Stocks were also helped by cost-cutting news that has flowed through via the earnings reports. This is a topic we touched on a couple of days back, stating it won’t take much of a bounce in demand to fire up profit results again. At least for Friday, one never knows how sentiment can shift on a day-to-day basis, traders were looking a couple of quarters ahead, which is probably the length of time it will take before good earnings growth off of easy comparisons becomes evident.
Friday’s gains, however, were not enough to push the broad market to a seventh-straight week of gains – the S&P 500 ended the week lower by 0.39% after posting six weeks of improvement that drove the index 30.5% above the intra-day low of 666 that was hit on March 9.
Basic material (metals producers, chemical makers and paper companies) led the winners as the S&P 500 index that tracks these shares jumped 4.41%. Consumer discretionary, energy and tech shares also easily outperformed the market. Utilities and telecom shares were the only losers.
Market Activity for April 24, 2009
Stress Tests
Every time I type the words “stress test” I think of former VP Al Gore’s famous “lock box” phrase – don’t ask me why. Anyway, the Fed released the methodology behind bank stress tests on Friday – although I’m not sure what all the hype was about (CNBC had a running countdown to the release the entire morning) since the methods have been reported on for three weeks now.
The real farce of these tests -- and I shouldn’t be this cynical, but let’s be real – is how the Fed stated any banks deemed to need more capital “is not (my emphasis) a measure of current solvency or viability of the firm.” Well, good luck with that one. Say the Fed deems a bank has insufficient levels of capital under worst case assumptions –even if those assumptions never become reality – institutions can forget about raising capital from the private sector. That leaves…guess who?
Durable Goods Orders
The Commerce Department reported that durable goods orders fell 0.8% in March after a downwardly revised 2.1% increase for February (previously estimated at a 3.4% increase). The decline in orders for March marks the seventh decrease over the past eight months. Excluding transportation orders, durables fell 0.6% last month, after a downwardly revised 2.0% increase for February (previously reported as a 3.9% increase). Orders are down 24.2% over the past three months at an annual rate, and while there is really no sign this data will bounce any time soon at least it’s a major improvement from the massive 50.4% decline of the previous quarter.
The most positive aspect of the report was the nondefense capital goods ex-aircraft component (the proxy for business spending), which rose for a second straight month. – up 1.5% in March and 4.3% in February. Now, these back-to-back readings follow a very large 12.2% decline in January so one can’t surmise that business spending has returned – more likely it’s a bounce from that plunge; this component is down 25.8% at an annual rate over the past three months. Still, it’s good to see back-to-back increases.
This business spending segment was boosted by a nice rise in electrical equipment. Machinery orders slipped 0.1% last month, but after a 7.1% increase in February it’s a moral victory the figure didn’t pull back further.
Shipments of durable goods fell for the seventh-straight month and is down 30% quarter-over-quarter at an annual rate. This is the figure the gross domestic product report picks up and thus will weigh heavily on Q1 GDP, again – we get the first look at the GDP reading on Wednesday.
The Commerce Department reported that durable goods orders fell 0.8% in March after a downwardly revised 2.1% increase for February (previously estimated at a 3.4% increase). The decline in orders for March marks the seventh decrease over the past eight months. Excluding transportation orders, durables fell 0.6% last month, after a downwardly revised 2.0% increase for February (previously reported as a 3.9% increase). Orders are down 24.2% over the past three months at an annual rate, and while there is really no sign this data will bounce any time soon at least it’s a major improvement from the massive 50.4% decline of the previous quarter.
The most positive aspect of the report was the nondefense capital goods ex-aircraft component (the proxy for business spending), which rose for a second straight month. – up 1.5% in March and 4.3% in February. Now, these back-to-back readings follow a very large 12.2% decline in January so one can’t surmise that business spending has returned – more likely it’s a bounce from that plunge; this component is down 25.8% at an annual rate over the past three months. Still, it’s good to see back-to-back increases.
This business spending segment was boosted by a nice rise in electrical equipment. Machinery orders slipped 0.1% last month, but after a 7.1% increase in February it’s a moral victory the figure didn’t pull back further.
Shipments of durable goods fell for the seventh-straight month and is down 30% quarter-over-quarter at an annual rate. This is the figure the gross domestic product report picks up and thus will weigh heavily on Q1 GDP, again – we get the first look at the GDP reading on Wednesday.
New Homes Sales
The Commerce Department reported new home sales fell 0.6% in March to 356,000 units at an annual rate. This follows the strong 8.2% bounce in February off of the all-time low hit in January. While the March figure fell slightly, it should be viewed as a positive that it was close to unchanged from the February bounce.
New home sales last month were held up by higher activity in the West region. This is where the bulk of the foreclosures, or distressed properties as they are often termed, reside and just as the existing home sales data illustrated bargain hunting in depressed areas has put a floor in on the data, the new home data shows the same. This is certainly not a good sign regarding the prospects of a recovery in the housing market, but one step at a time, you’ve got to get the floor in first. Sales jumped 15% in the West last month, were flat in the South, fell 7.8% in the Midwest and plunged 32% in the Northeast.
The median price of a new home fell 3.5% to $201,400 and is down 12.2% from the year-ago period.
The supply of new homes has now moved below the 45-year average and once sales bounce the inventory-to-sales ratio will fall fast. But this will take a labor market recovery and we’re quite a while from that occurring.
Futures
Stock-index futures are significantly lower this morning on the swine flu news. It seems we’re getting a little carried away on this one, there are 36,000 flu-related deaths in the U.S in a typical year and this variation hasn’t killed anyone (in the U.S.) to this point – in fact there aren’t even many reported cases. People who seem to understand these viruses say it will probably fizzle out and return again in the winter months, at which point we are likely to have a vaccine – assuming biological scientists understand the strain.
One can’t gauge how the market is going to react to what will surely continue to be much press focus on this issue simply by the way futures are reacting on a Monday morning. However, when we get to the top end of these trading ranges it doesn’t take much to push us lower again. We’ll just have to wait to see if this is a trading-range trigger, or something else will prove to be the mechanism, but when the market rallies nearly 30% (even if it’s from a very low level) in seven weeks one has to expect some sort of pull back.
We also have the Treasury market trading range that may put pressure on stocks. Recall, last week we talked about how the Treasury market rallies when the 10-year hits 3.00% as traders understand the Fed is a buyer and see this level as a way to make quick and easy profits – does this take money out of equities as a result? We don’t know, but it may act as an adverse consequence of the Fed purchases.
Well, like clockwork Treasurys are rallying this morning, pushing the yield on the 10-year down to 2.94% -- it closed at 2.99% on Friday. (At the shorter end of the curve, the support seems to be at 1.00% on the 2-year Treasury, for instance. That maturity closed at 0.96% on Friday and is down to 0.92% this morning. Remember, the price of a bond and its yield are inversely related so when traders are buying and pushing the price higher, the yield falls, and vice versa.)
Of course all of this may be a result of the swine flu news, as investors flee back to the safety of the Treasury market, but we’ve seen the 10-year bounce off of this 3.00% level too many times now to ignore the trading range.
Have a great day!
Brent Vondera, Senior Analyst
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