Daily Market Reports | Jun 19 2009
By Greg Peel
The Dow rose 58 points or 0.7% while the S&P rose 0.8% to 918 and the Nasdaq was as good as unchanged.
A feature of the falls on Wall Street earlier this week has been weakness in the two specific sectors of healthcare and banks. Healthcare is a defensive sector which was a haven when the market was falling although less sought after in the rally. Banks were at the forefront of market losses but led the rally. Legislation proposed by the Obama Administration to introduce what every other Western nation has – government-funded universal healthcare – sent investors scurrying out of private healthcare stocks. Legislation proposed to further regulate financial markets had a similar effect on the banks.
Throw in a toppy commodities market and the scene was set for this week’s sharp falls. But last night investors decided perhaps the legislative proposals weren’t quite so bad after all. Banks led the rally and healthcare tagged along. Providing further impetus was some good news on the economic data front.
It has been said often enough in this Report that the weekly new jobless claims number is a volatile one and should be treated with care. However, the continuing claims number does provide a broader perspective. Last week new jobless claims rose by 3,000, which is not a lot, but Wall Street was thrilled to learn of the development in continuing claims.
For the first week since January, continuing claims fell. After 21 consecutive weeks of increases to record levels, a fall of 148,000 to 6.69m broke the trend. One might be wary of a simple blip, but the fall was actually the largest in a week in seven years.
Unemployment is a lagging indicator and usually peaks around nine months after an economy has turned. It would be premature to say the peak is now in. And while not wishing to be a wet blanket, one must always remember that every lining has a silver cloud. America has a convoluted system of state/federal unemployment benefit policies which look nothing like those in Australia. Workers who are legitimately laid off receive a proportion of their previous wage for a period of six months. Thereafter they no longer receive such benefits but drop into the social security system.
In other words, 148,000 Americans did not necessarily find a job last week. Some of them just dropped off the six month benefit period into oblivion.
But at least it wasn’t bad news. Further good news came in the form of the Philadelphia Fed manufacturing index, which is considered a good proxy for overall national activity. This index works on zero being the turning point from contraction to expansion, and in May it read -22.6. Economists were hoping for a rise to -17.4 in June, but what they got was a rise to a mere -2.2.
But wait, there’s more. The US Conference Board’s index of leading economic indicators rose 1.2% in May after seven consecutive declines. Doesn’t seem a lot? That’s the biggest jump since March 2004. Leading indicators are taken to be indicative of about six months ahead in the economy.
Put them all together, and last night’s data were pretty damned terrific. But we only saw a 50 point move in the Dow nonetheless. This news in April or May would have sent the indices soaring.
Which brings us back to our theme of “green shoot” economic data needing to simply now confirm why we are 40% higher, rather than take us higher still. But there is also some slightly more concerning data to consider.
Speaking on CNBC this morning, the CEO of investment fund manager TrimTabs pointed out that the last few weeks has seen a big surge in retail money entering the stock market. This is money that has, to date, been waiting indecisively on the sidelines. History shows (and indeed Dow Theory is based on the concept) that your average retail investor is always the last to join the party. In other words, this is a very reliable contrarian indicator. Retail selling hit record levels in late February, for example. Retail buying broke all sorts of records in early 2000, for another.
History also shows that when offerings of new capital reach levels of over US$30bn per month, the market cannot sustain them. Every corporation and its dog have been taking the golden opportunity granted by the rally to issue fresh capital and repair balance sheets. The flow has not abated, and is indeed still building - past the US$30bn per month level.
This has been going on for a while now, and the bulls will say the reason we are going sideways right now is because the market is happily absorbing the new capital. But the CEO of TrimTabs suggests it is only now previously sidelined retail money providing the support. And that money, he believes, has now all but run out.
The US dollar started the session weaker last night but recovered to be stronger on the day on the economic data. [Incidentally, FNArena subscribers can now follow the daily movements of the US dollar index in the Cockpit.] The move was enough to send gold down US$5.50 to US$932.30/oz, but commodity prices were betwixt and between. Strong dollar bad, but positive data good.
The end result was that oil rose US34c to US$71.37/bbl. London base metals went absolutely nowhere. The Aussie actually gained half a cent to US$0.7997, but this reflects greater risk appetite on the back of good economic news as investors sell the yen to buy the Aussie on the carry trade.
In one of those constant push-pull effects, the US 10-year bond yield, which had been drifting lower this week much to everyone’s relief, jumped 13bps back to 3.81% last night. The reason is simple – good economic data mean less deflationary pressure and more inflationary pressure down the track. The stock markets are currently keeping a weather eye on the bond market, and any surge back to 4% will not be well received.
Which is why next week may bring some grief. If you thought the US Treasury auctions of two weeks ago were substantial, you ain’t seen nothing yet.
Next week the Treasury will issue US$31bn of 13-week bills and US$30bn of 26-week bills on Monday, US$40bn of 2-year notes on Tuesday, US$37bn of 5-year notes on Wednesday, and US$27bn of 7-year notes on Thursday.
It should be fun.
The SPI Overnight rose 21 points or 0.5%.
