U.S. stocks staged a late-session rally fueled by energy and information technology shares. A better-than-expected earnings announcement from Hewlett-Packard helped tech shares advance. Energy shares caught a bid as multiples and dividend yields on most of these stocks may have investors returning to the group after a six-month rout that’s driven the S&P 500 Energy Index down 43% from the peak hit in June.
The Dow Industrial Average fared better than the broad indices – which was more apparent prior to the close as most stocks spent much of the session lower --, bolstered by shares of HP after the company reported fourth-quarter profit will top analysts’ estimates. The shares gained 14%, which amounted to 33 Dow points. For clarity, if the stock’s advance had been commensurate with the rest of tech-land the Dow’s gain would have been closer to 1.4% than the 1.83% that significantly outpaced the advance in the broad market.
The S&P 500 wants to test the October 13 intraday low of 818 and that may just have to occur before a rally that extends longer than a week takes place. The good news is we’re close to finding out whether it will be a successful test or move right past that level.
What was encouraging late yesterday, while we’re talking about this short-term action, is how the S&P 500 rallied hard in the final hour of trading after blowing through the October 27 closing low of 848. I don’t know if any of this technical stuff really matters, but it’s interesting to talk about nonetheless.
Market Activity for November 18, 2008
As we’ve touched on several times, stocks could be in a trading range that lasts not months but years – the direction of policy will determine which duration proves to be the case. But make no mistake, stocks are cheap. Granted, this is because the economic outlook is dismal, the aforementioned policy direction may prove to be less than market-friendly and earnings will decline for at least a couple of quarters.
However, the NYSE Composite trades at 13 times earnings, the Dow at 9.9 times and the S&P 500 (based on the past four quarters of profits) trades at 11. These are multiples that reflect an unemployment rate closer to 8% than the current 6.5%, an inflation rate that’s closer to double-digit territory than 4% and long-end Treasury curve rates much higher than the ultra-low 3.50%-4.10% where they currently reside. Yes, things will get worse before they get better, but if it does stocks seem to have fully priced these events in. For the longer-term investor, it is essential to look past these events, and benefit from the multi-year buying opportunity that has developed, but allocations must be in line with true personal risk levels.
Over the short-term we’ve got a strong shot at a powerful rally from these levels. From there, the sustainability of such a rally will depend on policy, which needs to be watched like a hawk right now.
The Economy
On the economic front, the Labor Department reported the headline producer price index (PPI) fell more than expected, down 2.8% in October – the estimate was for a 1.9% decline. To no one’s surprise, the plunge in energy prices enabled this substantial move lower – the total energy component within the index fell 12.8% in October, gasoline prices alone were down 24.9%.
The decline in headline PPI was the largest monthly drop in the 61-year history of the report – this record is made possible by the fed-induced run-up in energy prices that pushed oil prices up 65% in the first half of the year, natural gas up 76% and gasoline up 56%. As we come crashing from elevated energy prices, headline inflation moves with it.
Digressing
These market distortions cannot go on. The Fed must be weaned from its flawed Keynesian models that cause the members of the FOMC to make major monetary policy mistakes. Until this occurs, the booms will become shorter and the busts more pronounced. Commodity prices will seesaw, making it increasing difficult for energy-sensitive industries to manage through these large fluctuations.
But back to PPI, core producer prices (which exclude food and energy) actually rose, meaningfully in fact, which illustrates the drop in the overall reading was vastly a result of the move in energy prices. Many food products along with textile, paper and packaging, rubber and plastics and chemicals products continue to rise. As the chart below shows, core PPI hit 4.4% in October, which is a substantial move from the 4.0% posted for September. This is what we call embedded inflation. We’ll see how core CPI behaves this morning.
The component we’ve been watching most closely is core intermediate goods, which involves the materials that go into making finished goods. This measure, while elevated on a year-over-year basis, has come lower. The three-month annualized figure is now negative, down 1.7%. The continued plunge in certain metals prices -- steel is down to $144 per ton from a high of $523 in August and copper is down to $1.61 per pound from the peak of $4.09 in July – will push the Fed to believe that core inflation is not a problem.
However, as we’ve been discussing, the massive amounts of liquidity the Fed has pumped into the system makes the deflation, or more appropriately disinflation, argument tenuous at best and will likely keep core inflation from falling back to more appropriate levels. At the least, inflation will bounce after a multi-month respite as the credit event has pushed demand lower. But inflation is a monetary phenomenon and overall prices will jump 6-8 months out as the current level of caution subsides, credit begins to flow and the Fed will be reluctant to take back the current level of easing as their Keynesian models send them the wrong signals.
The Senate
The Democrats moved one step closer to a filibuster-proof Senate as the Alaska race has gone their way. This leaves the Minnesota recount and the Georgia run-off election. Odds are the Minnesota race will add another seat – making it 59 for the Ds. Therefore the Georgia run-off (December 2) will have much at stake, which means it will get nasty.
Modern Day Peg Legs
As you all probably know, pirate activity off the East Africa coast has picked up. Somalia pirates took over the Sirius Star – a Saudi-owned super tanker – late last week and yesterday it was reported high-jacked a huge shipment of grain. According to the AP, these pirates are holding 15 vessels they’ve raided over the past few months. It may be time for the U.S. Fifth Fleet to roll in to make a statement. This shipping lane must be protected.
This morning we get the consumer price index for October, housing starts and building permits. Headline CPI should show a substantial decline, we’ll be watching the core rate as that headline move should be almost totally due to lower energy prices. Housing starts and permits will likely show another leg down.
Have a great day!
Brent Vondera, Senior Analyst
The Dow Industrial Average fared better than the broad indices – which was more apparent prior to the close as most stocks spent much of the session lower --, bolstered by shares of HP after the company reported fourth-quarter profit will top analysts’ estimates. The shares gained 14%, which amounted to 33 Dow points. For clarity, if the stock’s advance had been commensurate with the rest of tech-land the Dow’s gain would have been closer to 1.4% than the 1.83% that significantly outpaced the advance in the broad market.
The S&P 500 wants to test the October 13 intraday low of 818 and that may just have to occur before a rally that extends longer than a week takes place. The good news is we’re close to finding out whether it will be a successful test or move right past that level.
What was encouraging late yesterday, while we’re talking about this short-term action, is how the S&P 500 rallied hard in the final hour of trading after blowing through the October 27 closing low of 848. I don’t know if any of this technical stuff really matters, but it’s interesting to talk about nonetheless.
Market Activity for November 18, 2008
As we’ve touched on several times, stocks could be in a trading range that lasts not months but years – the direction of policy will determine which duration proves to be the case. But make no mistake, stocks are cheap. Granted, this is because the economic outlook is dismal, the aforementioned policy direction may prove to be less than market-friendly and earnings will decline for at least a couple of quarters.
However, the NYSE Composite trades at 13 times earnings, the Dow at 9.9 times and the S&P 500 (based on the past four quarters of profits) trades at 11. These are multiples that reflect an unemployment rate closer to 8% than the current 6.5%, an inflation rate that’s closer to double-digit territory than 4% and long-end Treasury curve rates much higher than the ultra-low 3.50%-4.10% where they currently reside. Yes, things will get worse before they get better, but if it does stocks seem to have fully priced these events in. For the longer-term investor, it is essential to look past these events, and benefit from the multi-year buying opportunity that has developed, but allocations must be in line with true personal risk levels.
Over the short-term we’ve got a strong shot at a powerful rally from these levels. From there, the sustainability of such a rally will depend on policy, which needs to be watched like a hawk right now.
The Economy
On the economic front, the Labor Department reported the headline producer price index (PPI) fell more than expected, down 2.8% in October – the estimate was for a 1.9% decline. To no one’s surprise, the plunge in energy prices enabled this substantial move lower – the total energy component within the index fell 12.8% in October, gasoline prices alone were down 24.9%.
The decline in headline PPI was the largest monthly drop in the 61-year history of the report – this record is made possible by the fed-induced run-up in energy prices that pushed oil prices up 65% in the first half of the year, natural gas up 76% and gasoline up 56%. As we come crashing from elevated energy prices, headline inflation moves with it.
Digressing
These market distortions cannot go on. The Fed must be weaned from its flawed Keynesian models that cause the members of the FOMC to make major monetary policy mistakes. Until this occurs, the booms will become shorter and the busts more pronounced. Commodity prices will seesaw, making it increasing difficult for energy-sensitive industries to manage through these large fluctuations.
But back to PPI, core producer prices (which exclude food and energy) actually rose, meaningfully in fact, which illustrates the drop in the overall reading was vastly a result of the move in energy prices. Many food products along with textile, paper and packaging, rubber and plastics and chemicals products continue to rise. As the chart below shows, core PPI hit 4.4% in October, which is a substantial move from the 4.0% posted for September. This is what we call embedded inflation. We’ll see how core CPI behaves this morning.
The component we’ve been watching most closely is core intermediate goods, which involves the materials that go into making finished goods. This measure, while elevated on a year-over-year basis, has come lower. The three-month annualized figure is now negative, down 1.7%. The continued plunge in certain metals prices -- steel is down to $144 per ton from a high of $523 in August and copper is down to $1.61 per pound from the peak of $4.09 in July – will push the Fed to believe that core inflation is not a problem.
However, as we’ve been discussing, the massive amounts of liquidity the Fed has pumped into the system makes the deflation, or more appropriately disinflation, argument tenuous at best and will likely keep core inflation from falling back to more appropriate levels. At the least, inflation will bounce after a multi-month respite as the credit event has pushed demand lower. But inflation is a monetary phenomenon and overall prices will jump 6-8 months out as the current level of caution subsides, credit begins to flow and the Fed will be reluctant to take back the current level of easing as their Keynesian models send them the wrong signals.
The Senate
The Democrats moved one step closer to a filibuster-proof Senate as the Alaska race has gone their way. This leaves the Minnesota recount and the Georgia run-off election. Odds are the Minnesota race will add another seat – making it 59 for the Ds. Therefore the Georgia run-off (December 2) will have much at stake, which means it will get nasty.
Modern Day Peg Legs
As you all probably know, pirate activity off the East Africa coast has picked up. Somalia pirates took over the Sirius Star – a Saudi-owned super tanker – late last week and yesterday it was reported high-jacked a huge shipment of grain. According to the AP, these pirates are holding 15 vessels they’ve raided over the past few months. It may be time for the U.S. Fifth Fleet to roll in to make a statement. This shipping lane must be protected.
This morning we get the consumer price index for October, housing starts and building permits. Headline CPI should show a substantial decline, we’ll be watching the core rate as that headline move should be almost totally due to lower energy prices. Housing starts and permits will likely show another leg down.
Have a great day!
Brent Vondera, Senior Analyst
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