U.S. stocks rallied again as strong retail sales activity for November and a surprising jump in October pending home sales offset a disappointing jobless claims report to fuel investor optimism.  The market was led by financials, industrials and consumer discretionary shares. 

The past two sessions (although on weak volume) have restored that which the weakness of the previous three weeks erased as the S&P 500 returned to and surpassed the 1218 mark – the level hit on April 23, which at the time was a 19-month high; a 16% correction ensued in May/June that slammed the broad market back down to 1022.  The latest romp leaves the S&P 500 just below the post-crisis high of 1225 hit on November 5. 

The CRB rallied a bit more, looking to take out that post-financial crisis high of 319 hit on November 9 – it closed at 312.10 yesterday, driven by cotton, cocoa, nickel, aluminum, and yes, the energy complex. 

Market Activity for December 2, 2010

ECB

Well, ECB President J-C Trichet didn’t quite give the market what it wanted, but thanks to that upside surprise from U.S. pending home sales and the strong retail results the market didn’t need it.  Traders wanted to hear the ECB announce they’ll expand the bond-buying program.  Instead, he refused to announce something big, but did leave the door open.  Of course, as it has been reported, the EU continues to pressure banks to keep buying sovereign bonds (and the ECB obliges by accepting these, no matter the credit rating, as collateral) to keep spreads from blowing out further.  Thus, they accomplish more purchases indirectly.

Again, ultimately these governments that should have been funding their deficits with longer-term bonds (and surely running much lower deficits) will have to restructure this debt, forcing bondholders to accept a swap to longer-term maturities -- and this means losses.  Nevertheless, it’s a necessary condition to get this problem behind us.  For now though they’ll continue to kick the problem down the road, and the market will have this uncertainty hanging over it regarding how far the ECB and EU will go and when exactly they’ll finally acknowledge the debt must be restructured. 

At what point does the realization that too many things are being artificially propped up finally surface?  It’s that point at which policy can no long manipulate the market.

Jobless Claims

The Labor Department reported that initial jobless claims jumped 26,000 last week to 436,000 (expected to rise to just 424K) after the previous week’s 410,000 (a number that was revised up slightly from the initially reported 407,000 – marking the 31^st upward revision in 32 weeks). 

The four-week average fell 5,750 to 431,000 thanks to that 410K print in the prior report. 

Continuing claims rose as both the standard issue (first 26 weeks of benefits) and emergency claims (that extend out to as long as 99 weeks) increased.   Standard claims rose 53,000 to 4.270 million – the first increase in seven weeks.  Emergency claims jumped 235,332 to 4.899 million, nearly erasing the decline in the previous week.  (These emergency level of claims have been extended several times now, and I’ve stated there’s no way the 112^th Congress will pass another extension.  But before we get there the current lame duck session may do so as part of a compromise to get the current federal income tax rates extended.) 

So, both initials and continuing claims rise, which is unfortunate.  Last week’s report really got people excited that the trend in initial claims would finally slide below the 400K mark (a key level that always accompanies substantial and consistent payroll growth).  We mentioned that it sure looked like the trend has moved to a lower level, but cautioned that we must see follow through via this report to confirm it.  I’m sorry, but we didn’t get it.  From here it’s anyone’s guess.  Do we show additional improvement and make another run for 400K, or are initial claims driven back up to that 450K mark?   This is a level (450K) we’ve trending around for way too long now (longer than any time in the data series history). 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending home sales jumped 10.4% in October, following a 1.8% decline in September.  This destroyed the expectation that pending sales would decline 1.0%.  (These are contracts signed to purchase an existing home, which portends higher official sales a month or two out – sales are officially counted when the contract closes.)  The 30-year fixed-rate mortgage hit its all-time low of 4.21% during the month.

Signings were driven by activity in the Midwest, which surged 27.3%; an increase of 19.6% in the Northeast; signings rose 7.1% in the South; the West reported a decline of 0.4%.

The jump in pending sales is strange considering mortgage applications to purchase a home were down 1.6% during October.  The pending sales data from NAR and the purchases apps from the Mortgage Bankers Association (MBA) don’t always match up, but such a large discrepancy is unusual.  In any event, most of these signings will turn into sales and suggests that the November and December official sales for previously-owned homes will resume its rebound from the 15-year low put in during the summer.  (The NAR did warn that closings are being impacted by appraisals that are coming in below the contracted sale price, so some percentage of these signings will not make it to close.)

ICSC Chain Store Sales

The International Council of Shopping Centers (ICSC) November same-store sales results came in very strong, up 5.8% from the year-ago period.  The results were fueled by an 8.5% surge within the wholesale club segment (up 5.7% excluding fuel sales), a 6.8% increase for department stores (apparel up 6.3% -- so some colder weather-related buying there), a 5.2% rise for the luxury segment, and a 4.9% increase for discount stores.

The previous two November sales results posted the only back-to-back yearly decline in the measure’s 17-year history. 

Jobs Report

This morning we await the November employment report.  Expectations are for an increase of 160,000 in private payrolls, but the whisper number appears to be something closer to 200K. 

Private payroll growth have averaged 106K/month over the past six months and has improved to 136K/month over the last three months.  We need 300K/month for an extended period to absorb discouraged workers returning to the labor force, college graduates and population growth.  Many people believe payroll growth will improve to 200K/month, which is not sufficient, but will help.  I’m not convinced we’ll see this occur, in a durable manner at least.  That is, I think results will remain choppy for some time still. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900