U.S. stocks began the session lower yesterday on a disappointing profit report from American Express that was released after Monday’s close, but the benchmark indices reversed course, gaining momentum throughout the day to end meaningfully higher.
Financial shares led the advance, jumping 6.59%, even after a couple of ugly profit – lack of profit rather – reports from Wachovia and Washington Mutual. Despite these harsh realities, we have had a number of bank names post better-than-expected results and investors may see some light at the end of the tunnel with regard to write-downs. The entire group has also stated there is no need for additional capital which may be the main catalyst for this sector’s rally. The S&P 500 financial index has rallied 27.8% in five trading sessions.
Market Activity for July 22, 2008
Of course, the very welcome decline in oil prices has also helped the market over the past five sessions – actually four of the past five sessions as we were fractionally lower on Monday. Yesterday oil prices closed in on the $125 per barrel handle, pushing stocks higher in the afternoon session.
The chart below shows the reversal in stocks yesterday – the orange line, it’s difficult to see, marks the opening price.
Oil prices have plunged $20 over the last seven sessions as we have hit the $125 handle this morning – falling another 1.59% to $125.92. We began to come off the all-time high closing price of $145.18 hit last Tuesday and estimations, and now the reality, that Hurricane Dolly will remain West of the major energy infrastructure in the Gulf has certainly helped things. Program trading has likely kicked into gear due to the degree of the decline, pushing the price of oil even lower.
I shouldn’t leave out that we have received a number of hawkish comments from Fed officials since Friday (focusing on the need to raise their benchmark rate) which certainly hasn’t hurt the dollar and scared some out of the oil trade. It will be interesting to see how oil prices react throughout the day. We’ll get speeches from Federal Reserve Vice Chairman Kohn and Governor Mishkin today. These are the so-called academics of the group – along with Bernanke – and thus the Phillips Curve addicts. Their comments will very likely have a more dovish tone – not at all ready to increase rates even mildly if their past comments are any indication – but will surely pay lip service to inflation as import prices have jump 20.5%, producer prices have hit 9.2% and CPI 5% -- all on a year-over-year basis.
And speaking of inflation, it’s been interesting to watch bond yields remain so low. Yes, yield have risen of late but we sit at 4.15% on the 10-year Treasury as we speak, which is still one of the lowest levels of the past 40 years.
This move in oil, if sustained, will certainly help out regarding the inflation figures. Still, with headline consumer-level inflation running at roughly 4.5% [the average of the regular CPI (5% YOY), chained CPI (4.2% YOY) and PCE (which will probably rise to 4.2% when released)] one would think investors to demand a yield on longer-term rates that compensates for this price action. Even the 10-year TIPS/conventional 10-year Treasury spread sits at just 245 basis points, as the chart below illustrates, which does seem a bit removed from reality. (TIPS are the Treasury Inflation Protected Securities.)
On the chart below, it is the yellow line that is the focus. The white line is the conventional 10-year Treasury yield, the orange line is the inflation-protected 10-year yield, and the yellow is the spread -- or the market’s inflation expectation.
Maybe inflation will come crashing lower and this spread, which is probably the most accurate high-frequency market indicator we have, is gauging things correctly. Of course, some of the low-interest rate environment is due to risk concerns, thus investors have fled to the Treasury market for safety – so there’s a possibility this market has not fully accounted for future inflation expectations. We shall see, but I would expect yields to rise some from here.
On the economic front, we received the OFHEO Home Price Index for May, which showed a decline of 0.3%. (OFHEO stand for Office of Federal Housing Enterprise Oversight.) On a year-over-year basis, the index has home prices down 5%. The largest declines have occurred in the West and South Atlantic regions – California, Nevada and Florida, place where the most speculation took place.
This index has prices declining at a much lower rate than does the press’ favored Case/Shiller Home Price Index that has prices down 16% year-over-year. This OFHEO index provides a much broader look as Case/Shiller only tracks the largest 20 cities – about half of which have witnessed the biggest declines. Factor both and we probably have home prices down 10-12% since the declines began to take hold in the fall of 2006. No one likes this situation, but this is what needs to occur for the home-supply figures to come off of very lofty levels.
We have a plethora of earnings results out this morning and virtually all have either met or outpaced estimates. As a result stock-index futures are nicely higher. We’ll wait for the Fed’s Beige Book – regional economic survey for the past six weeks – release later this afternoon and the Kohn/Mishkin comments, which will surely be market movers.
Have a great day!
Brent Vondera, Senior Analyst
Financial shares led the advance, jumping 6.59%, even after a couple of ugly profit – lack of profit rather – reports from Wachovia and Washington Mutual. Despite these harsh realities, we have had a number of bank names post better-than-expected results and investors may see some light at the end of the tunnel with regard to write-downs. The entire group has also stated there is no need for additional capital which may be the main catalyst for this sector’s rally. The S&P 500 financial index has rallied 27.8% in five trading sessions.
Market Activity for July 22, 2008
Of course, the very welcome decline in oil prices has also helped the market over the past five sessions – actually four of the past five sessions as we were fractionally lower on Monday. Yesterday oil prices closed in on the $125 per barrel handle, pushing stocks higher in the afternoon session.The chart below shows the reversal in stocks yesterday – the orange line, it’s difficult to see, marks the opening price.
Oil prices have plunged $20 over the last seven sessions as we have hit the $125 handle this morning – falling another 1.59% to $125.92. We began to come off the all-time high closing price of $145.18 hit last Tuesday and estimations, and now the reality, that Hurricane Dolly will remain West of the major energy infrastructure in the Gulf has certainly helped things. Program trading has likely kicked into gear due to the degree of the decline, pushing the price of oil even lower.I shouldn’t leave out that we have received a number of hawkish comments from Fed officials since Friday (focusing on the need to raise their benchmark rate) which certainly hasn’t hurt the dollar and scared some out of the oil trade. It will be interesting to see how oil prices react throughout the day. We’ll get speeches from Federal Reserve Vice Chairman Kohn and Governor Mishkin today. These are the so-called academics of the group – along with Bernanke – and thus the Phillips Curve addicts. Their comments will very likely have a more dovish tone – not at all ready to increase rates even mildly if their past comments are any indication – but will surely pay lip service to inflation as import prices have jump 20.5%, producer prices have hit 9.2% and CPI 5% -- all on a year-over-year basis.
And speaking of inflation, it’s been interesting to watch bond yields remain so low. Yes, yield have risen of late but we sit at 4.15% on the 10-year Treasury as we speak, which is still one of the lowest levels of the past 40 years.This move in oil, if sustained, will certainly help out regarding the inflation figures. Still, with headline consumer-level inflation running at roughly 4.5% [the average of the regular CPI (5% YOY), chained CPI (4.2% YOY) and PCE (which will probably rise to 4.2% when released)] one would think investors to demand a yield on longer-term rates that compensates for this price action. Even the 10-year TIPS/conventional 10-year Treasury spread sits at just 245 basis points, as the chart below illustrates, which does seem a bit removed from reality. (TIPS are the Treasury Inflation Protected Securities.)
On the chart below, it is the yellow line that is the focus. The white line is the conventional 10-year Treasury yield, the orange line is the inflation-protected 10-year yield, and the yellow is the spread -- or the market’s inflation expectation.
Maybe inflation will come crashing lower and this spread, which is probably the most accurate high-frequency market indicator we have, is gauging things correctly. Of course, some of the low-interest rate environment is due to risk concerns, thus investors have fled to the Treasury market for safety – so there’s a possibility this market has not fully accounted for future inflation expectations. We shall see, but I would expect yields to rise some from here.On the economic front, we received the OFHEO Home Price Index for May, which showed a decline of 0.3%. (OFHEO stand for Office of Federal Housing Enterprise Oversight.) On a year-over-year basis, the index has home prices down 5%. The largest declines have occurred in the West and South Atlantic regions – California, Nevada and Florida, place where the most speculation took place.
This index has prices declining at a much lower rate than does the press’ favored Case/Shiller Home Price Index that has prices down 16% year-over-year. This OFHEO index provides a much broader look as Case/Shiller only tracks the largest 20 cities – about half of which have witnessed the biggest declines. Factor both and we probably have home prices down 10-12% since the declines began to take hold in the fall of 2006. No one likes this situation, but this is what needs to occur for the home-supply figures to come off of very lofty levels.
We have a plethora of earnings results out this morning and virtually all have either met or outpaced estimates. As a result stock-index futures are nicely higher. We’ll wait for the Fed’s Beige Book – regional economic survey for the past six weeks – release later this afternoon and the Kohn/Mishkin comments, which will surely be market movers.
Have a great day!
Brent Vondera, Senior Analyst
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