Daily Insight

U.S. stocks ended a pretty wild session in the black as investors pushed aside another day of speculation regarding the likelihood of an Israeli attack on Iran’s nuclear installations and higher oil prices to focus on better-than-expected manufacturing and construction spending reports.

Stocks gained some steam early in the session when the ISM (Institute for Supply Management) survey showed factory activity expanded in June, but gave it back quickly as oil prices jumped on the Middle East news. The Pentagon released a statement mid-day dismissing the news and oil prices pulled back; stocks gained ground as crude fell from the session’s highs.

(With all of this talk of a strike, and Israel’s military exercise last month preparing for what may be the inevitable, Iran is suddenly inviting the idea of talks over their nuclear activities. Of course, this is what Iran does; they act as though they are serious about keeping to their end of the bargain, while they buy time and continue to enrich uranium to weapons grade status. The Israeli’s understand this and prudently prepare for action considering the regime continues to makes statement such as “Israel will be wiped from the map.” The market is currently trying to assess the appropriate multiple due to this uncertainty, among others.)

Market Activity for July 1, 2008

The S&P 500, as the chart below illustrates, had been down as much as 1.5% from the opening price, but jumped nearly 2% from those lows to close the session meaningfully higher. Financial, consumer discretionary and energy shares led the broad-market’s advance. The Dow’s gain was propelled by shares of American Express, Proctor and Gamble, McDonalds and Wal-Mart.

Advancing stocks just about matched decliners on the NSYE. Some 1.58 billion shares traded on the Big Board, slightly more than the three-month daily average. For this July 4th holiday-shortened week, volume is usually much lower, but with the June jobs data release coming on Thursday, traders likely delayed vacation to be around for this all-important report.

On the economic front, the latest manufacturing report showed factory activity expanded in June, marking the first move above 50 (the level that divides expansion and contraction) since January. Even so, during the previous four months of contraction, the index was just barely below the line of expansion and no where near the level that indicates trouble.

The Chairman of the Institute for Supply Management explained in the report, as we’ve touched on in the past, that when the survey averages 50 it corresponds to roughly 2.8% real annualized GDP growth. During the second quarter ISM averaged 49.4, so we’re looking at a GDP reading of about 2.6% by this indication.

(I believe we will see a number in that range as increased capital goods shipments, higher personal consumption numbers and the production needed to rebuild low inventory levels will catalyze growth. Housing will continue to subtract a full percentage point from the reading; if housing were merely flat, GDP would come in at 3.5% for Q2, but this flattening will not take place until the supply of homes comes down significantly – which will probably take another year, hopefully.)

In a separate report, the Commerce Department reported that construction spending fell less-than-expected in May, declining by 0.4% -- the consensus estimate was for a 0.6% decline. The April reading was revised higher to show a 0.1% drop, after previously estimated at a 0.4% decline.

Two months of declines surely doesn’t give one a sense of full-flowing optimism, but considering the residential component – which makes up 40% of this reading – was down 1.6% in May (and off by 26.9% year-over-year) these mild declines are relatively good news. Strength came from lodging construction (up 2.6% for the month), schools (up 1.6%), power plants (up 1.5%) and manufacturing facilities (up 0.9%).

Lastly, the auto industry released its sales data for June, and the turn down of the past three months continues. But lower sales volumes are not the result of a lack of credit availability or even demand. Instead, according to the report, there is just too much supply of trucks and SUVS and not enough of what consumers currently desire during this period of high fuel prices – more fuel efficient vehicles.

Over the next several months manufacturers will undoubtedly ramp up production of the cars people want in this environment and unless something changes with regard to the job market – which is currently soft but not showing statistically significant declines – sales should rebound several months out.


Have a great day!

Brent Vondera, Senior Analyst