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Market Rises Over 3% on Better News and Fading Fears
By Louis Navellier
With Greece's sovereign debt fears subsiding, better-than-expected same-store sales and jobless numbers, plus new jobs almost guaranteed to rise dramatically next month (thanks to the U.S. Census), Wall Street suddenly has nothing to worry about - except maybe the cost of the latest healthcare reform bill and other legislation. As a result, Wall Street is now focused on the improving earnings environment. That helped lift the S&P 500 3.1% for the week (and +2.1% for the year). Also, due to a new surge of worldwide growth, commodity prices rose strongly last week, with crude oil reaching $82 per barrel on Friday and gold making a new six-week high at $1,135. Copper also rose last week, due to supply disruptions in Chile.
Stat of Week: 4% February Same-Store Sales Growth
One reason for the stock market's surge last week was that consumers seem to have emerged from their winter hibernation. Despite some nasty storms in February, last Wednesday we learned that same-store sales rose a whopping 4% in February, much higher than economists' consensus expectation of a 2.9% rise. This number, based on 28 retailers surveyed by Thomson Reuters, marked the sixth month in a row of rising sales - after 12 straight monthly declines. Two chains -The Limited and Nordstrom - posted 10% increases, while major retailers like Costco and Target rose 4% and 2.4%, respectively.
Meanwhile, the Commerce Department announced that consumer spending rose 0.3% in January on a seasonally adjusted basis. Real (inflation-adjusted) spending on goods actually increased by 0.8%, while real after-tax incomes fell by 0.6%, the largest decline in real incomes since July. That combination of statistics suggests that as personal income improves, consumer sentiment and sales will likely rise, too.
Conflicting Job Reports: Payroll vs. Household Survey
On Thursday, the Labor Department announced that businesses were more productive in the second half of the year than previously reported. In fact, unit labor costs fell sharply in the third and fourth quarters, by 7.6% and 5.9% respectively, according to the Bureau of Labor Statistics. In the fourth quarter, productivity grew at a revised 6.9% annual rate, up from the 6.2% announced just a month ago. That explains how the economy could grow at a 5.9% rate in the fourth quarter without creating any new jobs.
Going into Friday, the stock market was on pins and needles about the jobs report, especially after the top White House Economic Advisor, Larry Summers, warned that the recent snowstorms could negatively impact the February payroll report. But on Friday, the Labor Department reported that only 36,000 payroll jobs were lost last month, far fewer than economists' expectations of 68,000 to 90,000 lost jobs. The unemployment rate remained unchanged at 9.7%, slightly better than economists' consensus expectations of a rise to 9.8%. Also, December and January payrolls were revised higher by 35,000 jobs.
Meanwhile, the broader household survey reported 308,000 more net new jobs, raising the February total to 138.6 million jobs. This figure covers in-home businesses and contract workers, while the payroll survey mostly covers corporations, which are laying off more workers than they are hiring. For instance, on Wednesday an informal survey by outplacement firm Challenger Gray & Christmas showed that major U.S. companies announced in February that they would cut 42,090 jobs, the fewest number since 2006 and down sharply from the 186,350 job cuts in February 2009, when layoffs were at their most extreme.
Other encouraging news on the job front: (1) On Thursday, new jobless claims declined by 29,000 for the week ending February 27. Also encouraging, (2) temporary jobs rose by 48,000 and (3) manufacturing jobs rose by 42,000, the second monthly rise in that previously troubled sector. And finally, (4) the job market will surely get a shot in the arm soon from the U.S. Census Bureau, which is expected to hire 1.2 million part-time workers at $20 per hour. In February, only 15,000 census workers were hired, but a lot more will be hired in March. That's why Wall Street generally ignored the February payroll report.
The Fed's Beige Book and ISM Surveys Reflect Manufacturing Surge
On Wednesday, the Fed released its latest Beige Book survey, in which it reported that economic activity improved in nine of the 12 Fed districts, even though February's severe winter weather was expected to hurt several sectors of the U.S. economy. Instead, the Beige Book said "Manufacturing activity strengthened in most regions, particularly in the high-tech equipment, automobile, and metal industries."
The Beige Book survey also said that "Boston, Cleveland, Chicago, and Dallas noted an increase in metals prices, particularly steel, and Chicago and Kansas City said the upward pressure on some raw materials prices was likely to continue." The weak spot in the Beige Book survey was commercial real estate and construction activity, putting small and regional banks under pressure from real estate losses.
Meanwhile, the ISM manufacturing survey fell to 56.5 in February, vs. 58.4 in January. Economists were expecting 57.5, so this was a bit disappointing. However, ISM officials said that any reading over 56 is consistent with strong manufacturing growth. Joe Liro, an economist for Stone & McCarthy Research, said "The February ISM index provides further evidence the recession is over and the increase in manufacturing activity during the first quarter is likely to be sustained at least at a moderate rate in 2010."
The ISM services (non-manufacturing) index rose to 53.0 in February, up from 50.5 in January, the largest rise in over two years. Economists were expecting just 51, so this was a very pleasant surprise. Previous to the 53 reading in February, the ISM non-manufacturing index had been in a narrow range between 48 and 51 since August. Also, the ISM business activity index rose to 54.8 in February, up from 52.5 in January, while the ISM new orders index improved to 55.0 in February, up from 54.7 in January.
The best news in the ISM survey is that their employment index rose to 56.1 in February from 53.3 in January, a strong indication that factories may be hiring again. This was the highest reading for the ISM employment index since January 2005 and is a good omen for the creation of more manufacturing jobs.
Speaking of manufacturing growth, Ford just took the lead in monthly U.S. vehicle sales for the first time in 12 years, after posting a 43.1% February sales rise. Specifically, Ford car sales surged 54% and truck sales rose 36% from a year earlier. Ford is trouncing its former Big-3 partners (Chrysler and GM, now in bankruptcy), and now Ford is also trouncing Toyota, due to its continuing quality-control problems.
Greek Euro-Bonds Oversubscribed by 3-to-1!
Greece enacted severe austerity measures last week, including steep cuts in civil service salaries and entitlements, as well as raising its value added tax (VAT) by 2% to 21% and adding a 20% tax increase on tobacco and alcoholic beverages. The cuts in civil service costs include reducing monthly pay and cutting holiday bonuses. Additionally, the cost of civil service pensions will be frozen this year.
The rest of the world was impressed with Greece's attempt to impose these unpopular cuts and take on its powerful civil service unions. In fact, Greece won a crucial vote of confidence when its offering of five billion euro ($6.8 billion) in 10-year bonds (yielding 6.25%) was oversubscribed by 3 to 1!
The most amusing news last week was that on Thursday a couple of members of Germany's parliament suggested that Greece sell some unpopulated small islands to raise cash. Greece has around 6,000 islands, of which only 227 are inhabited, so there are plenty of empty but attractive Greek islands to sell.
In addition, the German tabloid Bild wrote an open letter to Greek Prime Minister George Papandreou, saying, in part: "Here, people work until they are 67 and there is no 14th month salary for civil servants. Here, nobody needs to pay a 1,000-euro bribe to get a hospital bed in time. Our petrol stations have cash registers, taxi drivers give receipts and farmers don't swindle EU subsidies with millions of non-existent olive trees. Germany also has high debts but we can settle them. That's because we get up early and work all day. We want to be friends with the Greeks. That's why since joining the euro, Germany has given your country 50 billion euros." Hmmm … it looks like some Germans resent helping out the Greeks.
Before you Throw Rocks at Greece…
Germans, Britons and other Europeans shouldn't be so quick to pick on Greece, and neither should we Americans. We have our own debt monsters to slay. Some U.S. states and European nations face similar problems, but they have not made the sacrifices the Greeks have committed to make. For instance:
Britain's household debt is now 170% of their overall annual income, compared with 130% in the U.S. The British government has a budget deficit of 14.5% of GDP, higher than Greece, but at an interest rate more than 2% lower because the Bank of England bought the majority of the bonds it issued last year.
California is a greater risk than Greece, according to Jamie Dimon, Chairman of J.P. Morgan Chase. Speaking at his company's annual meeting, Dimon added that "Greece itself would not be an issue for this company," while California poses more of a risk, given the state's $20 billion budget deficit.
Iceland held a weekend referendum on how to repay Britain and the Netherlands $5.3 billion from failed Icelandic banks. Saturday's referendum was triggered when Iceland's President Olafur Ragnar Grimsson blocked a repayment plan agreed between the countries, which would put a strain on Iceland's finances.
Ireland has 13% unemployment and is suffering from deflation: Consumer prices are down 2.6% from a year ago, the biggest price drop in the euro zone. Deflation is also brewing in Spain, where over 19% are jobless. According to the European Commission, prices in Ireland and Spain will keep falling in 2010.
So, let's not be too hard on Greece. They are suffering in public, while others are suffering more silently.