U.S. stocks dropped for the second-straight session (down four of the past five following that 5.1% move on the day of the FOMC meeting) as we’re all but out of time for that Santa Claus rally a number of financial-press articles predicted over the weekend. There are just too many people hiding in cash, and surely mutual fund managers want to show heavy cash positions for year-end reports, while tax-loss trading puts pressure on what is already a light-volume week.
Yesterday’s economic reports didn’t help matters either, as data showed the housing market continues to weaken and the final revision to third-quarter GDP corroborated what the previous estimate told us, the economy contracted during the July-September period.
What’s more, profit reports are illustrating that corporate earnings will have declined substantially this quarter.
While we’ve seen overall S&P 500 profits decline for five quarters now, this has mostly been a financial-sector story. Ex-financial profits have remained positive during this stretch, expanding upon the 20-quarter post-WWII record of double-digit profit growth for total S&P 500 profits. This will not be possible when Q4 earnings season kicks off in a couple of weeks, we’ll see widespread deterioration.
That said, the market has discounted this deterioration in earnings as the conspicuous 46.9% decline on the NYSE Composite illustrates. This is not to say things will be a cakewalk from here, we’re just pointing out that there isn’t much – from an economic perspective -- that should surprise the market at this point.
Market Activity for December 23, 2008
GDP
The Commerce Department reported their final revision to third-quarter GDP came in unchanged from the preliminary revision, showing the economy contracted at a 0.5% real annual rate. The NBER (National Bureau of Economic Research) officially announced the recession began in December 2007, but the contraction truly took hold last quarter.
Real PCE (consumer activity) was downwardly revised to show a very large 3.8% decline at an annual rate. Business equipment spending collapsed, falling 7.5% at an annual pace, much lower than even the meaningful 5.7% drop estimated in the previous revision.
The deterioration in business equipment purchases is the most salient aspect of how quickly things changed when the credit markets froze up. Business spending jumped 10% at an annual rate November 2007-July 2008, but shut down on a dime beginning in September.
Residential fixed investment (housing) declined 16% at an annual rate last quarter. It appeared we had found a bottom in housing during the second quarter as this segment of GDP fell 13.3%, which was a major improvement after falling 25.1% in the prior quarter, and this level of decline had been the trend for the previous several quarters. However, we couldn’t expand on that progress in the third-quarter as credit tightened up and labor-market weakness did additional damage to home sales.
We’ll note a couple of things though. Last quarter’s GDP figure would have still posted a mildly positive reading if not for the Boeing strike, which put additional pressure on durable goods orders, and Hurricanes Gustav and Ike, which did major damage to the Gulf region, shutting down energy and utility production in the Texas and Louisiana. (Gustav made U.S. landfall September 1 and Ike two weeks later – Ike was the third most destructive Hurricane in U.S. history.)
In any event, the report is old news as everyone is focused on the current GDP situation which will be the doozy; we’ll get the advance release (the first estimate) on January 30. Most look for roughly a 6% drop in real GDP, which would mark the worst reading since 1982. The data over the past three months surely bears this out.
Housing
The Commerce Department also reported sales of new homes dropped another 2.7% in November and remained at a 17-year low. Sales came in at an annual rate of 407,000 units. The median price of a new home did rise 2.7% last month, but is off by 11.5% over the past 12 months and down 16.07% from the peak hit in March 2007.
The housing market has hit another snag of late due to the credit event. It appeared as though things had begun to stabilize late-spring/early-summer as the decline in sales eased and we actually saw a couple of months in which sales actually rose; however, the improvement proved short-lived as the combination of tighter credit conditions and a weak labor market have wreaked additional havoc. The unadjusted data showed that just 28,000 new homes sold in November.
The supply of new home, adjusted to the current sales pace dipped slightly, yet as you can see remains very elevated.
On the bright, as we’ve touched on for a couple of months now, the number of new homes available for sale has plunged and when the sale figures do bounce back this shows the inventory-to-sales ratio will fall fast.
In a separate report, the National Association of Realtors (NAR) reported that existing home sales fell a large 8.6% last month (8.0% when taking out multi-family units) to 4.49 million at an annual rate. The median price fell 2.9% last month, down 13.2% from the year-ago period.
Existing home sales are based on contract closing (as opposed to new home data, which is counted when a contract is signed). Thus this November data may be a reflection of the credit crunch that intensified in late September – since there is a 6-8 week lag between the signing and closing of a contract. Let’s hope this data proves the worst has arrived; yet it’s likely the weak job market will be an issue for the housing market for a while still.
The inventory figure, which had shown nice improvement from the peak, has moved higher again.
We really need to see this figure fall to the seven months’ worth of supply level to begin getting excited. The traditional drags on housing – a weak labor market – will cause additional problems for sometime. Mortgage rates have come down nicely over the past three weeks, but we’re not sure this is enough to offset the decline in payroll positions.
The next administration will target mortgage rates (this is our guess, it has not been announced) possibly by issuing long-dated Treasury notes at sub-3.00% -- the 30-year T-bond currently trades at a yield of 2.65% -- and have Fannie and Freddie write mortgages somewhere around 4.25%-4.50%. Depending on how they target this, such artificial meddling within the mortgage market may not have longer-term ramifications. However, if they include those who have been seriously delinquent on their payments (even after prior loans have already been modified) this will certainly cause problems down the road. If they do include these people they better darned make the loans fully recourse.
Such a plan would be a way to take advantage of very low borrowing costs for the government. Problem is there is no free lunch, everything has its cost.
Have a Merry Christmas and a Happy Hanukah!
Brent Vondera, Senior Analyst
Yesterday’s economic reports didn’t help matters either, as data showed the housing market continues to weaken and the final revision to third-quarter GDP corroborated what the previous estimate told us, the economy contracted during the July-September period.
What’s more, profit reports are illustrating that corporate earnings will have declined substantially this quarter.
While we’ve seen overall S&P 500 profits decline for five quarters now, this has mostly been a financial-sector story. Ex-financial profits have remained positive during this stretch, expanding upon the 20-quarter post-WWII record of double-digit profit growth for total S&P 500 profits. This will not be possible when Q4 earnings season kicks off in a couple of weeks, we’ll see widespread deterioration.
That said, the market has discounted this deterioration in earnings as the conspicuous 46.9% decline on the NYSE Composite illustrates. This is not to say things will be a cakewalk from here, we’re just pointing out that there isn’t much – from an economic perspective -- that should surprise the market at this point.
Market Activity for December 23, 2008
GDP
The Commerce Department reported their final revision to third-quarter GDP came in unchanged from the preliminary revision, showing the economy contracted at a 0.5% real annual rate. The NBER (National Bureau of Economic Research) officially announced the recession began in December 2007, but the contraction truly took hold last quarter.
Real PCE (consumer activity) was downwardly revised to show a very large 3.8% decline at an annual rate. Business equipment spending collapsed, falling 7.5% at an annual pace, much lower than even the meaningful 5.7% drop estimated in the previous revision.
The deterioration in business equipment purchases is the most salient aspect of how quickly things changed when the credit markets froze up. Business spending jumped 10% at an annual rate November 2007-July 2008, but shut down on a dime beginning in September.
Residential fixed investment (housing) declined 16% at an annual rate last quarter. It appeared we had found a bottom in housing during the second quarter as this segment of GDP fell 13.3%, which was a major improvement after falling 25.1% in the prior quarter, and this level of decline had been the trend for the previous several quarters. However, we couldn’t expand on that progress in the third-quarter as credit tightened up and labor-market weakness did additional damage to home sales.
We’ll note a couple of things though. Last quarter’s GDP figure would have still posted a mildly positive reading if not for the Boeing strike, which put additional pressure on durable goods orders, and Hurricanes Gustav and Ike, which did major damage to the Gulf region, shutting down energy and utility production in the Texas and Louisiana. (Gustav made U.S. landfall September 1 and Ike two weeks later – Ike was the third most destructive Hurricane in U.S. history.)
In any event, the report is old news as everyone is focused on the current GDP situation which will be the doozy; we’ll get the advance release (the first estimate) on January 30. Most look for roughly a 6% drop in real GDP, which would mark the worst reading since 1982. The data over the past three months surely bears this out.
Housing
The Commerce Department also reported sales of new homes dropped another 2.7% in November and remained at a 17-year low. Sales came in at an annual rate of 407,000 units. The median price of a new home did rise 2.7% last month, but is off by 11.5% over the past 12 months and down 16.07% from the peak hit in March 2007.
The housing market has hit another snag of late due to the credit event. It appeared as though things had begun to stabilize late-spring/early-summer as the decline in sales eased and we actually saw a couple of months in which sales actually rose; however, the improvement proved short-lived as the combination of tighter credit conditions and a weak labor market have wreaked additional havoc. The unadjusted data showed that just 28,000 new homes sold in November.
The supply of new home, adjusted to the current sales pace dipped slightly, yet as you can see remains very elevated.
On the bright, as we’ve touched on for a couple of months now, the number of new homes available for sale has plunged and when the sale figures do bounce back this shows the inventory-to-sales ratio will fall fast.
In a separate report, the National Association of Realtors (NAR) reported that existing home sales fell a large 8.6% last month (8.0% when taking out multi-family units) to 4.49 million at an annual rate. The median price fell 2.9% last month, down 13.2% from the year-ago period.
Existing home sales are based on contract closing (as opposed to new home data, which is counted when a contract is signed). Thus this November data may be a reflection of the credit crunch that intensified in late September – since there is a 6-8 week lag between the signing and closing of a contract. Let’s hope this data proves the worst has arrived; yet it’s likely the weak job market will be an issue for the housing market for a while still.
The inventory figure, which had shown nice improvement from the peak, has moved higher again.
We really need to see this figure fall to the seven months’ worth of supply level to begin getting excited. The traditional drags on housing – a weak labor market – will cause additional problems for sometime. Mortgage rates have come down nicely over the past three weeks, but we’re not sure this is enough to offset the decline in payroll positions.
The next administration will target mortgage rates (this is our guess, it has not been announced) possibly by issuing long-dated Treasury notes at sub-3.00% -- the 30-year T-bond currently trades at a yield of 2.65% -- and have Fannie and Freddie write mortgages somewhere around 4.25%-4.50%. Depending on how they target this, such artificial meddling within the mortgage market may not have longer-term ramifications. However, if they include those who have been seriously delinquent on their payments (even after prior loans have already been modified) this will certainly cause problems down the road. If they do include these people they better darned make the loans fully recourse.
Such a plan would be a way to take advantage of very low borrowing costs for the government. Problem is there is no free lunch, everything has its cost.
Have a Merry Christmas and a Happy Hanukah!
Brent Vondera, Senior Analyst
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