U.S. stocks rebounded for a third-straight session yesterday as prices typically rebound from a big downward move, at least week’s worst level down 19% from the April 29 multi-year high. With Monday’s move though, the broad market has fully erased last week’s losses so the S&P 500 is down just 12% from that April 29 close.  Traders were able to ignore another very ugly manufacturing-sector survey, but the gains occurred on weak volume – half the volume recorded on the big down days.

Utility shares led the rally with a 3.48% upshot. Energy, financials and telecoms also outperformed.  Consumer-related, basic materials and tech shares underperformed.

The CRB Index remains very strongly correlated to stocks, thus the index has rallied too over the past three sessions.  Monday’s move was driven by the prices of cotton, coffee, silver and OJ.   Crude got back to $87.88/bbl yesterday after falling below $80 last week.  I remember a major energy trader stating, about two months back, that crude wouldn’t trade below $80 again in our lifetimes.  Well, so much for that.  And if we’re on the verge of recession then crude is going below $70 before the next Bernanke goose job fires the price higher yet again.  I’ve often wondered how firms manage around this bouncing ball – probably about as well as retailers locking in cotton prices early in the year (for fear it was going even higher) only to watch the commodity plunge 51% since March.

Spitalian interest rate spreads (cant’ take your eye off this subject) remain wide but are well off the worst levels of a week ago, not much occurred yesterday though with Italy closed for a holiday.

More below…

Market Activity for August 16, 2011

Sector Activity for August 16, 2011

So the market continued to recover yesterday from last week’s erratic activity that had the broad market net lower.  And look, we’ll just have to grin and bear as it’s unlikely we’ll return to an environment that is even close to normal (stocks trending higher over a long period of time) because such wild fluctuations are simply a function of a market that hinges on short-term policy decisions.  There is no inkling of actual fixes – amelioration of the troubles that currently plague Western-economy growth rates.  No, everything right now is about pushing huge debt problems – even larger than they were three years ago -- yet further down the road.

While the latest rebound has cut the correction to -12% from near bear market territory of 19% at last week’s low point, this stumbling market has consumer confidence deep in the tank and is why the Fed is so focused on propping stock prices.  It’s not just a household wealth thing that the Fed is worried about, but higher stock prices are also a huge driver of consumer spending – and vice versa.

The Fed will undoubtedly be back with more QE.  The decision last week to set an explicit date with regard to ZIRP suggests there will be more to come; but this time will it work?  With energy prices at current levels, a goosing of equity prices will surely goose oil too, crushing a consumer that remains in deep debt and dealing with a weak labor market.  While we have earnings that are at peak levels (just to acknowledge that half of the move for stock prices from 2009’s bottom was fundamentally sound, they are also so high that they are not sustainable and enormously dependent upon very low payroll levels.  In this environment of high unemployment and dangerously high long-term unemployment, the profit cycle simply cannot last for much longer.  This is what the market seems to be discounting and adjusting to at the present.

(And quickly on that decision to keep ZIRP in place until mid-2013:  What does this mean?  It means, as we have seen, long-end Treasury yields will rally to extreme lows, helping those who can refinance to do so.  This will cause the MBS on the Fed’s balance sheet to prepay and The Bernank will use those proceeds to buy even more long-dated Treasurys.)

Empire Manufacturing

The first regional factory survey for August failed to get the month started off on a good note as it showed activity in the New York region fell deeper into contraction mode.

The Empire Manufacturing Survey (a gauge of activity calculated by the Federal Reserve Bank of New York) declined four points to -7.72 (expected to improve to a reading of zero), marking the third-straight month in contraction territory.  The expectations measure of business conditions (respondents’ view of things six months out) plunged 23.5 points to 8.7.  These are recession-type declines.  Not sure we’ll hit technical recession with the Fed at zero and willing to pump evermore liquidity into the market.  But whether GDP actually prints a negative reading or we just muddle around at 1% growth it doesn’t matter – neither scenario produces anywhere near the level of job growth that we need.

New orders slipped 2.5 points to -7.8, marking the third month of a negative print; backlog of orders declined three points to -15.2; inventories fell another three points to

-7.6, so a major catalyst to GDP during this very weak period of recovery looks to be nonexistent for a second-straight quarter.  Bucking the trend was the average workweek reading, which remained in negative territory, but improved a large 13 points to -2.2.

So we’ll have to wait for the readings from Philly, Richmond and Chicago to get a broader look at how nationwide manufacturing activity is playing out for the month, but this report from New York suggests the national ISM number will dip closer to contraction mode.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900