U.S. stocks bounced yesterday, nearly erasing the prior session’s losses, after the latest regional factory survey and pending home sales beat expectations.  The major indices went positive out of the gate and the rally gained ground after those economic reports were released – they essentially offset a weaker-than-expected jobless claims reports (more on this data beyond the click). 

However, the credit market didn’t follow suit as the Treasury market rallied again (the safety trade), investment grade corporates sold off a touch and European sovereigns traded lower. 

Financials, industrials and energy led the broad market higher.  Consumer staples, utilities and telecoms were the day’s laggards but even these groups (two of which are the best-performing sectors for the year) posted nice gains. 

Despite the upswing in stocks, and the basic materials group outperforming the broad market, the commodity complex traded lower.  Nickel, natural gas, hogs and gold led the CRB Index lower.  Gold has taken a beating over the past six weeks, down 14% -- and 18% off the peak hit in August.  That’s the steepest decline for gold since 2008 when all chaos broke loose and traders/investors sold anything they could.  

Market Activity for December 29, 2011

Sector Activity for December 29, 2011

Jobless Claims

Initial jobless claims couldn’t extend the latest improvement to four weeks as those claims rose 15,000 to 381,000 last week (expected to rise to 375K).  The previous week was of course revised up, which occurs about 90% of the time these days, but it was still good at 366K.  The revision to this latest number may prove to be larger than usual as several states had to estimate their results due to the holiday-shortened week; it prevented offices from completing their counts, according to the Labor Department.

The four-week average fell 5,750 to 375,000. 

Continuing claims rose too, but just a bit as the standard issue (first 26 weeks of joblessness) rose 34,000 and emergency claims (taking over to extend bennies out to 99 weeks) increased 8,000.  Total continuing claims (those on bennies anywhere from two weeks to 99 weeks) stands at 7.098 million – that’s about half of the 13.3 million people who are officially unemployed and a little more than a third of the 19.9 million people who are actually unemployed (this number includes those who did not look for work over the previous four-week period but said they wanted a job). 

Chicago PMI

Factory activity out of the Chicago region beat expectations with it 62.5 print for December, a tick lower than November’s 62.6 but better than the 61.0 that was expected.  A number above 50 marks expansion.

This region continues to be the bright spot, the only one that has not declined to contraction mode at any point this year, as it’s certainly helped by auto production -- and probably too machinery orders as firms have been incentivized to push forward their spending plans due to the higher depreciation allowance (tax advantage) this year. 

The internals looked pretty good as new orders held at a strong level, coming in at 68.0 after the 70.2 for November; order backlogs rose to 57.9 from the 55.1 in the prior month; and employment bounced to 58.6 from 56.9 (although it’s averaged a healthy 59.6 for the past four months, yet we haven’t seen this show up via the official manufacturing payrolls data – up just 2,000 per month since September). 

So good news from Chicago, and the other regional measures have improved a bit from the contraction of the past months.  What it all comes down to is seeing this result in more payroll growth.  The overall jobs report should look good for December, we’ll see how the factory side looks. 

Bloomberg Consumer Comfort

Bloomberg’s consumer sentiment gauge (the most-watched weekly indicator on the consumer, it goes back to 1985) slipped after improving for two weeks in a row.  The measure fell to -47.5 from the -45.0 in the prior week. 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending homes sales rose 7.3% (expected up just 1.5%) for November after the 10.4% jump in October.  These are contract signings; they are officially counted as existing-home sales when the contract closes – so there is usually a one-two month period as to when these pending sales show up as official sales. 

As a result, we should expect some better home sales figures for December and January – something that is very much needed as a run rate closer to five-million units per year is required to help absorb supply, currently sales are running under four-million units. 

One should be cautious though not to expect too much as contract cancelations are running at four times the normal rate.  This seems to be a function of the underwater mortgage situation – depending on the research firm, 25-30% of all mortgage are underwater (the mortgage is higher than what the home is currently worth). 

As a result, sellers are required to ask a higher price (and buyers are in many cases willing to pay it due to the very low interest-rate environment).  The problem is the appraisals aren’t meeting this contracted sales price and the contract ends up getting canceled as a result.  Over the next couple of months we’ll see if this cancellation rate has eased or remains elevated, as evidenced by whether or not the official sales data matches what the pending data is signaling. 

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Have a great weekend! 

Brent Vondera, Senior Analyst