U.S. stock indices traded ugly again yesterday – but at least not as ugly as European and Asian bourses, which were off by 4% across the board – as the market once again is in the process of pricing in recession/European financial chaos.  The broad market has returned to the low end of the trading range we’ve been stuck in since early August, the third time we’ve tested this level of 1120 on the S&P 500 in six weeks

The global scene deteriorated a bit more on Wednesday night/Thursday morning as a preliminary survey of Chinese manufacturing activity printed contraction for September, followed by the eurozone’s main factory gauge showing contraction for the first time since mid 2009.   Also, there was news that French bank BNP Paribas is in talks with Qatar to raise capital, even as the bank continues to say they don’t need more capital – yeah, sure.

Also contributing to this latest sell off is a growing concern that maybe central bankers are running out of tools.  I don’t believe the Fed ever had the tools for this environment, at least not in terms of bringing the economy out of its funk.  Sure, they can provide liquidity to a banking system that continues to need it, but monetary policy can’t erase our central problem – too much debt.  In fact, the mistaken monetary policy of the past decade that began to drive real rates negative in 2002, thus encouraged the assumption of vastly more debt, is the original cause of our stagnation.

Utilities, telecoms and consumer staples outperformed again.  Basic material, energy and industrials took on the heavy water.

The price of crude slid nearly $6 to close at $80.17, which is down from $90 a week ago.  Wholesale gasoline finished at $2.55, which is off more than 20 cents in five sessions.  These declines are nice, but as we’ve talked about for a while now, the only reasons energy prices fall these days are hardly consumer friendly.

The Treasury market rallied hard as a result of the Fed’s brilliant (biting sarcasm) Operation Twist and deep worries over where we’re going economically.  The yield on the 10-year slid to 1.72% and the 30-year to 2.79%.

The latest equity-market rout continues this morning as Asia and Europe trade lower and our futures point to another deeply negative open.

More in the full Insight...

Market Activity for September 22, 2011

Sector Activity for September 22, 2011

So here we are, going nowhere for now as we remain stuck in this latest range.  The broad market has corrected by 17% since hitting a nearly three-year high on April 29 and we’re 28% below the peak hit in October 2007.  This is what the investing landscape looks like in a world in which we seek to patch over problems, choosing quick “fixes” when only time and frankly sacrifice can return us back to the level of growth we all desire.

Of course, the correct policy stance (and as I touched on yesterday I’m talking about tax and regulatory regimes) can help to ease the damage and offer businesses the confidence and relative certainty so that they put more of their cash to work.  Instead, we watch the federal government spend trillions more and drive us deeper into our debt hole – and all with negative economic benefit as it creates more uncertainty and pessimism.  Further, we continue to look to the Fed to save us, when they’re the ones primarily responsible for driving us into this ditch.

We will return to a world in which this economy is able to grow at real annual rates of 3.0%, and I think our potential is actually closer to 4% under the correct policy stance, and the stock market is able to break this funk.  In fact, I believe there is another 1980s/1990s boom out there waiting to occur as business are supremely streamlined and market valuations reside at reasonable levels again  But it’s going to take a considerable amount of time to get there, and each additional quick “fix” the government implements only delays the ultimate time of recovery.

Jobless Claims

Initial jobless claims fell 9,000 last week, coming in at 423,000 (420K was expected) after the previous month was revised up yet again – up 5K this time to 432K.  That makes it 23 of the last 24 weeks initials have been back above 400K, and the only week that we were below it was a print of 399K.

The four-week moving average rose slightly, up 500 claims, to 421,000.

Continuing claims fell again, down 131,000 as both the standard and emergency level of benefits declined.  These claims have dropped 400,000 over the past three months.  However, payrolls have only increased 105,000 and the household survey has total jobs down 152,000.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900