U.S. stocks withstood some mid-session weakness, which pushed the broad market into negative territory shortly before lunch, to rally in the final hour and post a nice gain for the day.  The Dow Industrials, however, were unable to close higher as the index was pressured by shares of McDonalds, IBM , 3M and Boeing. 

Financial, telecom, basic material and consumer staple shares led the S&P 500 higher. Consumer discretionary and tech were the biggest losers, the only of 10 major industry groups to close lower for the session.

The CRB Index slipped a bit yesterday, pushed lower by the prices of natural gas, OJ and soybeans.  Higher prices for cotton (which hit limit up yesterday as it headed back to the all-time high put in last week), aluminum, and silver kept the index’s decline to a minimum.  Commodities in general have vacillated in a fairly tight range for the week; the CRB is about flat over the past five sessions. 

Market Activity for December 9, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 17,000 last week to 421,000 (expected to fall to 425K) after the previous week’s reading was revised up 2,000 (32^nd of the past 33 weeks in which the prior number has been revised up) to 438,000.  The four-week average fell 4,000 to 427,500.

Continuing claims fell, both for the standard issue and emergency level of benefits.  The standard issue (the first 26 weeks of benefits) slid 190,000 to 4.086 million – that’s the lowest level since November 2008.  Emergency level of claims (those that extend out as long as 99 weeks) also fell, down 393,227 to 4.506 million – lowest level since July.  I’ll point out though that the emergency level of claims figure has a two-week lag to it.  That is, it’s for the week ended November 20 -- the same week that initial claims fell to 407K.  Since we’ve seen a boost in initials back to 438K in the previous reporting week it’s pretty clear that these claims will rise again via next week’s report. 

Bottom line: the jobless claims figures have clearly improved but not to the point that sent job-market excitement to its recent crescendo when initials hit that 407K number a couple of weeks back.  That decline was viewed as a sign they’d summarily fall below the critical 400K level.  Obviously, that has not occurred.  While we’ve remained below the elevated 450K mark for five weeks now, absent a move below 400K we lack the evidence to suggest durable and substantial payroll growth is upon us.  For continuing claims, I assume some of the improvement is due to the long-term unemployed finding work.  However, the latest jobs data illustrates that such repair has been tepid to say the least.  The rest must be due to expirations. 

Wholesale Inventories

The Commerce Department reported that wholesale inventories jumped 1.9% in October (double the increase expected) after a 2.1% jump in September that was revised up from the 1.5% initially reported. 

And the sales data helped out for the first time in six months, meaning sales outpaced the increase in stockpiles, which helps to alleviate the concern that the unintended inventory build of late will force the end to the inventory cycle.   Distributors’ sales jumped 2.2%, the most since March – the sales data had been flat since the first quarter. 

The caveat is that October sales were driven by a 26% surge in farm products, reflecting higher agricultural commodity prices.  This accounted for 60% of the monthly increase.  With one component responsible for such a large part of the increase, the risk is that sales fall off again in short order. 

FYI, wholesale stockpiles make up about 30% of all inventories; manufacturing stockpiles about 40% and the rest comes from retailers.  Inventory rebuilding accounted for more half of the 2.5% real rate of annualized growth in the previous quarter and well-more than half of the rebound in economic growth since it began in June 2009.

Household Net Worth

The Federal Reserve reported that household net worth rose $1.2 trillion in the third-quarter, falling short of making up for the $1.4 trillion decline in the second quarter but has made good progress since stocks hit their 13-year low in the first quarter of 2009.

And the stock market is what drove the reading higher as the S&P 500 gained 11% for the quarter – the broad market’s 12% decline was the main contributor to the previous quarter’s decline.  (Explains why Bernanke is so focused on keeping the stock rally going – and has actually felt the need to explicitly state this as a primary goal.)

Continued decline on the liabilities side of the household ledger also helped out, but is still largely driven by loan defaults; hopefully we get the job and income growth soon that allows for more constructive pay down of debt – the decline in mortgage borrowing was the largest contributor to the decline in debt; credit card balances have declined for 26-straight months. 

Outside of the household sector, nonfinancial companies remain chary with their cash, holding $1.93 trillion in cash and equivalents last quarter – 7.4% of assets, the highest in 50 years. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900