Daily Insight

U.S. stocks built upon Wednesday’s rally, sending the broad-market higher by 3.71% over the past two sessions. Financial and consumer discretionary shares once again led the indices higher, with technology and industrial stocks helping out nicely.

Again, just as on Wednesday, earnings results and a decline in oil prices were the spark. We saw a number of Dow components report very healthy profit growth and the financial sector is delivering results that are surpassing expectations – still weak, but we’ll take what we can get right now.

I’ve got to think the initial jobless claims number, showing claims remain well below the 400K level., also helped to keep things going. The four-week average remains well-below troublesome levels and we just won’t see significant job losses so long as this remains the case – more on that below.

Market Activity for July 17, 2008

Earnings are looking good, outside of the financial sector – and this morning’s releases have turned stock-index futures around. Dow futures were down 100 points a few minutes ago, but have reversed course, down just eight points as I type thanks to additional better-than-expected results. Citigroup has just reported results that beat expectations and Honeywell has knocked the cover off of the ball – 24% operating profit growth, beating their number by 16% and raising full-year guidance. This follows a very nice report from United Technologies yesterday.

A couple of tech names missed their mark yesterday – Google and Microsoft reported income that missed estimates – but the growth rates were stellar. Microsoft reported 25% operating profit growth and Google 33%. Merrill Lynch reported a horrible number last night, losing $4.66 per share, but the rest of the universe is overwhelming their troubles.

To this point, with one-fifth of S&P 500 members reporting, profits have declined 21.4% as financial-sector net income is down 78.8% for the second quarter. However, ex-financial results look ready to record another quarter of double-digit growth, up 12.7% to this point.

The other catalyst over the past two trading sessions has been a welcome decline in oil prices. If we can move down to $125 per barrel that will provide a huge boost to stocks. Personally, I don’t see it happening just yet, although we are finally getting some good comments out of Congress regarding the removal of drilling restrictions – follow this talk up with action and we’re onto something. If not, it will take some mild Fed tightening to really cause a rotation out of the oil trade, in my view.

On the economic front, the Commerce Department reported housing starts jumped 9.1% in June, but that was only because of a change in New York’s building code. That change resulted in a large jump in multi-family units in the Northeast, but excluding this jump starts would have declined 4%.

As the chart below illustrates, starts remain at a lowly level, and it’s tough to picture a sustained bounce until the supply of homes come off of these extremely elevated levels. It will simply take time to reduce this supply, hopefully over the next 12 months we’ll see sales rebound – once they do, the supply figures will fall in pretty quick order.

Residential fixed investment has been a drag on GDP for 10 quarters now. Single-family homes fell 5.3% in June, down 43% year-over-year, but the monthly declines have eased of late. We are probably close to seeing the worst, but foreclosures are the pig still moving through the python, so I’m not sure the bottom in housing can be called just yet. Again, these things just take some time – hopefully we don’t get anymore harmful legislation out of Congress, the more they attempt to be the savior of all of those who made poor decisions the more unintended consequences will result and extend this housing correction.

In a separate report, the Labor Department showed initial jobless claims rose 18,000 in the week ended July 12, but this was less than the 32,000 expected. Remember, the week prior showed a huge decline in claims that was a likely a result of having to adjust to the July 4 holiday. Based on this, there was a concern we’d get a big bounce back to the 380,000-390,000 range. We didn’t though as claims sit at 366,000. The chart below is the four-week average and so long as this reading remains below 400,000, it is very likely job losses will remain tame.

We really need to see things turn a bit and move to mild additions, but this is going to be tough to accomplish until the housing sector comes around – construction-job losses are really weighing on the figure. One glimmer of hope over the short term is what appears to be a rebound in capital spending, which has rebounded, but the jury is out whether it will become a trend. The smart part of the “stimulus” package was the increase in current-year write-down allowance and 50% bonus depreciation for business. This should spark capex and may boost jobs as a result.

In addition to better-than-expected profit results, we’ve received official announcement this morning that Teva Pharmaceuticals, an Israeli company and the world’s largest generic-drug maker, will buy Barr Pharmaceuticals for $7.46 billion in cash – a 41% premium over Barr’s closing price on Wednesday. The deal is helping to boost stock-index futures, so hopefully another nice day is in store.

Have a great weekend!


Brent Vondera, Senior Analyst