This gets us to what we were discussing yesterday, one day they can say something that juices the market, the next day they create concern – we’re at the whim of Washington and that’s no way to enable a secular bull market. Nothing good can come of these tests, it creates the perception that a bank is insolvent even if the worst-case scenario that deems that institution insolvent never comes to fruition. In addition to that, the Treasury says it may force those firms the government has targeted to be in need of capital to announce whether the source of that capital will come from the private sector or the government. Well, you can forget about the private capital injections once this announcement is made, which makes the whole thing one giant farce – say hello to even more government involvement.
The day’s economic data probably offered a bit of support to stocks and buoyed the indices from an even greater freefall at the end of trading. Futures were meaningfully lower in pre-market trading and that negative sentiment spilled into the official trading session, but the indices rallied after the latest housing price gauge showed an increase for February – the first back-to-back monthly gains since early 2007. While the late-session news erased the rally, it may have been worse if not for that housing report. The NASDAQ Composite did manage to close higher as tech shares held onto their gains.
Financials led the declines, falling 4.6% in the final half-hour, ending the session lower by 3.82%. Industrials led the gainers, up 1.14% on better-than expected results and guidance from Ingersoll-Rand.
Market Activity for April 22, 2009
Crude Oil
Crude for June delivery continues to hold up even though the supply figures have increased for the sixth-straight week. The weekly Energy Department report showed a build of 3.9 million barrels in the week ended April 17 – estimates were for an increase of 2.5 million units.
Total stockpiles stand at 370.6 million barrels, the highest level since September 1990. The large contraction within the manufacturing sector alone has crimped demand, and now we’ve got GM idling 15 plants. Nevertheless, the price of oil continues to hold up as it is trading with stocks for the time being – when investor sentiment is on the rise you just don’t have the concerns over global demand, at least not in a heightened sense, and thus oil holds above the $45 per barrel mark.
Mortgage Applications
The Mortgage Bankers Association’s mortgage applications index rose 5.3% for the week ended April 17, after falling for the first week in six in the previous period. The index rose 5.3%, propelled by a 7.7% increase in refinancing activity – refis continue to make up 80% of the reading.
Unfortunately, purchases fell for a second-straight week, down 4.2% after the 11.3% decline during the previous week. The 30-year fixed mortgage rate remains in sub-5.00% territory, which will keep refi activity going, but purchases will remain sketchy as the weak labor-market conditions will continue to weigh on the figure. Hopefully, we’ll begin to see the degree of monthly job losses wane a couple of months out; I really doubt the current rate of losses is sustainable past June, and just maybe this will offer enough confidence for some buying to begin a slow trend upward in sales.
FHFA Home Price Index
The Federal Housing Finance Agency stated its index of home prices rose 0.7% in February after a downwardly revised 1.0% increase for January (initially estimated at a 1.7% gain). For the past 12 months, this index has home prices down 6.5% -- this is one of the broadest gauges of home prices, but does miss the high-end market.
The regions that helped push the index higher were the Pacific (HI, AK, WA, OR and CA) and New England (ME, NH, VT, MA, RI and CT) areas of the report. The Pacific region showed home prices jumped 3.8% in February after a series of large monthly declines. Home price in the index’s New England region rose 2.2%, marking the second month of increase.
The report’s West N. Central region (ND, SD, MN, NE, IA, KS and MO) showed prices rose 1.5% and West S. Central (OK, AR, TX and LA) was up 1.9%. The South Atlantic (DE, MD, VA and WV) registered a 0.8% decline.
The Earnings Front
First-quarter earnings season is proving to be a tough one; however, results are coming in better-than-expected. With 25% of S&P 500 members reporting thus far, overall operating profits are down 18.6% and ex-financial results are down 21.5% -- expectations averaged about -20% on the overall reading and -30% on ex-financial.
Basic material (-65.1%), industrial (-42.9%), energy (-26.0%) and information technology (-24.2%) lead the sectors to the downside. Financials, after four quarters of the most horrible of horrible results, is among the two sectors reporting positive results – up 1.6% for the quarter. The health-care sector has posted a 3.6% increase thus far.
There’s little doubt we’ll have another two quarters of negative earnings seasons to content with, but one has to think – even for people like me who worry very much about how government actions will keep businesses cautious – that the bounce back in profit results will be dramatic. Firms have engaged in a massive round of cost cutting. This is always the case during a downturn, but the level of job-reductions this go around has been the most dramatic since the early 1980s. As a result, sales won’t have to bounce much in order for bottom lines to show significant upswings.
I remain concerned that when the economic rebound does occur, it will not be sustainable. It will not come close to the duration of the last expansion and in absolutely no way be comparable to the 1980s and 1990s expansions that both lasted a full decade – there is way too much government involvement, way too much capital that will be removed from the private sector as public-sector spending will be on parade, and the actions by the Fed (while they have had little choice) will have ramifications the economy will have to deal with in the not-to-distant future. Nevertheless, based on the significant round of cost-cutting within the business community over the past several months, it shouldn’t take much to fire profit growth two-three quarters out. It will come, the duration of the event is the question at this point.
Have a great day!
Brent Vondera, Senior Analyst
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