U.S. stocks withstood a huge jump in initial jobless claims that pushed the reading back above the 450K mark for the first time three months.  But then, poor economic results don’t have the quite the usual adverse effect on the market as it gives the Fed reason to remain a huge player in the advance.  For a second day though, some late-session weakness kept the Dow Industrial Average from that 12K close and the S&P 500 from the 1300 mark. 

Financials and consumer discretionary shares led the broad market higher, which seems strange considering the news on jobless claims.  Telecoms, consumer staples, basic materials and energy were the losers. 

On the earnings front the news was mixed yesterday.  Caterpillar’s results killed it, while P&G, Colgate-Palmolive and AT&T disappointed.   P&G and Colgate cited surging input costs as a problem (higher commodity prices are not going to help the job market situation) and AT&T dealt with a steep decline in long-term service contracts (resulting from Verizon introducing the iPhone).  And even though CAT is posting rippin’ results – the company is a huge benefactor of rising commodity prices and robust construction activity in Chine, which is why it’s been a must own during this rally --- results will become much tougher to beat by the time the second quarter rolls around and China continues to tighten policy. 

The U.S. dollar weakened for the 13th session out of the past 15, moving deeper into that 77 handle on the Dollar Index (DXY) – and lower again this morning to 77.68.  As I’ve commented a couple of times now that the 75 handle on DXY should be viewed as the danger zone, a level that will increase the chances of a currency war. 

Wow, I suppose most people saw at least a summary of the FCIC’s report on the financial crisis.  It explained that 12 of the 13 largest U.S. financial institutions “were at risk of failure.”  Think about that for a moment so when the Fed Chairman says the peak of the crisis was the worst shock in global history, worse than the Great Depression, you get a feel of what’s occurred. 

Government actions certainly averted chaos from occurring, but those decisions have also thwarted the healing process and many of the policies (particularly monetary policy) that played a major role in fueling the behavior that led to the crisis have not changed.  We don’t go from the worst crisis in global history to a normal economic environment in a manner of 18-24 months, and we’re seeing that.  While the economic state of things has improved, we’ve simply saddled the public sector with even more debt; we’ve delayed the arrival of market-clearing prices within the housing market and household balance sheet repair; and we’ve certainly engendering improper risk assessment.  This is precisely why I remain extremely cautious, and skeptical that we’ve ultimately left the crisis behind. 

Market Activity for January 27, 2011

Sector Activity for January 27, 2011

Jobless Claims

The Labor Department reported that initial jobless claims unexpectedly jumped 51,000 last week to 454,000, crushing the belief that sub-400K was around the corner. 

The four-week average rose 15,750 to 428,750.

Continuing claims were mixed as the standard issue (covering the first 26 weeks of benefits) increased 94,000 to 3.991 million, while the emergency level of claims (extending benefits out to as long as 99 weeks) fell 98,027 to 4.618 million. 

This is a very telling report.  It may make sense that some of the jump in initial claims was due to the weather (snow in the previous week created a backlog that was processed this week – although most states allow workers to file online so blaming the weather may be a stretch).   But after the massive payroll destruction that occurred in 2008-09 it is amazing that net layoffs continue at this level.  I’m not ready to say that the trend will return to the 450K level.  More likely, as mentioned last week (even as initials slid back to the 400K mark), the trend will remain stuck around 425K-430K. 

The problem is anything above 400K simply fails to offer evidence that payroll growth has improved, and is not even close to a level that’s sufficient to bring the jobless rate lower in a reasonable timeframe.  One would think after eight million payrolls were slashed during the recession, and six million of these cuts taking place in a blinding 11-month period, that initial claims would have slid to the 200K handle.  Who exactly is left to layoff?   Firms simply can’t feel as good about the economy as the rise in stock prices suggests.

On continuing claims, the way the results set up shows that the decline in the emergency level of claims was due to benefits expiring rather than via job growth. Of course, the fact that initials and the standard issue of continuing claims both jumped corroborates this view. 

Durable Goods Orders

The Commerce Department reported that headline durable goods orders fell 2.5% in December (expected to rise 1.5%), which marks the third-month of decline. 

But as we often explain, the ex-transportation number is really the figure to watch as the extremely volatile commercial aircraft segment causes havoc in the headline number.  But that ex-trans number missed expectations too, up just 0.5% (expected to rise 0.8%) – and that number would have been worse if not for a huge 10.6% increase in machinery orders (a result of the jump in commodity prices and Asian stimulus that is now in the process of unwinding); electrical equipment was flat and computer/electronics orders fell 1.2% (the segment has been dragged down by electronic component orders which have declined since April). 

The important non-defense capital goods ex-aircraft figure, the proxy for business-equipment spending, rose 1.4% (beating the 1.2% increase expected) thanks to that surge in machinery orders.  So business spending continues but the rate of growth has really slowed, up just 5.4% at an annual rate since June – it was running at a 25% clip during the earliest stage of recovery. 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending home sales rose 2.0% in December, besting the 1.0% increase that was expected.  These are contract signings to purchase previously-owned homes, those sales are officially counted when the contract closes.  Thus, these figures offer evidence to the direction of existing-home sales two months out – NAR estimates that 80% of these signings turn into actual sales.

The figure doesn’t quite jibe with what mortgage applications have shown, which were down in December; although, most of the latest slide in purchase apps didn’t occur until January. 

In any event, pending sales suggests that previously-owned home sales will extend their two-month streak of increase, but not nearly at a level sufficient to absorb the current and coming supply.  

It’s not a surprise we haven’t seen sales surge even as prices are down 30%; it’s a function of labor market troubles and a supply glut that keeps big potential buyers on the sidelines.  (Hedge funds have been waiting to deploy large amounts of capital into the residential market, but not before the next round of distressed properties hits – a result of the latest foreclosure moratorium from the robo-signing litigation.  And it goes beyond that as banks are actively managing this problem.  The average number of days past due for loans in the foreclosure process is up to 16 months, with 18% of these defaulters living in their home payment-free for more than two years.)   We’ll eventually see a rush in the number of distressed homes hitting the market, or policies will simply further delay the inevitable. 

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Have a great weekend!

Brent Vondera, Senior Analyst