U.S. stocks got the year started off strong as the major indices were able to hold most of their early gains as the session wore on – there was some slight weakness as we headed for the close.   Treasury yields jumped as prices sold off hard in the morning, but the Fed came in buying ($8 billion worth yesterday) and prices rallied off of those morning lows.

Financials, telecoms, and consumer discretionary shares led the advance.  Consumer staples, utilities and basic material shares were the laggards.  No one wants the safety stocks, which means it’s a good time to accumulate. 

Stock index futures were flyin’ in pre-market trading, juiced after a very upbeat 2011 GDP forecast from Goldman Sachs, a WSJ article suggesting that companies would unleash their mountain of cash this year, and high likelihood that Friday’s jobs report is going to show a decent rebound after very weak results in November.  I touch on all of these topics below. 

The CRB inched higher, led by the prices of OJ, wheat and the energy complex.  Oil breached $92/barrel yesterday before pulling back late in the session with the stock market, the highest level in 27 months. Of course, back in October 2008 it was a bit easier to absorb the cost as the economy was six million jobs stronger and there was much more full-time employment.  (It’s also important to note, in that WSJ article touched on above the interviewed business leaders cited continued increases in commodity prices as a risk that would cause them to keep holding back on capital spending plans.)

Market Activity for January 3, 2011

Giddy

Just to touch on each of topics that juiced pre-market activity:

The GS call for 3.4% GDP growth in 2011 is certainly doable thanks to that payroll tax cut – that 2% reduction is very likely to ease what was otherwise likely to be very soft growth in the first half of the year and may just deliver something close to GS’s forecast.  This assumes a continued rise in gasoline prices doesn’t consume much of the short-term benefit.  But I guess people forget that GDP should be printing something closer to 6.0%  at this point in the cycle (particularly since we didn’t get the 6%-7% GDP prints that are typical in the first year of recovery from deep recession), but stock-market rallies cause all kinds of forgetfulness. 

On firms spending their cash, we’ll see about that.  I suspect they’ll go hunting for market share as firms will find little revenue boost by way of pricing power.  But there are all kinds of risks that remain ready to jump out at anytime to suddenly shutdown a desire to spend. 

And on payrolls, numbers around +140K total and +150K private-sector for December (these are the consensus forecasts) appear pretty good after the weak average of 99K over the past seven months and the super-soft 39K in November.  However, to get the unemployment rate lower it will take 300K/ month; and frankly, sub-200K is pathetically weak.  Remember, during the crisis payrolls were slashed by eight million in a period of 18 months – six million taking place within 11 months.  Coming off of such complete destruction, one would think we’d manage at least a couple of +500k/month prints and initial jobless claims would have fallen to the 200K handle (the last time we came off of 10% unemployment, a mere nine months into the 1983 recovery payrolls jumped 1.114 million in September of that year and was followed by an average of 365K/month for the next 14 months).   If firms felt better about things wouldn’t they be substantially rebuilding from the crisis-led period of fear; and who exactly is there to still to be laid off? (referring to that jobless claims comment)

As I’ve said before, I don’t make such comments because I enjoy it. Long time readers may still remember that my tendency is toward upbeat commentary, which was the case for the first eight years of this letter’s existence.  But I don’t see that current economic challenges have been erased and policymakers have certainly created even more challenges as they choose to mask over troubles.  Beyond that, I find it important to put some things into perspective when traders get giddy over expectations that just aren’t very impressive for this stage in a recovery, specifically one that emerges from the worst recession in the postwar era. 

I’m yearning for big bang job growth, not just because it’s what’s necessary to repair our structural problems, but because it means the Fed will final cease and desist.  When the central bank’s market manipulation ends, we’ll learn the fundamental resilience of this market.

ISM

The Institute for Supply Management’s manufacturing reading came in at a strong 57.0 for December (right in line with expectations) after the 56.6 print for November.  This is a strong result, although I bet a lot of people expected more after Chicago’s 68 print in Thursday.

New orders rose four points to hit 60.7 and customers inventories fell 5.5 points to 40.0 (this is good as it means suppliers are more comfortable with those inventories).  However, the export orders measure, while healthy at 54.5, continues to back off of the 60.5 hit in October; and the backlog of orders remains in contraction mode.  The backlog orders reading doesn’t matter so long as new orders remains positive but production is running ahead of new orders and when those orders cool production will quickly follow. 

The employment index slipped 1.8 points but remains at a strong 55.7 – everyone has to be expecting a big manufacturing payroll increase on Friday as ISM and the regionals suggest something hot.  The prices paid figure continued to jump, up three points to 72.5, which has me increasingly worried about margins in this environment of little consumer-end pricing power. 

Construction Spending

The Commerce Department reported that construction spending rose 0.4% in November (twice the 0.2% expected), finishing a very nice three-month rebound.   While the public-sector share of total construction spending remains at an outsized 39.3%, private-sector activity played a greater role in generating increases over this three-month stretch.

Construction spending remains 33.5% below the peak and the private sector activity is off by 48.87% -- which explains how much government spending has helped to ease the damage. 

What’s the cost of this spending?   Not just for reasons of inhibiting the market from finding market-clearing prices, but also from a perspective of public-sector debt.  We’ll find out in time. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900