U.S. benchmark stock indices declined yesterday, pushed lower by financials shares after JP Morgan warned it may post more credit losses – not sure this was really news as most expect financial losses to drag on for at least another quarter, but there just wasn’t much else to trade on so the market focuses on this negative.
Also putting pressure on bank stocks were comments from Dallas Fed Bank President Richard Fischer who mentioned the current financial turmoil is worse than the savings and loan crisis of the late 1980s/early 1990s. I’m not sure about that one, especially since William Seidman (former chairman of the Resolution Trust Corporation, which was instrumental in cleaning up that mess) has gone on record saying the two are not comparable. But, we shall see. For now, not surprisingly, these types of comments will be met with market downside.
Market Activity for August 12, 2008
As said, financials led things lower as the S&P 500 Financial Index lost 5.19%. Utility and consumer discretionary shares were the other major losers down 2.08% and 1.48%, respectively.
Consumer staples and basic materials were the only two major industry groups to post gains. Commodity prices fell some more yesterday but the declines leveled off, offering some support to the materials stocks – these shares have taken a beating over the past few weeks. The CRB (Commodity Research Bureau) Index has dropped 18.8% from the July 2 high.
On the greenback, the dollar continues to strengthen, which is nice and is a development that was very much needed regarding international-investor perceptions and inflation – particularly with regard to import prices. As we touched on yesterday, I think we’ll need a little Fed tightening to get us to 80 on the Dollar Index – a level that will make those worried about the greenback much more comfortable. For now though, at least we’ve returned to where we were in February and have erased the most recent leg lower.
On the economic data front yesterday, the Commerce Department reported the trade deficit narrowed in June, which was an unexpected move as the estimate was for the figure to widen – although I’m not sure why the narrowing was a surprise as import activity has been lagging export growth for many months now. Nothing of late has shown this trend will end in the immediate future.
Exports rose 4% as imports were up 1.8%. The importance of this narrowing is it will result in a higher revision to second-quarter GDP (the initial estimate to Q2 growth assumed the deficit widened in June). Combine this fact with higher inventory and capital expenditure (capex) figures and we may just see that 2.6%-3.0% real GDP reading we expected a couple of weeks back.
But back to the trade figures for a moment, in real terms (adjusting for inflation) the trade gap narrowed sharply (to its lowest level since December 2001) as real imports declined 0.6%.
U.S. exports have been on fire fueled by sales to South America and OPEC countries. Exports to OPEC countries has jumped 33.7% on a year-over-year basis. I mention this to point out the fact that higher oil prices are not a zero sum game as this flows back in higher export activity.
These comments have in mind all of those that speak of importing oil as a wealth transfer – as if these funds are lost forever. Those that speak of wealth transfers due to trade fail to tell the entire story and are often times either oblivious to how the global economy works or intellectually dishonest. A large degree of the U.S. dollars that move overseas in exchange for goods come back to us in the form of investment. (Before I go on, make no mistake – I do not enjoy being more dependent than needs to be the case on certain regions of the globe for our energy needs. In my world, congressionally built barriers to domestic energy production would be torn down never to be rebuilt. In the end we will accomplish this simply because we’ll have to. The state of the world will marginalize those that believe producing our own abundant sources of energy is a bad thing – a mindboggling stance.
But back to the flow of capital, a large part of it comes back in the form of investment. Some goes to the Treasury market, simply because this is the most liquid and broad market in the world. A significant degree of it though also goes to corporate bonds, equities, mortgage-backed securities, and venture capital. I’ll remind everyone that our long-run return on capital is higher than our cost of capital. Hence, those funds finance future growth, which creates jobs, provides the seed money for innovation and technological advances and leads to higher levels of income growth -- higher levels of productivity, improved living standards, lower inflation and real economic growth are the by-products.
In other news, the Treasury Department reported the July budget deficit widened due to the rebate checks and increased outlays to the FDIC to cover insured deposits at failed backs. The $102.8 billion deficit last month compared to the $36.4 billion in July 2007. Lower tax revenues due to job losses and lower corporate profits – mostly a result of financial-sector woes – has also increased the deficit, but the real damage has come from this Keynesian rebate check scheme.
Too bad because last year we had whittled the budget gap down to just 1.2% of GDP – half the long-term average. This year will be a different story, however. Nevertheless, the deficit will remain manageable for now, but if we do not get a handle on entitlement spending and reform these programs to reflect changing demographics we’ll have a problem on our hands a few years forward.
On the bright side, corporate tax receipts rose 6.6% in July on a year-over-year basis. This marks the first increase in a year.
This morning we get some very important data as July import prices and retail sales will be market movers. Also we get the June business inventories report, which should show the estimated inventory change that dragged so heavily on GDP was flawed. A larger-than-expected reading here will provide additional evidence Q2 GDP will be revised h
Have a great day!
Brent Vondera, Senior Analyst
Also putting pressure on bank stocks were comments from Dallas Fed Bank President Richard Fischer who mentioned the current financial turmoil is worse than the savings and loan crisis of the late 1980s/early 1990s. I’m not sure about that one, especially since William Seidman (former chairman of the Resolution Trust Corporation, which was instrumental in cleaning up that mess) has gone on record saying the two are not comparable. But, we shall see. For now, not surprisingly, these types of comments will be met with market downside.
Market Activity for August 12, 2008
As said, financials led things lower as the S&P 500 Financial Index lost 5.19%. Utility and consumer discretionary shares were the other major losers down 2.08% and 1.48%, respectively.
Consumer staples and basic materials were the only two major industry groups to post gains. Commodity prices fell some more yesterday but the declines leveled off, offering some support to the materials stocks – these shares have taken a beating over the past few weeks. The CRB (Commodity Research Bureau) Index has dropped 18.8% from the July 2 high.
On the greenback, the dollar continues to strengthen, which is nice and is a development that was very much needed regarding international-investor perceptions and inflation – particularly with regard to import prices. As we touched on yesterday, I think we’ll need a little Fed tightening to get us to 80 on the Dollar Index – a level that will make those worried about the greenback much more comfortable. For now though, at least we’ve returned to where we were in February and have erased the most recent leg lower.
On the economic data front yesterday, the Commerce Department reported the trade deficit narrowed in June, which was an unexpected move as the estimate was for the figure to widen – although I’m not sure why the narrowing was a surprise as import activity has been lagging export growth for many months now. Nothing of late has shown this trend will end in the immediate future.
Exports rose 4% as imports were up 1.8%. The importance of this narrowing is it will result in a higher revision to second-quarter GDP (the initial estimate to Q2 growth assumed the deficit widened in June). Combine this fact with higher inventory and capital expenditure (capex) figures and we may just see that 2.6%-3.0% real GDP reading we expected a couple of weeks back.
But back to the trade figures for a moment, in real terms (adjusting for inflation) the trade gap narrowed sharply (to its lowest level since December 2001) as real imports declined 0.6%.
U.S. exports have been on fire fueled by sales to South America and OPEC countries. Exports to OPEC countries has jumped 33.7% on a year-over-year basis. I mention this to point out the fact that higher oil prices are not a zero sum game as this flows back in higher export activity.
These comments have in mind all of those that speak of importing oil as a wealth transfer – as if these funds are lost forever. Those that speak of wealth transfers due to trade fail to tell the entire story and are often times either oblivious to how the global economy works or intellectually dishonest. A large degree of the U.S. dollars that move overseas in exchange for goods come back to us in the form of investment. (Before I go on, make no mistake – I do not enjoy being more dependent than needs to be the case on certain regions of the globe for our energy needs. In my world, congressionally built barriers to domestic energy production would be torn down never to be rebuilt. In the end we will accomplish this simply because we’ll have to. The state of the world will marginalize those that believe producing our own abundant sources of energy is a bad thing – a mindboggling stance.
But back to the flow of capital, a large part of it comes back in the form of investment. Some goes to the Treasury market, simply because this is the most liquid and broad market in the world. A significant degree of it though also goes to corporate bonds, equities, mortgage-backed securities, and venture capital. I’ll remind everyone that our long-run return on capital is higher than our cost of capital. Hence, those funds finance future growth, which creates jobs, provides the seed money for innovation and technological advances and leads to higher levels of income growth -- higher levels of productivity, improved living standards, lower inflation and real economic growth are the by-products.
In other news, the Treasury Department reported the July budget deficit widened due to the rebate checks and increased outlays to the FDIC to cover insured deposits at failed backs. The $102.8 billion deficit last month compared to the $36.4 billion in July 2007. Lower tax revenues due to job losses and lower corporate profits – mostly a result of financial-sector woes – has also increased the deficit, but the real damage has come from this Keynesian rebate check scheme.
Too bad because last year we had whittled the budget gap down to just 1.2% of GDP – half the long-term average. This year will be a different story, however. Nevertheless, the deficit will remain manageable for now, but if we do not get a handle on entitlement spending and reform these programs to reflect changing demographics we’ll have a problem on our hands a few years forward.
On the bright side, corporate tax receipts rose 6.6% in July on a year-over-year basis. This marks the first increase in a year.
This morning we get some very important data as July import prices and retail sales will be market movers. Also we get the June business inventories report, which should show the estimated inventory change that dragged so heavily on GDP was flawed. A larger-than-expected reading here will provide additional evidence Q2 GDP will be revised h
Have a great day!
Brent Vondera, Senior Analyst
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