U.S. stocks managed some nice gains on very light volume yesterday, brushing aside manufacturing data that showed activity within the sector remained very weak and housing data showed price declines accelerated in October.
The news that the lending arm of GM will receive $5 billion in TARP funds (at a cost 8%) likely helped the indices advance. While bankruptcy is the best path to viability for the Detroit Three, the market probably doesn’t want to contemplate the ramifications to an already weak labor market that would result.
We’ll note the dire predictions that an additional three million workers will be thrust into the unemployment rolls are a bit hyperbolic; nevertheless, such an event would cause the unemployment rate to jump. Re-organization is a necessary condition to get GM, Chrysler and Ford streamlined for the future, but the marketplace doesn’t want to deal with this reality right now, so stocks get a short-term boost on news of government-assistance.
Unfortunately, the rally in stocks was not accompanied by a decline in Treasuries. We’ll really need to see some money come out the Treasury market as this will signal an easing in risk aversion. So long as money continues to hide under the Treasury market rock, it’s tough to get too excited.
The goods news is intraday swings have become much milder, so we may have entered into this feeling out process, as we’ve termed it – a period in which the market determines which way it wants to go after a serious plunge, such as the 40% slide in the two months that ended November 20. During the 1974 bear market a similar period of relative calm ushered in a powerful rally.
Many seem to believe a robust rally will come in January. We’re not so sure as the de-leveraging event may have not yet fully run its course. The Middle East is also heating up, which won’t help things. Based on what is presently known, we do believe a powerful bear-market rally is on the horizon, but may have to wait a few weeks still. It’s impossible to time.
Market Activity for December 30, 2008
U.S. stocks are headed for their worst year since 1931 as things fell apart when Lehman went down on September 15; the event roiled the money markets and caused the overall credit market to freeze up. The following chart of the S&P 500 Index shows what has occurred from the peak hit in October 2007. It took us basically a year to fall 20% from that peak, but prices began to plunge in the third week of September.
Economic Data
The S&P Case/Shiller Home Price Index, a gauge of the largest 20 metro areas in the U.S., posted its largest decline yet in October.
Case/Shiller recorded home prices fell 18.04% on a year-over-year basis. As you can see via the table below, the most significant damage continues to occur in the West, although Miami, Detroit, Tampa and Minneapolis also continue to see exceptionally large declines. This home price index has values down 23.4% from the peak.
We’ll note, as long-term readers know, that this gauge is not a broad representation of what is occurring nationwide. The FHFA (Federal Housing and Finance Agency) offers the broadest measure of home prices. This measure has home prices down 10% from the peak hit in early 2007 (the exact time of the peak depends on the gauge). This measure also has its flaws though. Where Case/Shiller is not a broad index, and subject to a number of cities that saw the greatest speculative fervor at the height of the housing euphoria, the FHFA index fails to cover high-end homes.
In our view averaging the four main home price measures, the two just mentioned along with price data from the new and existing home sales figures, offers the best look at what prices in general have done. This shows average home prices are down roughly 16% from the peak.
For a longer term perspective, home prices in generally are up about 35% since 2000. That means home prices have grown about 3.4% annualized, which is slightly below what I believe to be the long-term average of 5%.
The decline in home prices has been a harsh reality; however, it is a necessary condition to bring sales back. It appears the process of reversion to the mean has run its course, in fact may have moved beyond what is justified. This does not mean prices will bounce back over the next couple of months, we do have a weak job market to contend with, which is the more traditional drag on housing. Nevertheless, we may be very close to the bottom.
In a separate report the Chicago Purchasing Managers Index (PMI), which measures factory activity in the region, edged slightly higher from the prior month’s depressed reading.
The overall activity index came in at 34.1 after posting 33.8 in November – the weakest readings since the spring of 1982. A reading of 50 is the line of demarcation between expansion and contraction.
(For context, Chicago-area manufacturing showed activity expanded 54 of the 55 months that ended in February 2008, which marked the longest run in the survey’s history. In February the index contracted mildly, but bounced back July-September as business spending accelerated. Things collapsed though beginning in October as the credit event caused businesses to cancel spending projects when the credit markets froze up.)
The new orders index moved up to 29.4 from 27.2 last month, while production fell to 31.7 from 34.3. The employment index rose nicely to 39.6 from 33.4; however this level still represents a significant decline in manufacturing jobs. For new readers, these are the sub-indices of the overall report.
Nothing in this report offers an indication the nation’s largest manufacturing region in on the verge of a rebound. The next reading on factory activity comes on Friday via the ISM survey (manufacturing activity for the entire nation).
The US Dollar
The greenback has given up much of the gains recorded in summer and fall and will very likely take a beating in 2009 as the combination of the Federal Reserve’s massive liquidity injections pumps more dollars into the system and the government’s spending spree will cause budget deficits to soar. And we’re not talking about deficits the media has harped on over the past several years, those were child’s play, extremely manageable levels that ran 1.2%-4.0% of GDP. No, the deficits that the government will record for 2009 and 2010 will hit $1 trillion plus, or more than 7% of GDP.
Last spring, the Dollar Index (DXY) hit the very low level of 71 but rallied beginning in July as it benefited from a flight to ultra-safe investments such as Treasury securities. Now though with yields at record lows, that money may move to other currencies, or more likely gold as the safety trade moves to this hard asset. We’d look for, as much as it pains us to say it, the DXY to return to the lows we saw in mid 2008.
This morning we get initial jobless claims for the week ended December 27, a day earlier than usual due to the New Year’s holiday.
Have a great day and happy New Year!
Brent Vondera, Senior Analyst
The news that the lending arm of GM will receive $5 billion in TARP funds (at a cost 8%) likely helped the indices advance. While bankruptcy is the best path to viability for the Detroit Three, the market probably doesn’t want to contemplate the ramifications to an already weak labor market that would result.
We’ll note the dire predictions that an additional three million workers will be thrust into the unemployment rolls are a bit hyperbolic; nevertheless, such an event would cause the unemployment rate to jump. Re-organization is a necessary condition to get GM, Chrysler and Ford streamlined for the future, but the marketplace doesn’t want to deal with this reality right now, so stocks get a short-term boost on news of government-assistance.
Unfortunately, the rally in stocks was not accompanied by a decline in Treasuries. We’ll really need to see some money come out the Treasury market as this will signal an easing in risk aversion. So long as money continues to hide under the Treasury market rock, it’s tough to get too excited.
The goods news is intraday swings have become much milder, so we may have entered into this feeling out process, as we’ve termed it – a period in which the market determines which way it wants to go after a serious plunge, such as the 40% slide in the two months that ended November 20. During the 1974 bear market a similar period of relative calm ushered in a powerful rally.
Many seem to believe a robust rally will come in January. We’re not so sure as the de-leveraging event may have not yet fully run its course. The Middle East is also heating up, which won’t help things. Based on what is presently known, we do believe a powerful bear-market rally is on the horizon, but may have to wait a few weeks still. It’s impossible to time.
Market Activity for December 30, 2008
U.S. stocks are headed for their worst year since 1931 as things fell apart when Lehman went down on September 15; the event roiled the money markets and caused the overall credit market to freeze up. The following chart of the S&P 500 Index shows what has occurred from the peak hit in October 2007. It took us basically a year to fall 20% from that peak, but prices began to plunge in the third week of September.
Economic Data
The S&P Case/Shiller Home Price Index, a gauge of the largest 20 metro areas in the U.S., posted its largest decline yet in October.
Case/Shiller recorded home prices fell 18.04% on a year-over-year basis. As you can see via the table below, the most significant damage continues to occur in the West, although Miami, Detroit, Tampa and Minneapolis also continue to see exceptionally large declines. This home price index has values down 23.4% from the peak.
We’ll note, as long-term readers know, that this gauge is not a broad representation of what is occurring nationwide. The FHFA (Federal Housing and Finance Agency) offers the broadest measure of home prices. This measure has home prices down 10% from the peak hit in early 2007 (the exact time of the peak depends on the gauge). This measure also has its flaws though. Where Case/Shiller is not a broad index, and subject to a number of cities that saw the greatest speculative fervor at the height of the housing euphoria, the FHFA index fails to cover high-end homes.
In our view averaging the four main home price measures, the two just mentioned along with price data from the new and existing home sales figures, offers the best look at what prices in general have done. This shows average home prices are down roughly 16% from the peak.
For a longer term perspective, home prices in generally are up about 35% since 2000. That means home prices have grown about 3.4% annualized, which is slightly below what I believe to be the long-term average of 5%.
The decline in home prices has been a harsh reality; however, it is a necessary condition to bring sales back. It appears the process of reversion to the mean has run its course, in fact may have moved beyond what is justified. This does not mean prices will bounce back over the next couple of months, we do have a weak job market to contend with, which is the more traditional drag on housing. Nevertheless, we may be very close to the bottom.
In a separate report the Chicago Purchasing Managers Index (PMI), which measures factory activity in the region, edged slightly higher from the prior month’s depressed reading.
The overall activity index came in at 34.1 after posting 33.8 in November – the weakest readings since the spring of 1982. A reading of 50 is the line of demarcation between expansion and contraction.
(For context, Chicago-area manufacturing showed activity expanded 54 of the 55 months that ended in February 2008, which marked the longest run in the survey’s history. In February the index contracted mildly, but bounced back July-September as business spending accelerated. Things collapsed though beginning in October as the credit event caused businesses to cancel spending projects when the credit markets froze up.)
The new orders index moved up to 29.4 from 27.2 last month, while production fell to 31.7 from 34.3. The employment index rose nicely to 39.6 from 33.4; however this level still represents a significant decline in manufacturing jobs. For new readers, these are the sub-indices of the overall report.
Nothing in this report offers an indication the nation’s largest manufacturing region in on the verge of a rebound. The next reading on factory activity comes on Friday via the ISM survey (manufacturing activity for the entire nation).
The US Dollar
The greenback has given up much of the gains recorded in summer and fall and will very likely take a beating in 2009 as the combination of the Federal Reserve’s massive liquidity injections pumps more dollars into the system and the government’s spending spree will cause budget deficits to soar. And we’re not talking about deficits the media has harped on over the past several years, those were child’s play, extremely manageable levels that ran 1.2%-4.0% of GDP. No, the deficits that the government will record for 2009 and 2010 will hit $1 trillion plus, or more than 7% of GDP.
Last spring, the Dollar Index (DXY) hit the very low level of 71 but rallied beginning in July as it benefited from a flight to ultra-safe investments such as Treasury securities. Now though with yields at record lows, that money may move to other currencies, or more likely gold as the safety trade moves to this hard asset. We’d look for, as much as it pains us to say it, the DXY to return to the lows we saw in mid 2008.
This morning we get initial jobless claims for the week ended December 27, a day earlier than usual due to the New Year’s holiday.
Have a great day and happy New Year!
Brent Vondera, Senior Analyst
No comments:
Post a Comment