Federal Budget et al 02-01-10

The Federal Budget was Reported on Monday, but Other Favorable Data Played a Big Role in the Day's Trade

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Federal Budget et al

The budget was not the only important information to reach the market on Monday. We received three other economic reports, and interesting data out of Europe and Russia as well. Strong manufacturing data and consumer spending absent of inflation inspired the Dow Jones Industrials to gain 1.2% on the day.

Federal Budget 2011

Keying Monday's news wire, the President released his fiscal 2011 federal budget for public review and Congressional approval. The most lauded aspect of the budget is the three-year discretionary spending freeze proposed. However, after spending heavily over the past year plus, it's clear the Administration has some concern about the strength of the dollar and the specter of inflation. We say this, because the president noted in his weekly address that budget control will be a critical tool against inflation. So he wants to protect the dollar here, and perhaps the nation's ability to borrow. Reining in spending should help appease our creditors abroad, quell any rating agency smart ideas and give strength to the greenback.

Personal Income & Spending

Personal Income increased 0.4% month-to-month in December, and rose 0.5% against the prior year period. The economists' consensus had pegged a 0.3% monthly increase, so the reading looked good enough. However, December profited from retroactive social security benefit payments that resulted from a recalculation of the earnings base underlying the benefits of recent retirees. That drove personal current transfer receipts up to $14 billion, versus the $9.8 billion recorded in November.

Goods producing payrolls decreased by $5.2 billion from November, versus a $2.9 billion increase in the November/October period. Service sector payrolls rose $11.5 billion in December, though against a $22.3 billion such increase in November. We guestimate this has a lot to do with seasonal hiring in retail and supportive industry. We would therefore look for a decline in January's line.

Personal Outlays rose by 0.2% in December, falling short of economists' consensus expectations for a 0.3% increase. Spending increased just 0.1% when adjusting for price change, versus a 0.4% increase in November. Durable goods purchases improved by 0.2%, compared to the 2.3% gain in November. Nondurables purchases decreased by 0.8%, as value conscious consumers are buying less expensive goods and necessities. Purchases of services improved by 0.4%.

The PCE Price Index inched 0.1% higher in December, after rising 0.3% in November. Excluding the price action of food and energy goods, prices rose 0.1% in December and less than 0.1% in November. So, inflation remains hard to find.

ISM Manufacturing Index

Manufacturing activity expanded in January, as ISM's Purchasing Managers Index moved to 58.4, up from 54.9 in December. December's reading above 50.0 marked the sixth consecutive month of expansion in the manufacturing sector. The month exceeded economists' views also, as Bloomberg's survey showed a consensus outlook for a reading of 55.0.

ISM's data was full of good news. January's mark was the highest since August of 2004, and 13 of 18 industries are now reporting growth, versus just nine last month. Both new orders and production were reported strong, so the outlook remains positive as well. While 13 industries reported growth, only one reported contraction, Furniture and Related Products. The rest noted unchanged activity. Even the Employment Index improved, and respondents reported that gains were coming at a faster pace (Employment Index: 53.3, up from 50.2).

Construction Spending

The economic good news ended there, as Construction Spending declined 1.2% in December, versus a similar 1.2% (revised) decline in November. Economists were not in tune with the depth of construction struggle, as they had only forecast a 0.5% slide. Private Residential activity declined by 2.8%, and Multi-Family Construction dropped by 4.4%. Construction activity still came in better than the prior year, as the 9.9% shortfall from the prior year's December compared against the -12% miss in November.

Overseas Activity

Manufacturing rebound has not been limited to the US. Today, eurozone area nations reported the best growth in two years. The 16-nation index of manufacturing activity improved to 52.4, up from 51.6 in December. Just like the US purchasing manager indices, this European version is indicative of economic expansion when marking points above 50.0.

Russia reported that its economy shrank 7.9% in 2009, the worst contraction in 15 years. Russia's own forecast was for a decrease of 8.5%, but how unbiased could a Russian government measure be. Seems more likely this was set up so that the data would prove better than expectations...

Corporate News Drivers

Exxon Mobil (NYSE: XOM) reported results today that were very similar to many of its energy peers, especially Chevron (NYSE: CVX). Exxon shares gained 2.7%, despite reporting a 23% decline in quarterly profits. The company managed to grow revenue by 6%, and beat the analysts' consensus view by ten cents (Factset), earning $1.27 per share.

The company did well in its upstream oil production business, as oil prices were significantly higher this year than last. Natural gas price decline ate into that gain, and refining activity lost money this quarter, versus a $2.6 billion profit earned last year. Prices of distillates have not kept pace with crude, thanks to oversupply on economic weakness. Crude equivalents production increased 2%, and the company has been active of late in prospective projects in Iraq and the US. Today's news and market reaction combo seems to say "buy" to me.

Corporate earnings drivers included Affiliated Managers (NYSE: AMG), Alberto Culver (NYSE: ACV), Anadarko Petroleum (NYSE: APC), Array BioPharma (Nasdaq: ARRY), Bank of Smithtown (Nasdaq: SMTB), Birks & Mayors (AMEX: BMJ), Capital Bank (Nasdaq: CBKN), Ceragon Networks (Nasdaq: CRNT), Changyou (Nasdaq: CYOU), Crown Holdings (NYSE: CCK), DST Systems (NYSE: DST), Duncan Energy Partners (NYSE: DEP), Enbridge Energy Management (NYSE: EEQ), Extreme Networks (Nasdaq: EXTR), First Merchants (Nasdaq: FRME), First State Bancorp (Nasdaq: FSNM), Flagstar Bancorp (NYSE: FBC), Gannett (NYSE: GCI), Gladstone Capital (Nasdaq: GLAD), Haemonetics (NYSE: HAE), Hewitt Associates (NYSE: HEW), Hologic (Nasdaq: HOLX), Humana (NYSE: HUM), ICU Medical (Nasdaq: ICUI), Integral Systems (Nasdaq: ISYS), Keithley Instruments (NYSE: KEI), Lacrosse (Nasdaq: BOOT), Local.com (Nasdaq: LOCM), Mannkind (Nasdaq: MNKD), MDU Resources (NYSE: MDU), Mitsui & Co. (Nasdaq: MITSY), Navarre (Nasdaq: NAVR), NiSource (NYSE: NI), Oclaro (Nasdaq: OCLR), Old National Bancorp (NYSE: ONB), Pacific Capital Bancorp (Nasdaq: PCBC), Palm Harbor Homes (Nasdaq: PHHM), Peapack-Gladstone Financial (NYSE: PGC), Pennymac Mortgage Investment Trust (NYSE: PMT), Plum Creek Timber (NYSE: PCL), Reinsurance Group of America (NYSE: RGA), Rent-A-Center (Nasdaq: RCII), Rudolph Technologies (Nasdaq: RTEC), Silicon Motion Technology (Nasdaq: SIMO), SOHU.com (Nasdaq: SOHU), Sterling Bancorp (NYSE: STL), Sterling Financial (Nasdaq: STSA), SYSCO Corp. (NYSE: SYY), Tupperware Brands (NYSE: TUP), Unica (Nasdaq: UNCA), Uroplasty (NYSE: UPI) and Virtusa Corp. (Nasdaq: VRTU).


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