Daily Take: China Stimulus Offsets Jobs Data

By Markos N. Kaminis - Economy & Markets:

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Horrible jobs data was conveniently neutralized today by a leak that China's PM might announce a substantial increase to his nation's economic stimulus tomorrow during his State of the Union Address. Below you'll find our analysis of these topics and the news releases we felt to be the most market consequential today.

Economic Report Analysis

ADP Private Employment Report

As a precursor to the government's Employment Situation Report due Friday, ADP noted private payrolls dropped by a stunning 697,000 in February. This is horrible news heading into the government data that has economists forecasting unemployment will rise to 7.9% and nonfarm payrolls will drop by 648K. You will be interested to discover that the most dire of the forecasts has 800K jobs lost in February and unemployment at 8.1%.

ADP had some more bad news to note this morning. The harbinger of our pending demise said January's nonfarm payroll losses had been understated, and revised those to 614K, from 522K.

Challenger Gray & Christmas Announced Corporate Layoffs

The day's second bit of employment data actually came first this morning. We're guessing Challenger smartly produces the report early in the AM due to the competition it faces for headline space with ADP. It is true that this report is often overshadowed by the private employment report, but it is not to be overlooked...

Challenger's reporting of announced corporate layoffs places February's firings at 186,350, a level only bearable when compared against January's worse environment. A total of 241,749 pink slips were issued through that month. The employment data will build toward crescendo on Friday, but we still have two key reports tomorrow, the Monster Employment Index (produced by Monster Worldwide (NYSE: MWW) and Weekly Jobless Claims.

ISM Non-Manufacturing Report

ISM posted its monthly measurement of the service sector today. The capitulation of the broad service sector went a long way toward turning this recession into a special one. Early on, when the trouble was restricted to construction, we warned that it would spread to this critical segment of the economy. Now that it has, the great concern is risk posed by the reverse feedback loop. As unemployment increases, folks spend less, leading to more layoffs, etc. Fiscal stimulus and most of the government programs initiated over the past few months are specifically targeted toward stopping economic contraction in its tracks before feedback enters the equation too substantially. Failure to do so would certainly condemn us to an even more protracted recession.

ISM measured its index at 41.6, versus expectations for a reading of 41.0, but don't excited because a reading below 50 still characterizes economic contraction. Besides, this month's measure was still short of January's reading of 42.9. Also, the New Orders Index deteriorated nearly a percentage point, to 40.7, and was described as doing so at a faster pace.

Weekly Mortgage Applications

As mortgage rates rose again this week, so too did mortgage application activity decline. Rates on 30-year fixed rate mortgages moved up to 5.14% in the week ended February 27, up from 5.07% the week before (which was also up from the week before). Needless to say, purchase activity is anemic to begin with, and a rise in rates simply vaporizes whatever demand exists. Overall application activity declined 13%, led by a 15% drop in refinancing activity and 5.6% decline in purchases (these are changes in indexes). The Purchase Index is not far off its January and all-time low.

Fed's Beige Book

The Federal Reserve's Beige Book of regional economic indicators is due for 2:00 p.m. release. Don't get your hopes up...

International Market News

British Prime Minister Gordon Brown Addresses U.S. Legislators

British PM Brown addresses a joint session of Congress today, after Congress recently passed a fiscal stimulus package that included provisions favoring American companies. The smart U.K. Administration recognized a need to reach out beyond the U.S. president, who Brown met with yesterday. Representatives from heavy manufacturing states face intense pressure from constituents to act on their behalf and protect American jobs. We expect that whatever Brown says today about the dangers of protectionism and need to trust in free markets will go by the way side. In the end, elected officials will protect the folks who vote for them every few years, because at the root the decision is the lawmakers' job security and public image. Selfish concerns usually govern the decisions of men, so even if the avoidance of protectionism is the best route for the better health of global and domestic markets, risk averse legislators will still choose it to protect their own rear ends.

New Round of China Stimulus

A day ahead of his State of the Union Address, Prime Minister Wen Jiabao of China is expected to discuss new stimulus and other plans to restore economic robustness. China has already committed to a 4 trillion yuan ($585 billion) stimulus plan, but Bloomberg reports that former statistics bureau head Li Deshui leaked the news ahead of Wen's address.

This is market favorable news, because any catalyst to spur China's domestic growth would increase demand for global exports to the giant nation with an expanding middle class. We see this as the most important catalyst of stock price movement today. That said, rumors are running rampant now, and so a let down is possible tomorrow if the stimulus increase is less than hoped for. Some folks are whispering that the total commitment could be doubled. I'm not sure if that's crazy talk, but it is dangerous word play for certain.

India Declares Surprise Rate Cut

India's central bank, the Reserve Bank of India (RBI), surprised market watchers this morning with an unscheduled action. The RBI cut rates by 50 basis points, stating that recent reports of economic deterioration in the developed markets of the U.S., Europe and Japan posed risk to Indian exports and investment. The RBI noted that the degree of economic contraction in these critical markets was worse than anticipated, and required it to take action. The bank also noted that its WPI inflation metric was easing as expected, giving it more freedom to take expansionary action.

Australia Strings Along

Australia's economy contracted in the fourth quarter by 0.5%, after actually growing 0.1% in Q3. Australia, while faring better than most other economies, is still seeing lower exports, corporate profits and housing investment. The Royal Bank of Australia could face pressure to cut rates further, despite holding them steady yesterday.

Corporate Event Drivers

Toll Brothers Tolled

High end home builder Toll Brothers (NYSE: TOL) reported earnings today, posting a 51% lower revenue figure in the process. To its credit, Toll slashed expenses and managed to narrow its loss to $0.06 before charges. The charge-inclusive loss was worse than analysts expected though, but TOL shares are up at this hour. Investors were likely enthused by Toll's cash creation and solid solvency position. The company has historically benefited from cyclical downturns by picking up valuable land positions from distressed sellers, and it will likely do the same this time around, in my opinion. Whether the stock is a buy, sell or hold is a complicated question to answer, and we'll try in a follow up article today.

Costco Burdened

Discount retailers are supposed to fare better in a tough economy, and to its credit, Costco (Nasdaq: COST) proved to have higher constitution than most of its rivals. However, it gave in to economic pressures in its January quarter. Burdened by lower same-store sales from its international stores, the company missed analysts' consensus for its FY Q4 today. COST looked for diamonds in the rough data, noting expectations its suppliers would be cutting costs as materials costs have declined. Still, the economic environment is getting worse, and that overwhelming factor proved the greatest reason for this quarter's weakness. We'll have more to say on Costco today also, we hope.

Today's EPS Schedule

The EPS schedule includes news from Alesco Financial (NYSE: AFN), Allion Healthcare (Nasdaq: ALLI), Allis-Chalmers Energy (NYSE: ALY), Altra Holdings (Nasdaq: AIMC), American Commercial Lines (Nasdaq: ACLI), American Railcar (Nasdaq: ARII), American Insurance (NYSE: ASI), Atlantic Tele-Network (Nasdaq: ATNI), Ballard Power (Nasdaq: BLDP), Big Lots (NYSE: BIG), BJ's Wholesale Club (NYSE: BJ), Brown Shoe Co. (NYSE: BWS), Casella Waste (Nasdaq: CWST), Chelsea Therapeutics (Nasdaq: CHTP), Churchill Downs (Nasdaq: CHDN), Clarient (Nasdaq: CLRT), Coldwater Creek (Nasdaq: CWTR), CombiMatrix (Nasdaq: CBMX), CombinatoRx (Nasdaq: CRXX), Copart (Nasdaq: CPRT), Cox Radio (NYSE: CXR), CRM Holdings (Nasdaq: CRMH), Cross Country Healthcare (Nasdaq: CCRN), Darling Int'l (NYSE: DAR), Diedrich Coffee, Inc. (Nasdaq: DDRX), Dynamex (Nasdaq: DDMX), Edgewater (Nasdaq: EDGW), EMS Technologies (Nasdaq: ELMG), Exelixis (Nasdaq: EXEL), Foot Locker (NYSE: FL), FPIC Insurance (Nasdaq: FPIC), France Telecom (NYSE: FTE), Frozen Food Express (Nasdaq: FFEX), Genesis Lease (NYSE: GLS), Giant Interactive (NYSE: GA), Global Ship Lease (NYSE: GSL), GP Strategies (NYSE: GPX), H&E Equipment (Nasdaq: HEES), Hutchinson Telecommunications (NYSE: HTX), InSite Vision (NYSE: ISV), Joy Global (Nasdaq: JOYG), Kadant (NYSE: KAI), Legacy Reserves (Nasdaq: LGCY), Liz Claiborne (NYSE: LIZ), LTX Corp. (Nasdaq: LTXC), Maidenform (NYSE: MFB), Martek (Nasdaq: MATK), Martin Midstream (Nasdaq: MMLP), Mindray Medical (NYSE: MR), Natural Gas Services (NYSE: NGS), Northgate Minerals (AMEX: NXG), Penwest Pharma (Nasdaq: PPCO), PetSmart (Nasdaq: PETM), Power Medical (Nasdaq: PMII), Rehabcare (NYSE: RHB), S1 Corp. (Nasdaq: SONE), Select Comfort (Nasdaq: SCSS), Semtech (Nasdaq: SMTC), Sigma Designs (Nasdaq: SIGM), Spartech (NYSE: SEH), Toll Brothers (NYSE: TOL), Trintech (Nasdaq: TTPA), URS Corp. (NYSE: URS), US Concrete (Nasdaq: RMIX), Weight Watchers (NYSE: WTW) and Yamana Gold (NYSE: AUY).


(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK). Please see our disclosures at the Wall Street Greek website and author bio pages found there.