U.S. stocks ended mixed on Tuesday as the Dow and S&P 500 closed a bit higher, while the NASDAQ failed to gain ground as information technology shares struggled.
Analysts’ comments on Fannie Mae and Freddie Mac – explaining that the two GSEs have enough capital to withstand losses through the end of the year and still keep a capital cushion above their requirement – helped financials shares gain ground. Energy shares also helped the broad market close higher as oil prices rose for a third-straight session as what is now Tropical Storm Gustav is on a projected path to threaten the Gulf.
Market Activity for August 26, 2008
All in all, seven of the 10 major industry groups closed yesterday’s session higher. Consumer staples, information technology and telecom shares were the losers.
The dollar has staged a very welcome rally of late as it has become evident the super-strong euro made zero sense considering the Eurozone economy has weakened considerably. This may force the European Central Bank to lower interest rates – they had been increasing rates even in the face of weakness as unions (which are much more powerful in Europe than here in the U.S.) force wages higher. The liklihood that the interest rate differential between the EU and U.S. will move in our favor has been one reason for dollar strength.
Oil prices have also moved substantially lower, as everyone knows – falling 20% from the all-time high hit on July 3. This trend is in jeopardy though as Gustav tracks toward Gulf of Mexico energy infrastructure. Evacuations of oil and natural gas production facilities are scheduled to begin as early as today.
In addition, Russia continues their disruptive behavior (which appears to be the correct term for now, their actions could escalate into something worse if not confronted) as they see how far they can push things. Their immediate objective: Gain control of the Tbilisi pipeline – the only Caspian-region oil flow to Western Europe that they do not have control over – and determining the future political environment of Eastern Europe. NATO needs to step up; this is their backyard; this is their reason for existence. Problem is European militaries have been so degraded that the Euros seem to have neither the will nor the ability to commit troops.
So we’ll see we’re these issues take the price of oil. For now, let’s hope Gustav misses major oil infrastructure – good news is the industry caps rigs very effectively these days and can get up and running again very quickly.
On the economic front yesterday housing data dominated.
First, we had the release of the S&P Case/Shiller Home Price Index and its tracking of 20 major cities showed prices declined 15.92% from the year-ago period. That’s quite a large drop and much worse than the National Association of Realtors, Commerce Department and OFHEO surveys have shown.
We’ll note that this survey’s reading (Case/Shiller) has been dragged lower by six cities – L.A., San Diego, Las Vegas, Miami, San Francisco and Phoenix – all down at least 25% year-over-year. These were the areas that exhibited the largest price spikes over the previous three years. As a result of its narrow reach, this survey does not show the true picture for home values across the nation as the aforementioned areas were where the most speculation took place.
On the bright side, the survey does show that price declines are waning from a three-month annualized perspective, decelerating to a decline of 10.05% vs. price declines of 15.87% in May, which followed a 21.73% hit in April and 24.98% in March.
Shortly after the release of Case/Shiller, we received the OFHEO Home Price Index. (OFHEO stands for Office of Federal Housing Enterprise Oversight and is a much broader-based survey. This survey’s main fault is that higher-end homes are not included, yet it does offer a better look at the housing situation from a national perspective.)
The OFHEO survey showed prices fell 5% from the year-ago period, coming in flat for June (meaning zero change) relative to the May figure.
Lastly, the Commerce Department reported that their new home sales report showed prices declined 6.3% from the year-ago period.
So we put the existing home sales data (which we touched on yesterday), the new home data and the OFHEO survey together and it shows home prices are down 6.1% on average over the past 12 months. This is quite different from the degree to which Case/Shiller is showing values declined and I think closer to the truth from a national perspective.
In terms of new home sales, they rose 2.4% in July, halting a two-month decline, to 515,000 at an annual rate -- new home sales have declined during 12 of the past 15 months. Lower prices may be starting to work, but I’m not convinced we’ve stabilized just yet – more data will be needed to confirm this.
The best news within the report was that the supply of new homes on the market fell a meaningful 5.2% to 10.1 months’ worth of supply at the current sales pace (as the chart below illustrates). While this level of stockpiles remains very elevated the trend is moving in the correct direction at least -- off from 11.2 months’ worth in March.
Important: The number of unsold new homes on the market has declined for 15-straight months. The problem is when the figure is matched against the sales rate (which is that 10.1 months’ worth of supply number mentioned above) supply remains very elevated. However, when sales do bounce that months’ worth of inventory figure should drop very quickly.
We need to see the above chart get to nine months worth before we get too excited and then work its way down to six months’ worth before home construction will begin to add to GDP again – this whole process will likely take another year to play out and we can’t rule out two-full years before this occurs. In any event, it will be a very nice plus when housing merely flattens out; at which point it will no longer subtract from GDP and this will be a substantial positive.
Have a great day!
Brent Vondera, Senior Analyst
Analysts’ comments on Fannie Mae and Freddie Mac – explaining that the two GSEs have enough capital to withstand losses through the end of the year and still keep a capital cushion above their requirement – helped financials shares gain ground. Energy shares also helped the broad market close higher as oil prices rose for a third-straight session as what is now Tropical Storm Gustav is on a projected path to threaten the Gulf.
Market Activity for August 26, 2008
All in all, seven of the 10 major industry groups closed yesterday’s session higher. Consumer staples, information technology and telecom shares were the losers.The dollar has staged a very welcome rally of late as it has become evident the super-strong euro made zero sense considering the Eurozone economy has weakened considerably. This may force the European Central Bank to lower interest rates – they had been increasing rates even in the face of weakness as unions (which are much more powerful in Europe than here in the U.S.) force wages higher. The liklihood that the interest rate differential between the EU and U.S. will move in our favor has been one reason for dollar strength.
Oil prices have also moved substantially lower, as everyone knows – falling 20% from the all-time high hit on July 3. This trend is in jeopardy though as Gustav tracks toward Gulf of Mexico energy infrastructure. Evacuations of oil and natural gas production facilities are scheduled to begin as early as today.
In addition, Russia continues their disruptive behavior (which appears to be the correct term for now, their actions could escalate into something worse if not confronted) as they see how far they can push things. Their immediate objective: Gain control of the Tbilisi pipeline – the only Caspian-region oil flow to Western Europe that they do not have control over – and determining the future political environment of Eastern Europe. NATO needs to step up; this is their backyard; this is their reason for existence. Problem is European militaries have been so degraded that the Euros seem to have neither the will nor the ability to commit troops.
So we’ll see we’re these issues take the price of oil. For now, let’s hope Gustav misses major oil infrastructure – good news is the industry caps rigs very effectively these days and can get up and running again very quickly.
On the economic front yesterday housing data dominated.
First, we had the release of the S&P Case/Shiller Home Price Index and its tracking of 20 major cities showed prices declined 15.92% from the year-ago period. That’s quite a large drop and much worse than the National Association of Realtors, Commerce Department and OFHEO surveys have shown.
We’ll note that this survey’s reading (Case/Shiller) has been dragged lower by six cities – L.A., San Diego, Las Vegas, Miami, San Francisco and Phoenix – all down at least 25% year-over-year. These were the areas that exhibited the largest price spikes over the previous three years. As a result of its narrow reach, this survey does not show the true picture for home values across the nation as the aforementioned areas were where the most speculation took place.
On the bright side, the survey does show that price declines are waning from a three-month annualized perspective, decelerating to a decline of 10.05% vs. price declines of 15.87% in May, which followed a 21.73% hit in April and 24.98% in March.
Shortly after the release of Case/Shiller, we received the OFHEO Home Price Index. (OFHEO stands for Office of Federal Housing Enterprise Oversight and is a much broader-based survey. This survey’s main fault is that higher-end homes are not included, yet it does offer a better look at the housing situation from a national perspective.)
The OFHEO survey showed prices fell 5% from the year-ago period, coming in flat for June (meaning zero change) relative to the May figure.
Lastly, the Commerce Department reported that their new home sales report showed prices declined 6.3% from the year-ago period.
So we put the existing home sales data (which we touched on yesterday), the new home data and the OFHEO survey together and it shows home prices are down 6.1% on average over the past 12 months. This is quite different from the degree to which Case/Shiller is showing values declined and I think closer to the truth from a national perspective.
In terms of new home sales, they rose 2.4% in July, halting a two-month decline, to 515,000 at an annual rate -- new home sales have declined during 12 of the past 15 months. Lower prices may be starting to work, but I’m not convinced we’ve stabilized just yet – more data will be needed to confirm this.
The best news within the report was that the supply of new homes on the market fell a meaningful 5.2% to 10.1 months’ worth of supply at the current sales pace (as the chart below illustrates). While this level of stockpiles remains very elevated the trend is moving in the correct direction at least -- off from 11.2 months’ worth in March.
Important: The number of unsold new homes on the market has declined for 15-straight months. The problem is when the figure is matched against the sales rate (which is that 10.1 months’ worth of supply number mentioned above) supply remains very elevated. However, when sales do bounce that months’ worth of inventory figure should drop very quickly.
We need to see the above chart get to nine months worth before we get too excited and then work its way down to six months’ worth before home construction will begin to add to GDP again – this whole process will likely take another year to play out and we can’t rule out two-full years before this occurs. In any event, it will be a very nice plus when housing merely flattens out; at which point it will no longer subtract from GDP and this will be a substantial positive.
Have a great day!
Brent Vondera, Senior Analyst
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