Bank stocks led the broad market higher for a second session as shares of JP Morgan led the financial index higher – the firm said it will cost less than analysts had expected to repay government funds. Technology and consumer discretionary shares also closed on the plus side. Tech shares advanced on speculation Microsoft will beat second-quarter profit estimates. Apple shares also rallied on the release of the new iPhone.
So much for that activity on Thursday in which the traditional areas of safety – utilities, consumer staples and health-care – led the way and appeared as if maybe some sector rotation was taking place. Two of these three sectors closed lower on Friday, although we did have quadruple witching so it wasn’t a great day by which to gauge trends. Quadruple witching occurs once a quarter and involves the expiration of stock-index futures and options, and single-stock futures and options contracts. It makes for a volatile session at the beginning and end of the trading day as traders settle positions due to the expiry of those contracts.
For the week, the S&P 500 lost 2.6%; the Dow fell 2.9% and the tech-laden NASDAQ Composite slipped 1.6%.
Market Activity for June 19, 2009
The Problem of Conflicting RegulationLast week we touched on the White House’s new regulatory proposal but one aspect of the plan has come under considerable fire and it seems worthwhile to touch on this topic again, particularly since we were without an economic release on Friday.
Under the proposal, an entirely new consumer protection agency within the financial industry will greet the private sector, specifically community banks across the country. Some may wonder what the big deal is; isn’t consumer protection a good thing? Well, it’s the typical example of proposals that look good on the surface, but when it come to real world application trouble arises. One issue regarding the set up of entirely new agencies is that they generally conflict with one another and whether it be smaller firms when we are talking about the entire economy, or community banks when specifically referring to the financial industry, these players can get caught between the cracks -- or the crevasse in terms of this regulation.
Community banks will have to deal with the safety and soundness regulator saying they can’t make certain loans. While on the other side, the new consumer protection regulators will be demanding they are not making enough loans and are shutting out certain consumers. The community banks get caught in the middle
When these separate areas of a regulatory regime are part of a larger agency, banks can go to the top and ask for some mediation to this problem of confliction. Not so now. When the elephants stampede, the grass gets trampled and I think there is a serious risk that community banks may get trampled. The adverse consequence is that instead of helping consumers, they may actually be hurt over time via higher consumer-loan borrowing costs.
This Week’s Data
We’re without a data release today, but get back to it tomorrow.
Existing Home Sales for May (Tuesday)
The sale of previously owned homes is expected to rise to 4.8 million units at an annual rate, which will mark a 2.5% rise from the 4.68 million units hit in April. I think there’s a very good shot the number will come in at 5.00 million or better as the most recent pending home sales data (a good indicator for existing sales over the subsequent one-two months) jumped 6.7%. If we do get a better-than-expected move it should juice the market. That said, existing home sales, all home sales, remain very depressed and are just 4.2% above the 12-year low hit in January.
Durable Goods Orders for May (Wednesday)
Durable goods orders rose in April after getting crushed over the past several months, down 27% year-over-year. May orders are likely to fall as business-equipment orders (technically, non-defense capital goods ex-aircraft) will take some time to come back and this component is going to weigh on the overall reading. We suspect business spending will bounce sometime in mid-2010, the caveat being how far the government goes with regard to regulations, tax rates and spending. If the business community worries that an economic rebound will be short-term in nature, then purchases will be delayed.
FOMC Meeting (Wednesday)
This is the big one for the week. The market eagerly await how the Fed will choose to manage the yield curve. Will they increase their quantitative easing strategy by boosting the planned purchased of Treasury and mortgage-backed bonds? Or will they attempt to do so via comments, such as attempting to convince the market that inflation concerns are overblown?
Initial Jobless Claims for the week ended June 20 (Thursday)
The market will watch that continuing claims number. I think it is widely expected that initial jobless claims will remain above the 600K level, but that continuing claims figure halted its record-setting move for the first time in 19 weeks last week. The question is whether this suggests the job market has improved at the margin, or the decline was due to state-unemployment benefits running out and a shift to federal benefits will then show up in this weeks data. This is going to be a big one for stocks. If continuing claims begins to ascend again, investor sentiment will descend.
Personal Income and Spending for May (Friday)
We’ll look for something other than the government transfer component of the data to rise, but I wouldn’t expect much as the labor market remains very fragile. Rental income actually did rise in the last reading, so April’s increase of 0.5% (which followed six months without an advance – down 2.4% at an annual rate during that stretch) wasn’t solely due to the government side, but darned near.
On the spending side, the market will need to see an increase, after declines in eight of the past 10 months. The retail sales data for May rose 0.5%, so there’s a good shot we’ll see a positive print. The data will also include the cash savings rates (measured as a percentage of disposable income). This figure jumped to 5.7% in April, up from 4.5% in March and pretty much non-existent a year ago as the stock market was sitting 40% above the current level – the value of stock and home prices has an effect on the savings rate as consumers feel more confident about things when those prices are higher. Also, until people become worried about things, very low interest rates also have an affect on the money many people keep in bank accounts. (The traditional measure of the savings rate does not count capital gains in the stock market as savings.)
Have a great day!
Brent Vondera
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