U.S. stocks erased the last two sessions of losses even as the day’s economic releases disappointed.  Some easing in worries over the European debt situation and optimism over earnings season (which officially kicked off on Monday but won’t get started in earnest until next week) helped the market advance. 

A big move in energy stocks led the broad market higher, up 1.58% or four times the gain in the S&P 500.  A rally in crude sent the price back above the $90/barrel mark, up two bucks to close at $91.25.  Basic materials and health-care also outperformed.  Telecom and consumer-related shares closed lower for the session.

And the CRB Index advanced, so the last couple days of gains has nearly erased the weakness in overall commodity prices from last week.  It wasn’t just oil either that drove the index higher as sugar, cotton, silver and copper prices were the leaders. 

European concerns may have eased just a bit yesterday after it was reported that Japan wants to “help out.”  Actually, the Japanese government won’t be directly buying peripheral debt but rather debt issued by the EFSF (the bailout fund), which carries a AAA rating.  Beyond the fact that, as stated yesterday, fixing a debt problem with more debt is hardly a solution, I find it funny how the poster child for excessive government debt levels is coming to the “rescue.” 

And concerns have eased some more this morning as the hugely anticipated Portuguese debt auctions have gone very well – the results just in about an hour before this writing. 

The ECB beautifully orchestrated the results (their purchases averted a further increase in yields).  But the idea that there is no free lunch is axiomatic and the other side of this fantastic degree of market manipulation will be harsh – what goes in quickly moves out as those gaming central bank actions will stampede for the exit door on the first sign of policy reversal.  The ECB and Federal Reserve will delay this day as long as possible as they’ve now taken on an incredible level of interest-rate risk, but the day will come either voluntarily or by force.   

Market Activity for January 11, 2011

NFIB

The National Federation of Independent Business’s latest on small business optimism unexpectedly fell in December, damaging hopes that the latest pull from the deep recessionary reading of 90 had legs.

The measure dipped about a half-point to 92.6 from 93.2 in November (expected to rise to 94.5). While this marks the third-straight month above that 90 level, the fact that the survey can’t continue to progress from this currently weak level is illustrative of the issues small business continues to confront.  Prior to this cycle, the measure has spent very little time around the 90 level, and when it did on the four previous occasions it summarily shot toward 100. 

The segments of the survey that pressured the index were poor responses to higher selling prices, plans to increase inventories, expects a better economy, and actual earnings change.  The latter two really stuck out as expect a better economy fell hard, down to 9% from 16% (should be hitting 30% during a recovery phase) and the earnings change question fell to -34% from -30% (almost always a negative reading as more respondents are typically skeptical of profits trends) but this should be closer to -10 and definitely not falling in a recovery cycle). 

On a brighter note, the plans to hire, plans to increase capital spending, and expect higher sales all ticked up – although they remain at low levels. 

Wholesale Inventories

The Commerce Department reported that wholesale inventories missed expectations big time as they unexpectedly fell 0.2% in November (expected to rise 1.0%).  The October reading was revised down a bit to show a 1.7% increase (previously reported up 1.9%). 

So while it appeared that the inventory cycle continued to hum in October, we now see quite a shift as this is the first decline in 10 months.  What’s really important from a GDP perspective is the change in inventories for the quarter, and at this points they’re down significantly on that basis.  The rebuilding of inventories has accounted for roughly half of economic growth during this recovery, but the fourth quarter will be the first in six with which the inventory change will not support GDP.

(It’s a good thing holiday sales were so good because we’ll need all the help we can get from personal consumption.)

There’s no reason just yet to believe that inventories won’t help out a bit in subsequent quarters as distributors’ sales (part of the same inventory report) advanced a strong 1.9%.  Thus, the inventory-to-sales ratio fell from an already very low level. 

However, if the strong spending we saw this holiday fails to follow through in early 2011, then inventories will drag on GDP in Q1 – again, the strong holiday spending will help to offset the drag from the inventory segment for Q4 GDP. 

One needs to take note though, what are businesses’ expectation of future sales if they are unwilling to continue with the stockpile build even as the inventory-to-sales ratio remains near the record low? 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900