U.S. stocks continued to rebound, up five of six days, from the mini-slide that had sent the broad market 6.4% below the 32-month high touched on February 18; the S&P 500 has recovered about two-thirds of those losses – volume has been very light though over the past three sessions. 

This market continues to look trouble in the face (if only for this week) and power higher.  To wit, so it looks like nuclear reactor troubles in Japan will take longer to resolve,  uncertainties rage in that hotbed of radicalism known as the Mideast, and Portugal’s government effectively collapsed as they couldn’t agree on the austerity package – a plan that was the last ditch effort to afford another $100 billion check written by the bailout fund. 

And for the EU, the big question is whether Spain goes running for a bailout, which seems more likely than most appear to estimate when one considers the state of their banking system, a housing market that reportedly remains in shambles and 20% joblessness.   None of this suddenly matters to Mr. Market and the story is that the lift has come from estimates that the destruction in Japan will boost global GDP when the rebuilding process begins.  This is a myopic and short-sighted view, and frankly so consensus it’s lazy.   I’ll explain below.

Tech, consumer discretionary and health-care led the way – normally a strange mix of cyclicals and safe havens, but we’ve seen that many times before in this cycle.  Energy and utilities were the laggards, but did close higher as all major sectors did. 

The Dollar Index slumped again on Thursday as the measure remains in the 75 handle – a level that will be responsible for delivering double-digit import price inflation by May on the current trajectory. 

Market Activity for March 24, 2011

Sector Activity for March 24, 2011

 Destruction Doesn’t Revive It Deprives

The 19^th century economist Frederic Bastiat discussed the topic better than I’ll ever be able to do via his broken window fallacy parable (so I suggest you read it), but I’ll just say this:

So economists are juiced again because the Japanese reconstruction is going to revive global growth.  Well, based on this belief maybe I should just go around puncturing the tires of every car I come across – this would certainly force some economic action.  Or on a larger scale why don’t we just bomb out a bunch of now vacant neighborhoods in the worst-hit regions of the U.S. housing market for the mere purpose of rebuilding them without regard to the misallocation of capital.  Or to really go big (and I’m removing the reality of human suffering to make a point), there is the northeastern section of the Pacific Plate (California) that hasn’t triggered during this tectonic cycle – the plate has been quite active with major quakes hitting Indonesia, New Zealand and Japan since October.  An 8.0-plus on the Richter Scale along with the tsunami that follows would certainly leave much treasure in need of rebuilding. 

I’m sorry, but I don’t see such events as economical helpful, and while those who think otherwise certainly do not wish such things upon us it doesn’t make their analysis any more correct.  In fact, instead of reviving GDP, it would likely deprive economic expansion for a long time to come. 

The point is destruction is not economically optimal.  The whole benighted idea forgets that Japan (the third-largest economy) will first have to deal with two quarters of contraction before the rebuilding “stimulates.”  And then we have the situation of a massively indebted government that will be forced to take on even more debt to rebuild – and as their debt levels, among other things, have held Japanese real GDP growth to a worthless 0.9% per year since 1992, you can expect it to be even weaker under a greater debt burden in the years to come.  On top of that, the entire view ignores that which is “not seen” as Bastiat wrote.  To what and where would this capital otherwise have been deployed, rather than rebuilding plant, equipment and general infrastructure that had plenty of useful life left?   

I understand that economists are just responding to that which we had little control over in the first place, a 9.0 magnitude quake and a massive tsunami, but to act as though this is going to help the economy is ridiculous, which we’ll see as time passes.

Jobless Claims

Initial jobless claims fell 5,000 last week to 382,000 (slightly beating the 383K expected), marking the fifth week out of the last seven we’ve printed sub-400K.  Thus, we can comfortably say that job growth will continue, although at a pace that’s required to bring the jobless rate down to a reasonable level and erase the LT jobless problem remains in question. 

The four-week average slipped 1,500 to 385,250.

Continuing claims continue to decline as both the standard issue (those that cover the first 26 weeks of joblessness) fell 2,000 to 3.721 million and emergency claims (those that extend benefits out to 99 weeks) fell 12,500 to 4.343 million.

Overall this is a good report.  We really need initial claims to plunge below the 350K level for a year or so as we saw in 1983-84 (the last time the official unemployment rate hit 10%) but the current environment is a far cry from 1983-84 when real GDP was growing at 6.6%, today we’re running less than half that.  Nevertheless, we’ll take this sub-400K level as that’s what we’ve been waiting for; it signals 200K in monthly payroll increases is a possibility. 

Durable Goods Orders

Headline durable goods orders fell 0.9% in February (expected to rise 1.2%), following a 3.6% increase in January – a number that was revised up from 2.7%.  This figure is down six of the past seven months.

The more appropriate number to watch is the ex-transportation reading (as the extremely volatile commercial aircraft segment plays games with the headline figure) and those orders fell 0.6% (expected to rise 2.0%), marking the second-straight month of decline – January orders slid 3.0%. 

The proxy for business spending – technically known as non-defense capital goods ex-aircraft – missed expectations big time as those orders fell 1.3% (expected to rise 4.3%) after slumping 6.0% in January.  

This segment, which has been a pretty key part of keeping GDP even at the paltry rate (for this stage of the cycle) of 2.9% has been net flat since May and down 14% at an annual rate for the current quarter.  Now, it is the shipments of goods not the orders that matter for GDP, but shipments are flat so will offer no help to economic growth for Q1 and the current-quarter decline in orders will funnel to Q2 shipments so it will drag heavily on that quarter’s GDP.  (Q1 GDP estimates are being revised down to the more realistic level of 2.5% from the comical 4.0% of just a couple of weeks back after this reading.)   I’m not sure what’s going on here with business spending but it may be firms trying to hold onto all the profit margin they can as input costs continue to rise.  And while the recent jobless claims reports point to healthy job growth to come, this figure is not a good sign for the labor market. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900