Wednesday, November 5th, Market Update

Wednesday: 11/05/08 10:30 AM EST :
Market Update

Weak economic data keeps mounting and today's news is putting pressure on stocks. Treasuries are generally higher but the approach of new supply coming next week is capping the upside for the market.

In the major news release of the day, the Institute for Supply Management (ISM) reported that its index of activity in the non-manufacturing (services) sector of the economy came in at 44.4 in October, down sharply from September's reading of 50.2. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.

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. October's reading is the lowest in the data series so far.
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 October came in at 44.2, down from September's 52.1. It was the lowest reading since last January's 41.9 and the second lowest since October of 2001 when it came in at 40.5.

On Monday, the ISM released its index on the manufacturing sector for last month and it came in at 38.9, the weakest reading since September of 1982.

Additional bad news came in a minor report this morning. The employment services firm, Automatic Data Processing, said that according to its records, private (non-government) payrolls fell by 157,000 jobs last month. This was the largest decline in the report's history since November of 2002. September's originally reported decline of 8,000 was also revised to a larger decline of 26,000.

In comparison with the Labor Department's recent figures, the ADP numbers have been much more bullish. While the ADP data shows a 26,000 drop in September, the Labor Department said non-government payrolls fell by 168,000.

The employment report for October will be released on Friday morning. Recent predictions call for a decline in payrolls of about 200,000. If that estimate is accurate, it would be the largest decline since March of 2003. The unemployment rate is expected to have jumped from 6.1% to 6.3%, the highest rate since June of 2003.

Another minor report this morning brought more bad news regarding the status of home financing. The Mortgage Bankers Association of America reported that its index of mortgage application activity fell last week by 20.3% as average fixed mortgage rates increased. The refinance sector was hit the hardest with a decline in its index of 27.8%. The purchase index declined by 13.9%. Refinances accounted for 42.9% of application activity, down from 46.9% the week before.
While the indices have been swinging back and forth over the past several weeks, the underlying trend has been down. The latest indices of overall activity and purchase activity were the lowest since the last week of 2000. The refinance index was the sixth lowest since that time. Registrations for adjustable rate mortgages edged up to 2.5% of total application activity from 1.9% the week before.

The accumulation of bearish data is currently giving stock traders a reason to take back some of yesterday's profits. A retreat was not unexpected considering the approach of the monthly employment report.

Treasuries also rallied yesterday and the gains could prompt some profit-taking. At present, however, the market is getting some support from a shift out of stocks. But upcoming supply does present some resistance. The Treasury announced this morning that next week's refunding auctions will consist of a $25 billion offering of 3-Year Notes on Monday, a $20 billion offering of 10-Year Notes on Wednesday, and a $10 billion offering of 30-Year Bonds on Thursday
Tuesday, 11/04/08 : Stocks caught a bid yesterday 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.

Yesterday'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 on Monday, they had been on the rise in the last week. In the last six sessions, the Dow gained 1,449.51 points or 17.73%. In Tuesday'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 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 at its lowest level of the last six sessions (yield moves inversely to price) . . . .