Monday, November 10th, 2008 Market Update

Monday: 11/10/08 12:45 PM EST:
Market Update

Treasuries are getting a bid as stocks have given up their early gains and are now in negative territory.

China announced its stimulus plan to maintain the country's economic momentum. The move adds to the growing string of countries that have enacted such measures and it helps ease concerns of a deep, global recession. The Asian stock markets closed generally higher on the news with Japan's Nikkei index up by 5.81% and Hong Kong's Hang Seng up by 3.52%. Most of Europe's markets are currently in the green, as well.

Also helping support U.S. stocks was news that the government is providing AIG with more loans that, in combination with those already made, total more than $150 billion. AIG's stock has surged on the news. Word of higher than predicted sales at McDonalds was also welcome news.
But stocks still face recent bearish economic indicators and expectations of more to come. In addition, not all of today's corporate news was positive. Fannie Mae reported a record loss for last quarter and Circuit City has filed for bankruptcy protection. Negative analyst guidance on General Motors is also pressuring the market.

There are no major economic reports scheduled for release today and bond trading will close early today ahead of tomorrow's Veterans Day closure of the market. The stock market will remain open tomorrow and since bond traders will not be able to react to any moves there, defensive positioning is likely to characterize today's trading action. However, a plunge in stocks could result in a safe-haven shift into government-backed debt securities (Treasuries).

This week's events calendar is weighted toward the end of the week but it is punctuated with new supply offerings. Today, the Treasury will be auctioning $25 billion in 3-Year Notes. The issue was discontinued in 1998 and reinstituted in 2003. It was discontinued again last year and was recently reinstituted. The last offering of this maturity was in May of last year. That issue met with mixed demand and the offer amount was only $14 billion. Bids exceeded the amount by 2.39 to 1, down from the 2.97 bid-to-cover ratio in the preceding auction in February of last year. Non-competitive bids, a gauge of individual investor demand, were solid, totaling $391 million versus the $303 million in the preceding auction.

Foreign demand was weak, however. Indirect competitive bids, which include those from foreign central banks, received just 18.9% of all accepted competitive bids and 18.3% of the entire issue. This was the lowest award portion for indirect competitive bids in the 2003-2007 issue cycle.
The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

On Wednesday, there are no major news releases scheduled but there will be the usual minor ones: the index data from the Mortgage Bankers Association on application activity for last week and the report on oil inventories.

But more supply comes to market on Wednesday as the Treasury will be auctioning its initial offering of 10-Year Notes. The offering will have a face value of $20 billion, up from $17 billion in the last initial offering in August. In October, the Treasury, in an uncommon move, reopened four old issues of 10-Year issues with a combined face value of $40 billion. The high offer size of this week's issue and last month's extra supply may have an impact on Wednesday's results.
August's auction met with relatively strong demand. The bid-to-cover ratio was 2.61, the highest for an initial 10-Year issue in four years. Noncompetitive bids totaled about $118 million. This was down from the $149 million in the preceding initial offering in May but it was above the average of $94 million for the twelve initial offerings preceding August's.

Foreign demand was decent. Indirect competitive bids received 33.8% of the issue, up from May's award portion of 27.8% but down slightly from the twelve-auction average of 36.3%.
On Thursday, the employment situation will be revisited in the jobless claims report. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits declined the week before by 4,000 to 481,000. But the originally reported level of 479,000 in the week of October 25 was revised up by 6,000 to 485,000. The four-week moving average, which smoothes out some short-term volatility was unchanged in last Thursday's report at 477,000.

Despite the latest decline, the claims level has been trending higher throughout the year. Any reading over 400,000 is considered a sign that layoffs are outpacing hiring activity. For the first forty-four weeks of the year so far, the average weekly reading has been 297,886. For the same period last year, the average was 317,659.

The report also said that continuing claims jumped by 122,000 in the week ending October 25 (continuing claims must be at least a week old) to 3.843 million. This was the highest level in twenty-five years. For the first forty-three weeks of the year, the average continuing claims reading has been 3,150,791. For the same period last year, the average was 2,530,884.
Also out on Thursday morning is the report on international trade for September. In August's report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $59.1 billion. The deficit was somewhat smaller than analyst predictions of $60.0 billion. Moreover, July's originally reported trade gap of $62.2 billion was revised to $61.3 billion.
The value of exports fell by 2.0% in August from July's record high. But there was a 2.4% decline in the larger category of imports due primarily to a drop in oil prices.

With oil prices continuing to decline in September, the balance of trade is expected to show a narrower deficit of about $57.0 billion. This would be the lowest in six months. Even if the report shows a slightly larger deficit, steeper declines in oil prices last month will likely show up in October's report in the form of a smaller deficit.

Thursday brings more supply as the Treasury will be reopening of August's issue of 29-year and 9-month securities (making Thursday's 29-year and 6-month maturities). The offer amount is $10 billion, the same amount as August's initial issue. That auction drew strong demand. The bid-to-cover ratio was 2.40, the best bid-to-cover ratio for an initial offering since February of 2007 (reopenings of the bond have often produced higher ratios since their offer amounts were relatively small -- not the case in this week's offering).

Noncompetitive bids totaled around $39 million, the largest amount for either an initial or reopening sale since February of 2006 -- the first auction in the current issuance cycle. And foreign demand was also strong. Indirect competitive bids garnered 42.7%, which was also the largest award portion for the bond since February 2006.

The supply issue will be further emphasized on Thursday afternoon by the release of last month's Treasury budget figures. October is the first month of the government's fiscal year and it usually starts out with a deficit; that is, greater outlays than receipts.

In October of 2007, the deficit was $56.8 billion. Because in part to increased bail-out activity for the financial sector, last month's deficit is expected to be around $90 billion. The 2008 fiscal year, which ended in September, produced a record high deficit of $454.8 billion. High deficits mean that more Treasuries will have to be issued to meet debt obligations and keep government operations running.

On Friday, the major economic release will be the report on retail sales for last month. Consumer spending, which constitutes the bulk of all economic activity, has been extremely weak since June. In that month, the seasonally adjusted level of retail sales rose by just 0.1%. This was followed by a 0.6% decline in July, a 0.4% decline in August, and a 1.2% decline in September.

Sales excluding the large but volatile auto sector have not been much better. They rose by 0.7% in June and by 0.1% in July, but they fell by 0.9% in August and by 0.6% in September.
For October, an overall decline of between 1.5% and 2.0% is anticipated. Excluding the auto sector, sales are expected to have fallen by between 1.0% and 1.3%. Some of the weakness in the forecast is due to falling gasoline prices but the report is expected to show a broad-based underlying weakness as well. Moreover, rising job losses are likely to continue reining in buying activity.

Another early release on Friday is the report on import and export prices. In September's report the Labor Department said that its index of import prices fell by 3.0%, the largest decline since April of 2003. The impact was blunted somewhat by the revision of August's originally reported decline of 3.7% to a still impressive 2.6% contraction.

Most of September's drop came in the petroleum products category. Its index fell by 9.0%, the largest decline since October of 2006. But even excluding the category, import prices were down by 0.9%, which, as in the case of the overall index, was the biggest drop since April of 2003.
The report said that export prices fell by 1.0% in September following a 1.7% drop in August. A large but volatile category of exports is agricultural products. Its price index fell by 0.3% following a huge, 9.6% decline in August. But excluding the category, export prices fell by 1.0% following a 0.7% decline in August.

Lower petroleum import prices are expected to result in another decline in overall imports. The latest forecast is for a drop of 2.0% or more.

The report on business inventories for September will be released a little later. In August's report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.3%, a slightly weaker gain than the 0.4% that analysts predicted. The increase was the smallest in five months but it followed a jump in July of 1.1%, the largest increase in four years.

As expected, the report indicated a sharp drop in sales. They fell by 1.8%, the largest drop since September of 2006. This pushed the inventory-to-sales (I/S) ratio up from July's 1.24 to a six-month high of 1.27. The I/S ratio is the value of remaining inventory divided by the value of sales for the month. It indicates how many months it would take to deplete the stocks on hand. Rising ratio figures mean that pressure on production is easing.

The latest factory orders report indicated that manufacturers' inventories fell by 0.7% in September, the first decline since August of last year and the largest decline since July of 2003. Today's report on wholesale inventories showed a 0.1% decline -- the first in twenty-one months. The only unknown is the retail category and it has averaged only a slight gain in the last twelve months. Consequently, the overall reading may show a slight contraction (which would be the first in a year-and-a-half) or it could show just a slight expansion.

And sales (inventory outflows) are expected to have fallen steeply in September. This will have pushed the I/S ratio up to what will probably be its highest level since early in 2007.
The final release of the week is the preliminary read on consumer sentiment for November from the twice-monthly surveys authorized by the University of Michigan. The final sentiment index for October was 57.6. This was down sharply from September's final reading of 70.3. In fact, it was the largest monthly drop in the history of the data series going back to 1978. The index was slightly higher than June's 28-year low of 56.4.

For the first part of this month, the recent forecast for the index was 57.0 but considering Friday's weaker than expected employment data, the reading could be considerably lower.