little chance of actually being cured, but why should they care; they’ll happily take the up-front modification fee.)

Among foreclosures, the segment that showed the largest increase came from the most creditworthy borrowers – the inventory of foreclosures via prime fixed loans rose to 2.45% from 2.36% in the previous quarter.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900