U.S. stocks ended mixed on Tuesday as the S&P 500 managed a decent gain, able to fight off several moves into negative territory; however, the Dow and NASDAQ Composite failed to close in positive territory as tech shares led the latter lower and a 6.5% decline in Boeing shares weighed on the Dow average. Shares of Boeing subtracted 22 Dow points from that index, it would have been nicely positive otherwise.
The broad market came under pressure during the morning session after the latest housing market report showed activity remains very weak despite a number of policy decisions that were meant to offset a troubled environment for the consumer. But financial, basic material and telecom shares helped propel the S&P 500 to the plus side by the close.
Consumer discretionary shares were among the worst performing sectors after memory-chip designer Rambus Inc. reduced its second-quarter revenue forecast, citing weak demand for consumer electronics. This news certainly didn’t help tech shares either.
Market Activity for June 23, 2009
Credit Spreads
There has been a lot of talk about the narrowing of credit spreads – the difference between Treasury yields (known as the risk-free rate) and the yields on variously rated corporate bonds. This is normally a key signal regarding financial market improvement and that economic growth prospects have increased. Like so many things in this environment, however, we need to be careful as the normal green lights may be malfunctioning as the Fed’s very aggressive easing campaign, which has sent interest rates very low, has a way of causing investors to misprice risk.
Corporate spreads have certainly narrowed, no arguing that, but it’s tough to tell whether this has occurred because the market believes earnings will rebound in strong fashion (hence default risk has eased substantially) or because investors have pushed corporate bond prices higher as they hunt for yield in this very low interest rate environment. Too be sure, one should also acknowledge that spreads remain at levels seen during the typical recessionary environment. Like so many economic indicators today, what we’re seeing may not be an all-clear signal but simply a move from economic armageddon to something that more closely resembles a normal downturn scenario.
BBB Rated Spread over the 10-Year Treasury
A repeating theme of this letter over the past couple of months has been that of caution. I just want people to be aware of how things look, not only relative to the deep contraction scenario of the previous several months, but to past economic downturns. When we compare the data to past contractions it tells us that we have moved to an environment of normal recession (from the worst since at least the 1957-58 contraction) rather than to a situation in which the business cycle is poised to expand with vigor.
Existing Home Sales
Well, I tried to offer some optimism over the past few days, estimating that previously owned home sales would blow by very low expectations, but it was not the case. A 6.7% rise in the latest pending home sales data sure seemed to suggest a bounce would take place, but the credit markets remain relatively fragile and some of these mortgage contracts may not be making it to the close. In addition, fixed mortgage rates spent the month of May below the 5.00% level, and May is one of the top three sales months of the year; combine that with the tax credit of $8,000 for first-time home borrowers and if these factors couldn’t produce a larger bounce you’re not going to get it until the largest factor of them all – the job market – improves markedly.
But getting to the data, the National Association of Realtors reported that existing home sales rose 2.4% in May to 4.77 million units at an annual rate – and that was from a downwardly revised level for April. The market expected sales to rise 3% from the higher initial April reading. Even the lower-than-expected reading was boosted by a 6.1% rise in multi-family units (co-ops and condos), single-family units rose just 1.9%.
As you may remember, we’ve been gauging single-family units against the December reading (the 12-year low put in place in January was largely due to worse-than-normal weather, which skewed the bounce back in February, so that December reading is the level with which I think makes most sense to gauge things instead of simply using the previous month). Single-family units came in smack dab at that 4.25 million annual rate hit in December. So, we have yet to get past that reading to this point and while it sure appears that the housing market has bottomed we have yet to bounce off of the weather-adjusted depressed levels.
The broad market came under pressure during the morning session after the latest housing market report showed activity remains very weak despite a number of policy decisions that were meant to offset a troubled environment for the consumer. But financial, basic material and telecom shares helped propel the S&P 500 to the plus side by the close.
Consumer discretionary shares were among the worst performing sectors after memory-chip designer Rambus Inc. reduced its second-quarter revenue forecast, citing weak demand for consumer electronics. This news certainly didn’t help tech shares either.
Market Activity for June 23, 2009
Credit SpreadsThere has been a lot of talk about the narrowing of credit spreads – the difference between Treasury yields (known as the risk-free rate) and the yields on variously rated corporate bonds. This is normally a key signal regarding financial market improvement and that economic growth prospects have increased. Like so many things in this environment, however, we need to be careful as the normal green lights may be malfunctioning as the Fed’s very aggressive easing campaign, which has sent interest rates very low, has a way of causing investors to misprice risk.
Corporate spreads have certainly narrowed, no arguing that, but it’s tough to tell whether this has occurred because the market believes earnings will rebound in strong fashion (hence default risk has eased substantially) or because investors have pushed corporate bond prices higher as they hunt for yield in this very low interest rate environment. Too be sure, one should also acknowledge that spreads remain at levels seen during the typical recessionary environment. Like so many economic indicators today, what we’re seeing may not be an all-clear signal but simply a move from economic armageddon to something that more closely resembles a normal downturn scenario.
BBB Rated Spread over the 10-Year Treasury
A repeating theme of this letter over the past couple of months has been that of caution. I just want people to be aware of how things look, not only relative to the deep contraction scenario of the previous several months, but to past economic downturns. When we compare the data to past contractions it tells us that we have moved to an environment of normal recession (from the worst since at least the 1957-58 contraction) rather than to a situation in which the business cycle is poised to expand with vigor.
Existing Home Sales
Well, I tried to offer some optimism over the past few days, estimating that previously owned home sales would blow by very low expectations, but it was not the case. A 6.7% rise in the latest pending home sales data sure seemed to suggest a bounce would take place, but the credit markets remain relatively fragile and some of these mortgage contracts may not be making it to the close. In addition, fixed mortgage rates spent the month of May below the 5.00% level, and May is one of the top three sales months of the year; combine that with the tax credit of $8,000 for first-time home borrowers and if these factors couldn’t produce a larger bounce you’re not going to get it until the largest factor of them all – the job market – improves markedly.
But getting to the data, the National Association of Realtors reported that existing home sales rose 2.4% in May to 4.77 million units at an annual rate – and that was from a downwardly revised level for April. The market expected sales to rise 3% from the higher initial April reading. Even the lower-than-expected reading was boosted by a 6.1% rise in multi-family units (co-ops and condos), single-family units rose just 1.9%.
As you may remember, we’ve been gauging single-family units against the December reading (the 12-year low put in place in January was largely due to worse-than-normal weather, which skewed the bounce back in February, so that December reading is the level with which I think makes most sense to gauge things instead of simply using the previous month). Single-family units came in smack dab at that 4.25 million annual rate hit in December. So, we have yet to get past that reading to this point and while it sure appears that the housing market has bottomed we have yet to bounce off of the weather-adjusted depressed levels.
The supply of previously-owned homes (relative to the rate of sales) remains elevated at 9.0 months worth. This is down nicely from the peak of 11.0 months worth hit a year ago but needs to come down to 6-7 months worth before the residential market will begin adding to GDP again.
The median price on existing homes rose 4% last month to $172,900 after hitting $166,000 in April -- the multi-year low of $164,200 was put in in January. From a year-ago perspective, the median price for existing homes is down 17%.
Richmond Fed
The latest reading out of the Richmond Federal Reserve Bank’s manufacturing gauge continued to show nice improvement in June. The Richmond Fed index rose to 6 in June from a reading of 4 for May – a reading above zero marks expansion, unlike the nationwide ISM index and the Chicago manufacturing report in which 50 is the dividing line between expansion and contraction.
The sub-indices of the report also registered very positive results, as the new orders index jumped to 16 from 10; order backlog rose to 8 from -3; and the average workweek rose to 8 from 5.
However, respondent expectations for these readings over the next six months weakened a bit, which offset some of the aforementioned positives.
All in all, this is not a closely watched reading as the Richmond Fed index is one of the smaller regional factory reports. Still, I thought it was worthwhile to touch on the results as we’ll take every positive reading we can get.
The big ones are Chicago (the largest and most watched regional factory report) and ISM (the nationwide factory index), both of which will be released at the end of the month. The other regional surveys we received thus far for June had pretty much offset one another -- New York factory activity fell, while Philly-area manufacturing rose -- and that is why Chicago and ISM are immensely important right now. (Note: it will not take a move to expansion on Chicago to be considered a good number as everyone understands auto-industry woes will weigh on the figure. If it can manage a rise to the low 40s (the May reading fell back to 34.9) and we can get ISM back to 45 it will be very helpful for stocks.
Have a great day!
Brent Vondera
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