Market Commentary

Industrial Production during September rose three times as much as expected
October 19, 2009

Industrial Production during September rose three times as much as expected putting manufacturing at the forefront of the emerging recovery.  The 0.7% increase exceeded all 77 forecasts and followed gains of 1.2% in August and 0.9% in July.  This is the sharpest three month gain since 2005.  [Bloomberg]  Capacity Utilization rose to 70.5%, the highest level in seven months.

The rebound was partially fueled by the rebound at automakers but the strength of the data suggests moderate gains will continue as firms replenish inventories, which are at the lowest level since December 2005, and to meet growing export demands partially fueled by a falling dollar.  Exports rose in August for the fourth consecutive month to reach the highest level of the year as per the Commerce Department. 

I think the data is suggesting that manufacturing is turning much stronger and faster than most anticipated following the deepest recession in many years.

Many are focused upon the lack of bank lending, a major drag to economic growth.  Every other aspect of the credit market has rebounded including the leverage buyout market (LBO).  LBO financing almost doubled during third quarter as compared to the second quarter and four times greater than the first. [Bloomberg]

I do think however it is noteworthy LBO lending stands at $86.3 billion for the year, vastly lower than the record $769.2 billion in 2007.

Historically LBO and bank lending are complimentary.  As noted a gazillion times and as per the Federal Reserve excess bank reserves are around $900 billion as compared to the historical average of $1 to $2 billion. If I stated three months ago LBO lending would rise exponentially from first quarter levels, albeit from extreme low levels, most would correctly conclude I was whacked. 

However such rapid change is consistent throughout this crisis, a crisis marked by the unexpected occurring at a lightening pace. What will occur this week?  Over 150 S & P 500 companies are slated to post earnings.  To date 80.4% of companies in the index that have released earnings have exceeded estimates. This compares to 72.3% during the entire April-June period which matched the highest proportion in Bloomberg data going back to 1993.

Additionally several high profile housing statistics are released including the National Association of Home Builders Index, housing starts and permits as well as existing home sales.  Moreover the Fed’s Beige Book is released.

Stocks ended moderately lower Friday on profit taking perhaps under the guise of buy on rumor and sell on fact.  Bonds were nominally higher after a wicked five day sell off.

Last night the foreign markets were up.  London was up 1.30%, Paris up 1.14% and Frankfurt up 1.25%.  Japan was down 0.21% and Hang Sang up 1.23%. The Dow should open moderately higher on earnings optimism. The 10-year is off 3/32 to yield 3.42%.