Friday, December 12th, 2008

Morning Market Update

More bad economic news and word that the Senate had rejected the auto bailout package were expected to send stocks into a tailspin this morning. But, though the indices are in the red, news that the Treasury is prepared to back the auto industry has provided some support for the market. Treasuries had been up in early trading but prices have since dropped into negative territory.

In today's economic news, the Commerce Department said that the seasonally adjusted level of retail sales contracted for a fifth consecutive month in November with a decline of 1.8%. Analysts had predicted a smaller decline of 1.4%. Moreover, October's originally reported decline of 2.8% was revised to a slightly steeper drop of 2.9% -- the largest decline in the current data series going back to 1992.

The sales level in the large but volatile category of auto and light trucks fell by 2.8%. But even excluding the category, sales were down by 1.6% following a 2.4% decline in October. Another volatile category is sales at gasoline stations and due to falling prices there, the sales level fell by a steep 14.7%. A bullish detail in the data is that excluding both the auto and gas station categories, sales rose last month by 0.3% after three months of contractions.

Declines were posted for non-store retailers (-1.3%); building materials, garden equipment and supplies dealers (-1.2%); and miscellaneous store retailers (-0.8%). But the other categories posted gains. The largest gainers were in sporting goods, hobby, book, and music stores (+2.8); electronics and appliance stores (+2.8%); and general merchandise stores (+1.2%). Sales at clothing stores rose by 0.8%. This was the first increase in the category since July and the largest since January.

In the other major release of the day, the Labor Department said that its Producer Price Index, a gauge of inflation at the wholesale level, fell in November by 2.2%, a deeper drop than the 1.8% that forecasters had predicted. This was a fourth consecutive monthly contraction and October's 2.8% drop was the largest in the history of the data series going back to 1947.

The declining price of oil is a key contributor to the contractions and today's report indicated an 11.2% decline in the energy price index last month following a 12.8% decline in October. Another volatile category is food and its index was flat (0.0%) last month. Excluding both volatile categories, the so-called core index rose by just 0.1%, the tamest reading in eight months.

Price pressures further down the production pipeline also contracted last month. At the intermediate stage, the price index fell by 4.3% and even excluding food and energy, the index was down by 2.3%. At the initial -- or crude -- stage of production the price index fell by 12.5% in November following an 18.5% drop in October.

The data indicate declining inflation pressures and that constitites a plus for both stocks and bonds. However, the price declines are due to falling demand and that is bad for corporate earnings and, therefore, stocks.

There were also a couple of minor releases today and they were mixed. The Commerce Department reported that the seasonally adjusted level of business inventories fell in October by 0.6%. This was the largest decline since August of 2003 and was worse than the 0.1% decline that had been predicted. In addition, September's previously reported decline of 0.1% was revised to a drop of 0.4%.

The inventory declines reflect the response to falling sales. Today's report said that the sales level decline in October by 3.5%. Consequently, the inventory-to-sales (I/S) ratio rose to 1.34 from September's 1.30 (originally 1.29). The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean decreasing pressure on manufacturing to replace supplies. October's ratio was the highest since June of 2003.
And lastly, the preliminary read on consumer sentiment for the month from the twice-monthly surveys by the University of Michigan resulted in a sentiment index of 59.0, up from November's final reading of 55.3 and stronger than most observers were expecting. The increase in optimism is being attributed to the decline in gasoline prices which has improved current conditions. But the bleak employment situation is casting a shadow over expectations for the future. News sources report that the index of current conditions spiked up to 69.4 from 57.5 while the expectations index slipped to 52.4 from 53.9.