The market actually held onto most of the early session’s gains – although it didn’t look that way by midday as the chart below illustrates – all sectors but energy and basic materials enjoyed a nice day with financials, consumer discretionary and industrials jumping between 2.4% and 4.7%.
Market Activity for September 8, 2008
Advancer whipped decliners on the NYSE by a 30-to-1 margin and volume was pretty strong as 1.7 billion shares traded on the Big Board.The S&P 500 is still 19% below the October 9 all-time high, but we’ve bounced back to 4.5% above the multi-year low set on July 15 – it will be important to remain above that mark. Even if we do, investors will likely need to lean on patience as the next short-term event is Hurricane Ike and longer-term the election.
Oil prices have moved back to the $104 per barrel handle this morning (for the first time since April) on news the Saudi Oil Minister stated inventories are “healthy” and the market is “well-balanced” at the cartel members’ meeting. OPEC is expected to keep production unchanged. While this is a big plus, weather-related events do threaten the welcome trend in crude prices. If Hurricane Ike maintains its current speed it is expected to keep south of major oil production facilities in the Gulf of Mexico and we could test $100 per barrel. If it does not, all bets are off.
On the economic front, the Federal Reserve reported that consumer credit rose half as much as expected in July rising $4.6 billion for the month, which represents the smallest increase this year – the financial press will focus on this point.
However, while the media will cite stricter lending conditions, leading one to believe credit is hardly available, we’ll note a reading of this nature is not unusual especially following several months of strong increases – which was the case in the prior six months of the year. What helped to drag the figure lower was the slump in July auto sales as gasoline prices jumped and consumers shunned SUVs and trucks.
For sure credit standards have tightened, but is this a bad thing? – especially in light of the fact that there have been little-to-no standards at all over the previous couple of years. I saw one report quote someone as saying the consumer is “stuck between a rock and a hard place,” but it is not because the availability of credit has disappeared, but more because real income growth has been hurt by accelerating rates of inflation and the ancillary effects of higher energy prices, even if those costs have come down of late.
Credit spreads have widened, thus the cost of money is higher than it otherwise would be with benchmark interest rates at their currently low levels but this latest report on consumer credit showed the cost of money actually fell for car loans – the average interest rate for new car loans fell to 3.31% in July from 5.49% in June as dealers offered incentives. For those with strong credit scores sub-1% financing is available. The loan-to-value ratio rose, not exactly a situation that takes place in an environment with which credit is scarce.
While financial institutions have become more cautious from an overall perspective, things have hardly progressed to the point that we need to worry credit has dried up and thus the economy will grind to a halt as a direct result.
In fact I would take a more optimistic view – and I’m not being Pollyannaish here as you all know I’ve got my concerns – as we’ve seen the consumer credit-to-disposable income ratio ease slightly even as the Fed continues to subsidize debt via their easy money policy. It’s saying something when this figure flattens out or dips slightly even as interest rates remain historically low – it’s a long-term plus that credit standards have become more reasonable.
So we have the media that is not happy when credit expands “too much,” for fear the consumer is spending beyond his/her means. Yet, when the borrowing figures rise less-than-expected, that isn’t good either. I would say the economy is adjusting to the realities of the economic environment just fine overall, even if is unpleasant during such periods as stocks struggle to gain ground and these adjustments make for trying times.
Mortgage Spreads Narrow
The temporary government take-over of Fannie and Freddie certainly helped stocks yesterday, as it also helped to bring mortgage rates lower. The yields on Fannie Mae mortgage-backed securities fell 40 basis points, narrowing to 150 basis points over the 10-year Treasury – that spread was 190 basis points on Friday and widened to 212 basis points in early August. This means the 30-year fixed mortgage rate will come down to a level that more closely mirrors the historic average, relative to Treasury rates. When these rates adjust to this reality next week we’ll be able to provide a chart of this picture.
Looks Like We Have a Race
Game on in the race for the White House as both the polls and pay-to-play Intrade has either McCain pulling away or the race narrowing.
Polls (of likely voters) show McCain is up by 5-10 points over Obama. But forget these polls; they can be wrong up to the final day as we found out in 2004. Pay-to-play Intrade betting has McCain gaining momentum, making a game of it. Obama remains in the lead according to this source, but the McCain surge is significant and one person is directly responsible – Sarah Palin.
The charts below show you pay 46 cents and get a buck if McCain wins. Pay 53 cents and get a buck if Obama wins.
Hard telling how things will play out, but the important thing with regard to the market and economy is that this tightening has helped ease the worry over tax rate changes, even if just slightly. This new surge, if you will, has caused the Obama campaign to state they may just defer their plan to raise taxes on income, capital and dividends. While politicians say a lot during a campaign, and do something entirely different when in office (no matter the party), this change may give investors a little solace – now that gives me something to believe in.This morning we get pending home sales for July and wholesale inventories. Pending home sales will likely show a decline as the figure has jumped 32% at an annual rate the past three readings.
On wholesale inventories, we’ve got to expect the underlying sales data will slip after four months of huge sales growth that has sent the inventory-to-sales ratio to an all-time low. Merchant wholesaler sales jumped 26% at an annual pace over the past four readings and one should expect a pull-back in sales as a result.
Have a great day!
Brent Vondera, Senior Analyst
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