U.S. stocks extended the latest bounce on continued hopes that EU policymakers will come up with another “fix” and Morgan Stanley appeared to mention that their Q3 earnings results will be “solid.”  The day’s economic data was mixed as job cut announcements surged for September, ADP’s gauge of payroll growth was better than expected and the latest service-sector measure also came in above estimates…more on these topics in the full Insight.

That Morgan Stanley news looked to be what drove the market in the final hour, which did account for much of the session’s gains.  That stock has gotten crushed, down 40% since July, as it looks like that firm has some serious issues on their hands.  Thus, the comments that results will be “solid” for a quarter that’s expected to be ugly for the industry eased concerns.  The comment that I found disturbing was the CEO’s statement that everything is “ok” over at the firm.  That sounds a lot like what Dick Fuld was saying up to the weekend Lehman went down.  (I’m not predicting the firm is going down, just that I find that kind of CEO nonchalance a bit eerie after what we went through three years ago.)

The latest attempt to mask over European problems came from an IMF official who stated the EU is working on a bank-recapitalization program worth €100-200 billion and that the IMF may begin to make outright purchases of government debt.  The purchase comments were later retracted as the IMF would have to change its legal structure – so flat out rumor on that one.  On the re-capitalization idea, where they get this money was not discussed, of course they’ll have to borrow it.  Germany and France are not large enough economies to make this problem go away on their own and all of the back-stopping they’ve already taken on will sooner or later show up via lower credit ratings.  What’s more, the re-capitalization plan we engaged in via TARP hardly solved the problem our banks are in as their straits continue.  But the market doesn’t always think about such realities as it’s in a tease me, please me state of mind.

All of this pie-in-the-sky talk comes as Greek protests rage again and that economy is effectively shutdown.  Greece has no reasonable shot at turning their ship around – it’s been taken out much too far into these deep debt waters.  The Europeans must realize they need to just let Greece go; they will in time.

Yesterday I mentioned that Dexia was the canary in the coal mine.  To wit, that bank obviously grew their assets beyond a level that made sense relative to their deposit base.  They also had the opportunity several months back to raise new capital and reduce its sovereign-debt portfolio but they didn’t want to realize the losses to do so.  What’s becoming clearer by the day is the same is true for large segments of the European banking system.  That’s why Trichet (in his last meeting as ECB President) will expand their liquidity program to provide unlimited funds to the European banking system.  Already out as of this writing, the British central bank has expanded its bond-purchase program as that economy is in dire straits as well.

Yesterday the world lost one of America’s great innovators.  Everyone is talking about the passing of Steve Jobs, so I don’t have to.  I’ll just say that it’s vitally important that this country employs an economic structure that maximizes the reward for entrepreneurial success.  We’ll pay for it via a lower standard of living if we choose otherwise.

Market Activity for October 5, 2011

Sector Activity for October 5, 2011

Challenger Job Cuts

U.S. employers announced the most job cuts in two years in September, according to Challenger, Gray & Christmas.  Year-over-year announced firings jumped 212%, the largest increase since January 2009, to 115,730 from 37,151 in September 2010.  Layoff announcements more than doubled in the last month alone as the August 2011 figure came in at 51,114.

ADP Employment

Payroll outsourcing firm ADP estimated that private-sector payrolls rose 91,000 in September.  While this number is insufficient to even nudge the jobless rate lower, the result did beat expectations, which were at +75K.  The three-month average stands at private payroll growth of 96K/month, down from the 119K/month average over the previous three-month period, which was down from the 199K/month for the three month before that.

ADP had service-sector payroll growth at 90,000 for September and good-producing payrolls up just 1,000 – manufacturers cut 5,000 positions and construction cut 2,000, so the pick up came from mining.

Small firms (< 50 employees), added 60K to payrolls; medium-sized firms added 36K; and large firms (> 500 employees) cut payrolls by 5,000.

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity slipped to a reading of 53.0 in September from the 53.3 printed for August.  However, the result was slightly better than the 52.8 that was expected.  Further, anything above 50 marks expansion so we shouldn’t worry too much that it slipped for the month.  What should be considered is that the ISM figures aren’t offering the accuracy with regard to actual economic activity that the surveys usually do – more on that in a minute.

The internals looked pretty good, some up some down but most remaining in expansion mode.  New orders printed the best result with a 3.5-point pick up to 56.5.  The problem readings were employment and imports, which fell to contraction mode – the former illustrates the weakness in the sector with which we get most of our jobs; the latter shows deterioration in domestic consumer activity.

Overall, the ISM figures (both manufacturing and service sectors) suggest a much stronger economy than what we’re actually living.  That is, the numbers the manufacturing ISM has printed over the past six months suggests the economy should have expanded at a 5% annual rate – that’s according to the Institute itself.  The average on the service-sector over this period suggest something closer to 3.00%.  In reality, we’ve grown at sub-1.00% during this timeframe.   I haven’t totally figured out what is causing the disconnect, but there’s no questioning the inaccuracy.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900