U.S. stocks gained ground on Friday after better-than-expected economic reports showed a bounce in business spending will help catalyze growth and new home sales rose in two of the four regions. The gains helped the major indices pare weekly losses on the Dow and S&P 500, while the strong 1.33% rise on the NASDAQ Composite moved the tech-laden index to a gain for the week.
The Commerce Department reported durable goods whipped the consensus estimate, with the business spending component jumping 10.4% at an annual rate since March. This number will push the second-quarter GDP figure to a level that easily surpasses the current estimate. The new homes sales number, while weak, didn’t hurt either. The supply of new homes fell, but remains extremely elevated.
Market Activity for July 25, 2008
The Commerce Department reported durable goods whipped the consensus estimate, with the business spending component jumping 10.4% at an annual rate since March. This number will push the second-quarter GDP figure to a level that easily surpasses the current estimate. The new homes sales number, while weak, didn’t hurt either. The supply of new homes fell, but remains extremely elevated.
Market Activity for July 25, 2008
Information technology shares led the advance, which was nice. Earnings growth has outpaced the rise in share prices for several years with regard to the overall market, but increasing so for the tech sector. Energy and material stocks also helped the benchmark indices bounce back from Thursday’s pummeling after a multi-session pull-back for these shares. Industrials and health-care stocks also rebounded.
On the earnings front, S&P 500 profits remain in negative territory for the second quarter and nothing is going to help this figure move to the positive side with the financial sector weighing so heavily. Financial-sector profits are down 94% for the three months ended June 30 – that’s from the year-ago period. Yet, ex-financial earnings remain in double-digit territory – up 12.1% thus far; roughly 40% of S&P 500 members have reported.
Five of the 10 major industry groups have recorded 10%-plus growth – consumer discretionary (+20.1%), consumer staples (+10.5%), energy (+27.0%), health-care(+10.1%) and information technology (+20.9%). The industrial, basic material, telecom and utility sectors have posted results in a range of 2%-6.8%. Financials is the only sector that’s negative.
In economic news, the Commerce Department reported new home sales dropped at half the expected rate in June and the supply fell for the second month in three. We’ll note that sales have declined 33.2% over the past 12 month, but have increased 13.9% at an annual rate over the past three months.
That last comment is encouraging, but the report does not account for cancellations of previously signed contracts, so the new home sales data is not the most reliable. (Existing home sales, although working with a bigger lag that new homes is probably a better indicator as sales are not counted until the closing, rather than when signed like new homes sales.)
Too, this figure is quite volatile and the next couple months of data can pull the rug from any optimistic thoughts – just something to keep in mind. If this trend of the past quarter continues, however, it may signal the housing sector is beginning to stabilize, but it will take more data to make this conclusion realistic. That said, I think the non-speculative regions of the market – those excluding California, Arizona, Nevada and Florida – may be showing a bottom in prices. Those four states are big ones though, five of the biggest 20 cities reside in California and Florida alone, which will weigh on the overall figure.
In terms of region, the Northeast saw new home sales increase 5.3% in June; sales rose 2.5% in the Midwest. The South and West regions showed declines of 2% and 0.9%, respectively.
In a separate report, Commerce showed durable goods orders for June easily surpassed the consensus estimate, rising 0.8% overall and the ex-transportation number, which has posted a gain in three of the past four months, jumped 2.0%. The estimate was for a 0.3% decline on the overall reading and a 0.2% decline in the ex-trans number.
Total durable goods orders have fallen 0.3% at an annual pace since March. Excluding transportation – which takes out the extremely volatile commercial aircraft orders and a beleaguered auto sector – orders have jumped 13.5%.
As mentioned in Friday’s letter, we were focused on the business spending figure and it didn’t disappoint -- up1.4% in June and 10.4% at an annual rate for the last three months. The shipments of this segment – technically known as non-defense capital goods ex-aircraft – increased 5.9% at an annual rate during the second quarter. This number feeds right into the GDP figure and we’ve got a great shot at seeing a 3.0% real rate of growth for Q2. This would be huge considering housing continues to subtract a full percentage point from the figure.
Big gains in electrical equipment and machinery orders were the catalyst for the capital goods segment. Industrial machinery orders were up 13.8% annualized past three months and 11.8% over the past year. Electrical equipment more than doubled, up 150% over the past three months – again that’s annualized – and 8.4% past 12 months.
In other news, the Senate passed the housing bill, which the President Bush will sign this morning I suppose. The bill involves the Fannie Mae and Freddie Mac provisions that would allow the Treasury Department to increase its credit line to the two GSEs, Treasury to take an equity stake if needed, and raise the size of loans eligible for purchase to $625,000 – that ceiling will depend on the region.
The centerpiece of the legislation is the program of $300 billion of FHA-insured mortgages to help refinance loans for those who cannot afford their current situation. The way I understand it, lenders would have to get a new appraisal on the property and then write it down by 15% from there for the homeowner to qualify. In return, the homeowner will have to share, equally, future price appreciation with the FHA. And if home values go down before they go back up, and the borrower goes under, then of course the taxpayer is on the hook.
Also, in the legislation is up to a $7500 tax credit for first-time homebuyers. They would have to buy between April 2008 and June 2009. That’s a big credit and may just kick sale up a bit; we shall see.
Have a great day!
Brent Vondera, Senior Analyst
In a separate report, Commerce showed durable goods orders for June easily surpassed the consensus estimate, rising 0.8% overall and the ex-transportation number, which has posted a gain in three of the past four months, jumped 2.0%. The estimate was for a 0.3% decline on the overall reading and a 0.2% decline in the ex-trans number.
Total durable goods orders have fallen 0.3% at an annual pace since March. Excluding transportation – which takes out the extremely volatile commercial aircraft orders and a beleaguered auto sector – orders have jumped 13.5%.
As mentioned in Friday’s letter, we were focused on the business spending figure and it didn’t disappoint -- up1.4% in June and 10.4% at an annual rate for the last three months. The shipments of this segment – technically known as non-defense capital goods ex-aircraft – increased 5.9% at an annual rate during the second quarter. This number feeds right into the GDP figure and we’ve got a great shot at seeing a 3.0% real rate of growth for Q2. This would be huge considering housing continues to subtract a full percentage point from the figure.
Big gains in electrical equipment and machinery orders were the catalyst for the capital goods segment. Industrial machinery orders were up 13.8% annualized past three months and 11.8% over the past year. Electrical equipment more than doubled, up 150% over the past three months – again that’s annualized – and 8.4% past 12 months.
In other news, the Senate passed the housing bill, which the President Bush will sign this morning I suppose. The bill involves the Fannie Mae and Freddie Mac provisions that would allow the Treasury Department to increase its credit line to the two GSEs, Treasury to take an equity stake if needed, and raise the size of loans eligible for purchase to $625,000 – that ceiling will depend on the region.
The centerpiece of the legislation is the program of $300 billion of FHA-insured mortgages to help refinance loans for those who cannot afford their current situation. The way I understand it, lenders would have to get a new appraisal on the property and then write it down by 15% from there for the homeowner to qualify. In return, the homeowner will have to share, equally, future price appreciation with the FHA. And if home values go down before they go back up, and the borrower goes under, then of course the taxpayer is on the hook.
Also, in the legislation is up to a $7500 tax credit for first-time homebuyers. They would have to buy between April 2008 and June 2009. That’s a big credit and may just kick sale up a bit; we shall see.
Have a great day!
Brent Vondera, Senior Analyst
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