Tuesday, November 4th, 2008 Market Update

Tuesday: 11/04/08 5:00 PM EST :
Market Update

Stocks caught a bid today and Treasuries were penned in for much of the day by the situation. But stocks fell back in afternoon action and this spurred a rally in bonds that sent them out with hefty gains. Stocks then regained their footing and rose again in the last hour of trading, leaving the indices near their highest levels of the day. In late trading, the 10-Year Treasury Note was up by 1-17/32, lowering its yield by 19 basis points to 3.72%; the Dow was up by 305.45 points to 9,625.28; and the Nasdaq was up by 53.79 points to 1,780.12.

Today's economic data was certainly not a catalyst for the stock rally. The level of new factory orders fell more than expected in September and the key sub-categories also exhibited weakness. A jump in oil futures was also largely a negative influence on stocks. With a cut in oil production by the Organization of Petroleum Exporting Countries taking effect this month, futures prices jumped by the largest amount since late September. The price of a barrel of light, sweet crude for December delivery rose by $6.62 on the New York Mercantile Exchange to settle at $70.53. However, though higher energy prices are detrimental to stocks in general (they divert money from other purchases), they are a plus for energy-related stocks. And traders were still picking up bargains following a steep fall-off over the last two months.

Though stocks took a breather yesterday, they have been on the rise in the last week. In the last six sessions, the Dow had gained 1,449.51 points or 17.73%. In today's action, the Dow gained 3.28%; the Nasdaq, 3.12%; and the S&P 500, 4.08%. The Dow and S&P 500 closed today at their highest levels since October 6 and the Nasdaq at its highest level since October 13. The yield of the benchmark 10-Year Note closed today at its lowest level of the last six sessions (yield moves inversely to price). But today's price gains were on light trading volumes so they may be vulnerable to profit-taking tomorrow.

The major economic release tomorrow is the index on the non-manufacturing or services sector of the economy from the purchasing managers survey conducted by the Institute for Supply Management (ISM). The current services index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. In September, the index came in at 50.2, down from August's 50.6. Any reading over 50.0 indicates a general expansion for the month.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for September came in at 52.1, up from August's 51.6 and the highest reading since May.

Nonetheless, the highest NMI reading this year so far has only been 52.0 and the average has been 49.5. This suggests that the sector is basically idling. The latest consensus forecast for October's index is a reading of about 47.0. This would be the weakest reading in nine months. Rounding out the economic picture: yesterday's index on the manufacturing sector indicated that activity there contracted sharply last month.

10:30 AM EST :
Tuesday Morning Market Update:

Despite more bad economic news, stocks are rallying this morning following on the heels of strong gains in overseas markets. Treasuries are feeling the pressure from the flow toward equities; however, prices in the bond market are currently hugging unchanged levels.

In today's only major economic release, the Commerce Department reported that the seasonally adjusted level of new factory orders fell in September by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.

A smaller decline had been anticipated because of a stronger than expected report on durable goods orders that was released last week. It said the order level rose by 0.8% and today's report revised that up to 0.9%. But today's report revealed a 5.5% drop in nondurable goods orders, the largest decline in two years.

All of the key sub-categories also saw sizeable declines in September. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August.

September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.
Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December. Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

The demand on the manufacturing sector is weak and the effect was evident in yesterday's ISM Index. Tight credit conditions and contracting demand from businesses and consumers are seen as the main reasons for the decline.

But with extraordinary rescue measures enacted by the Federal Reserve and Treasury, stock traders are hopeful that increased confidence and looser credit conditions will spur the economy. It should be noted, though, that upcoming economic news is likely to continue to paint a bleak picture that will test stocks and prompt some safety shifts into bonds. The markets have been extremely volatile in the last two months and will probably remain so for awhile . . . .