Energy shares also helped propel the broad market higher as results from drilling-services firm Diamond Offshore followed equally good result from Noble Corp. the day before – a dearth of supply remains in the marketplace and rig day rates continue to climb.
The market is treading water right now as investors appear to be pretty much frozen – deer in the headlights analogy applies pretty well. We have earnings season that is shaping up a bit better-than-expected -- profits are down significantly, but results not as bad as the worst-case estimates. But we continue to have an immense level of government meddling that frankly has to be giving investors pause. We also have these stress test results that are expected to be reported May 4, so this may keep some money on the sidelines until results are announced.
The S&P 500 has been stuck right around 850 since April 9. It appeared we were going to break through what many believe is an important resistance level of 875 last Friday when the index closed at 869.6, but fell back to 832 on Monday and have barely moved above 850 with yesterday’s close.
Market Activity for April 23, 2009
Another Sign Inflation is Poised to Roar?
I want to return for a moment to the higher rig rates (oil and nat. gas drilling rigs) touched on above, it reminded me of something I noticed a couple of weeks back regarding the oil tanker market. Oil tanker rates have plunged, and as a result firms have been scrapping ships because between the insurance, labor, maintenance and interest costs, losses are mounting. This is a result of massive swings in commodity prices, energy in particular.
When oil skyrockets to $140 per barrel, shippers can’t build enough vessels, yet when oil summarily plunges they find they have way too much supply. While this pricing environment is not the case for drilling rigs, it means one thing – the supply of ships, just as the supply of drilling rigs, will come up very short of what is needed when oil goes on a tear toward $75, $80, $100 again.
Day rates for jack-up rigs (relatively shallow water drilling) rose to $131,000 last-quarter, up from $102,000 a year earlier; rates for semi-submersibles (used for deep-water drilling) jumped to $283,000 from $249,000. When inflation makes a comeback due to the massive liquidity injections by the Fed and trillions in fiscal stimulus, these rates will move higher – higher energy prices will encourage much more energy production activity and thus greater demand for rigs. And oil tankers, which are being scrapped as we speak, will suddenly find more business than they can handle, which means shipping rates will explode. These costs will be quite something for the economy to deal with. Oh, and Mr. Bernanke, your job won’t get any easier…or, should I say Mr. Summers, as he is next in line for the job. Good luck boys. We’ll need some sort of recovery first though.
Jobless Claims
The Labor Department reported initial jobless claims rose last week, suggesting the substantial decline in the previous week was due to the Good Friday holiday more than an easing in jobs losses.
Initial jobless claims rose 27,000 to 640,000 in the week ended April 18. The good news is we didn’t bounce back to the more than 26-year high hit three weeks back and while we’ll need another week to confirm, this may be a sign that we have seen the worst in initial claims.
The four-week average of initial claims fell 4,200 to 646,800.
Continuing claims (those that remain on benefit rolls) continue to show the labor market is very fragile as the number rose again, up 93,000 to 6.137 million. This marks the 12th straight week in which the figure has set a record.
The insured unemployment rate, a reading that is tied to the continuing claims data, rose to the highest level since January 1983 -- up to 4.6% from 4.5% in the previous week. This number closely tracks the overall unemployment rate and thus suggests we’ll see the jobless rate rise again when the official labor market data for April is released May 8. The overall unemployment rate hit 8.5% in March and we’ll see it move a little closer to 9.0% for April and hit or surpass that level in May if these claims figures do not reverse.
Bottom line, it is a mild positive that initial claims didn’t shoot back up to 670,000, but we’ll need another week worth of data before we get too excited over the prospect that initial has peaked. From there, we will need to see the reading trend into the 500K handle, when this occurs it will offer a very good signal that the worst has been seen regarding the labor market.
Unfortunately, continuing claims are shouting the job market is extremely tenuous right now and this will keep economic activity very soft. The economy will likely already have begun to rebound before continuing claims show real improvement (it is more of a lagging indicator, the initial claims figure is the more leading indication) but this reading must halt the march to new weekly highs in order for one to have conviction economic activity has truly bottomed out.
Existing Home Sales
The National Association of Realtors announced that sales of previously owned homes fell in March after jumping in February by the most in five years. As we touched on at the time of that February release, the jump in sales appeared to be more a function of weather-related events than anything else – terrible weather in January that depressed home sales more than otherwise would have been the case and then very mild weather in February helped sales bounce back substantially.
Existing home sales fell 3.0% to 4.57 million units at an annual rate from the 4.71 million hit in February – this is just 1.7% higher than the 12-year low hit in January and confirms the above commentary. That said it does appear the figure has bottomed; however, the labor market will likely hold activity near this bottom rather than allowing for housing to rebound, at least regarding the next few months.
Distressed properties made up 50% of all sales; this bottom-fishing has put a floor on sales. When the data shows other-than-distressed purchases moving to 70-75% of sales this will be another sign we’re onto something.
Looking at just single-family units, the overall reading includes multi-family (apts. and condos), the data shows the same. We want to be aware of this single-family figure because activity in condo units, in particular, appear to be lagging the single-family environment and we’re watching singles for some sign of improvement that the overall reading may not show. But evidence of a bounce has yet to present itself, as the chart below shows. Again, we’ll very probably have to see some easing in monthly job losses before home sales begin to recover a bit.
The number of existing homes for sale remains elevated.
And the inventory/sales ratio remains stuck too.
The rate of year-over-year decline in prices has eased for the second-straight month, which appears to be the only positive aspect of the report.
Have a great weekend!
Brent Vondera, Senior Analyst
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