Parental Guidance

U.S. stocks made a couple of runs at extending Wednesday’s sick rally, but traded in negative territory for most of the session and that’s where the broad market closed the day.  The data was mixed yesterday with jobless claims disappointing, ISM Manufacturing printing a positive surprise, and Bloomberg’s confidence measure failing to show the improvement the other sentiment gauges had for the month.

Tech, consumer discretionary and health care were the only sectors to close positive.  Financials, energy and basic materials gave back a smidge of Wednesday’s bounce. (No matter whether speaking of a particular sector or the market as a whole, I have a tough time calling Wednesday’s move a “gain,” which is why I keep using the word bounce, as we have yet to dig out of the hole from the August slump.  In fact, the 7.47% rebound that occurred during the first three days of this week failed to even erased the mid-November selloff much less recoup that August damage.

A couple of news items out of China and Europe before getting to yesterday’s U.S. data releases, make it click…

Market Activity for December 1, 2011

Sector Activity for December 1, 2011

First, we now see why China has begun to ease reserve requirements again as their manufacturing index fell to contraction mode yesterday for the first time since 2009 – although this shouldn’t be a surprise as that factory data has been deteriorating for six months.  What is a surprise is that the ChiCom government actually allowed the print to be published instead of fudging the number.

Second, following Wednesday’s central bank actions, and surely more buying from the ECB, sovereign debt yields fell nicely yesterday as Italy dropped below the 7% level and Spain came back to 6% -- and rally more this morning, sending these yields yet lower.  This also helps French yields, which has sent the spread against the German counterpart to narrow big time – the symbolism behind the coordinated central bank move was that they’d be there to keep that banking system afloat, and thus the French government may not have to take on so much more debt to bail them out.  (This is really one of the overall problems.  Governments have taken on mountains of more debt to keep these zombie banks, and in many cases zombie economies, afloat.)

The decision by monetary authorities to open wide the liquidity lines to the banking system was certainly fostered by belief that one or more EU banks were in trouble – and they are clearly in a deep fix as it’s been reported this morning that euro-zone banks borrowed $8 billion from the ECB yesterday alone.  But the central-bank move was also about buying time until the EU can implement its next “solution” – there’s no doubt Bernanke and Draghi (ECB President) are privy to discussions among EU government leaders.

And this next plan that looks to be gaining traction is the idea of a “redemption fund.”  The details are sketchy, but it looks like a fund that would be set up in which each country would pay into each year until its debt/GDP ratio is reduced back to 60% -- it’s like forcing your child to save (and the EU certainly needs parental guidance; I guess I shouldn’t throw stones, so does Washington).  This doesn’t get around the reality that government spending will have to be reined in and the additional economic weakness that results, but there was never a way around this anyway – not a big deal though because it’s only a short term hit so long as these governments implement policies that give the private sector a boost.

They may be onto something with this plan if indeed the details on the thing are accurate and it’s not simply another ‘solution” that involves taking on more debt.  We’ll have a better idea of what’s going on here when the EU engages in its 16^th summit in 23 weeks on December 9.

Jobless Claims

The Labor Department reported that initial jobless claims rose 6,000 to 402,000, breaking the three-week string of sub-400K prints that averaged 394K; the previous week, per usual, was revised higher.

The four-week average inched up 500 to 395,750.

Continuing claims rose too, up 105,000 to 7.26 million, as standard claims (covering the traditional first 26 weeks of joblessness) increased by 35K and emergency claims (taking over to extend bennies out to 99 weeks) jumped 70K.  And naturally, as we see about 90% of the time from initials, the previous week was revised up to show an 81K increase in continuing claims rather than the 61K initially reported last week.

ISM Manufacturing

The November reading on nationwide manufacturing activity from the Institute for Supply Management came in a bit better than expected printing 52.7 (estimated to come at 51.8).  That’s nice after averaging 50.9 over the previous four months (remember a reading of 50 is the cut line between expansion and contraction), but it’s really only acceptable in this relative sense – it’s not a level that offers confidence the figure won’t soon fall to contraction.

And on that note, there’s the Chicago/ISM chart we posted yesterday and I post again (below) now that we have the November print from ISM.   Chicago PMI (the regional factory survey for the upper Midwest) rallied four points to print a strong reading of 62.6 for November.  However, as the chart below shows, Chicago diverges (to the upside) from ISM on occasion and when it does the convergence almost always (sole expectation being 1986) plays out with Chicago coming down to ISM rather than the other way around.  Basically what I’m saying is we need to see ISM rally to 55+ to offer the confidence that the factory sector is gaining momentum again and Chicago is not soon going to meet ISM at a much lower level.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900