U.S. stocks slumped yesterday as the latest jobless claims report showed that initial claims remain stubbornly high and Fed Chairman Bernanke failed to offer any specifics with regard to the Fed’s next move.  The broad market traded pretty much flat for most of the session until Bernanke, via an afternoon speech, failed to deliver the words of more stimulus our addicted market wants to hear.  For sure, we’ve got to wean ourselves from this monetary addiction.

Utilities and consumer staples took over as the leaders as both groups barely lost ground for the session.  Financials, industrials and consumer discretionary shares led the broad market lower.

Crude and gasoline prices eased back a touch as the former closed at $88/bbl and the latter to $2.88/gal.  The weekly energy report showed crude stockpiles rose four million bbls (expected to rise just 1.7), while gasoline inventories rose 200K (expected to fall 900K).  Refinery rates remained high (at least for these days) at 89%, which explained the drawdown in crude.  Because gasoline demand fell 3% last week, it resulted in a build in gasoline stockpiles even with more product being processed.  The prices of crude and gasoline would have fallen more substantially if not for traders expecting another big money-pumping scheme coming from Bernanke sometime in the near future.

On President Obama’s proposal, I don’t know I go into these things expecting more of the same but still find myself surprised when the same fruitless and short-term policy is proposed.   What do we have here?

  * $35 billion to the states (this only delays the job cuts that states must continue to engage in to get their finances right)

  * $105 in infrastructure spending (more short term spending that probably ends up being misappropriated, as history has blaringly shown) 

  * $240 in tax cuts by halving the payroll tax and a $4,000 tax credit to businesses that hire people who have been jobless for six months (Why will a firm go through the rigors of hiring someone for a benefit that lasts only one year?  Why will a firm discriminate between applicants just to hire someone who hasn’t worked for at least six months for a one-time $4,000 credit?) 

  * $65 billion to extend jobless benefits out to 99 weeks (which was supposed to expire at the end of this year and is probably partially responsible for the very long-term jobless situation the president wants to fix)

We don’t know  how much of this plan will be passed, but beyond a one or two quarter shot in the arm, my expectation is that there will be no lasting economic benefit.

Market Activity for September 8, 2011

Sector Activity for September 8, 2011

Jobless Claims

The Labor Department reported that initial jobless claims rose 2,000 to 414,000 last week – of course the previous week’s figure was revised up yet again, just by 2K but the trend for a long time has been higher revisions.  Initials have been above 400K for 21 of the past 22 weeks with the only week below that number being 399K.

The four-week moving average increased 3,750 to 414,750.

Continuing claims fell as both the standard issue and emergency claims (those that extend out to as long as 99 weeks and will now be extended through 2012) declined.  In total, continuing claims stand at 7.31 million, still a very high level but down by about two million over the past year.

Trade Balance

The trade figures for July will be supportive to GDP assuming the numbers don’t reverse in August as the trade gap narrowed a large $6.8 billion (expected to narrow just $2 billion) as exports climbed and imports fell.

Exports rallied 3.6% in July, fueled by sales of telecom equipment, civilian aircraft and autos.  Imports fell 0.2% as crude oil imports slid 7.6%.  Excluding petroleum, imports rose

1.3%.  That ex-petro number was boosted by auto and apparel imports as electronics, industrial supplies and pharmaceuticls posted pretty heavy declines.

So, much of the narrowing in the trade figure for July was due to that big decline in oil imports.  While a narrowing, no matter how it occurs, is supportive to GDP (again assuming the data doesn’t reverse course we may even get a 1.5% GDP print for Q3), the lack of fuel demand is hardly a positive sign and suggests overall domestic demand remains weak.

This lack of demand has been a problem for the economy throughout this recovery.  Most of the policy tools we’ve chosen, and continue to choose, have been targeted toward increasing demand, but Keynesian-style policies really do nothing other than temporarily boosting consumer spending for a quarter or two only to see that consumption sapped in the subsequent quarters.  It would be much better to acknowledge that Says Law is correct, which is that supply creates its own demand.

It really doesn’t take a rocket scientist to understand the axiomatic nature of that law by Jean-Baptiste Say simply because one must first have income before there is money that can be spent.  While you can get around this reality for a while, we have found via high debt levels and unsustainable social programs that there comes a time to pay the piper when spending comes before income.  If we create the incentives for firms to produce (not just goods but plant and equipment investments), and a U.S. corporate sector that currently sits on mounds of cash certainly has the resources to boost production, then jobs will follow and so will a sustainable economic expansion.  It won’t occur until incentives are unleashed and that means correctly structuring our regulatory regime, instituting a sound energy policy and creating a tax code that is broader but with much lower rates.

Consumer Credit

Consumer credit jumped in July by the most since April 2008 but it was all due to increased car and student loan activity as revolving credit (credit card debt) fell – credit card balances fell by the most in six months, something that needs to occur but it hits GDP in the short term.  I do worry about the ascent in student loan activity over the past couple of years.  The job market better improve markedly over the next 12-18 months or we’re going to have a real problem on our hands via government subsidized loans.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900