U.S. stocks ended mixed on Wednesday as the Dow and NASDAQ Composite closed slightly higher, while the broad S&P 500 was unable to make it back to the flat line. The major indices spent most of the day lower on concern second-quarter earnings season will disappoint investors, but erased those losses (nearly all of what was a 1.4% decline at its lowest point regarding the S&P 500) in the final hour of trading.
It appeared to be a better-than-expected consumer credit report for May, which was released around 2:00 CDT, that helped boost stocks late in the session. This is not normally a heavily-watched report but with consumer activity in the shape it is in, these readings garner increased attention. The report out of the Federal Reserve showed consumer credit shrank $3.2 billion at an annual rate; it was expected to drop by $8.8 billion. Revolving credit (such as credit cards), fell $2.9 billion, while non-revolving (such as car loans) came in essentially flat. The average maturity on car loans rose to 62.9 months and the loan-to-value increased to 93% in May. Yow!
Health-care and consumer-related shares helped to buoy stocks with their late-session surge. Financial shares weighed on the broad S&P 500 index – the sector, which makes up 13.2% of the index, lost 1.7% for the session.
More than two stocks fell for every one that rose on the NYSE Composite. Roughly 1.3 billion shares traded on the Big Board, about 7% below the three-month average – while relatively weak again, yesterday’s volume was the most in seven sessions.
Market Activity for July 8, 2009
Mortgage Applications
The Mortgage Bankers Association reported its mortgage apps index rose 10.9% for the week ended July 3 as refinancing activity jumped 15.2% and purchases rose 6.7% despite a 30-year fixed mortgage rate that held at 5.34% for a second week. (Just to explain to new readers, we do not view a 5.00% fixed rate as onerous per se, from a historical perspective this is super low as anything below 7.5% is viewed as very attractive from a long-term perspective. However these days people have become accustomed to view anything above 6.00% as high and with the job market in the shape it is in, we’ve seen it is rather unusual to see such a large increase in refis and purchases at a rate higher than 5.00%)
I can’t explain the jump in refis, maybe enough people who had been holding out for the long mortgage rates to come back below 5.00% threw in the towel and went for it. On the purchases side, it’s not quite as surprising as foreclosure-driven price declines have enticed buyers – average existing home prices are 25% off the peak hit in the summer of 2006.
Crude-Oil
Oil for August delivery fell for a sixth session, lower by 4.4% to $60.17 per barrel, as the latest Energy Department report showed fuel inventories rose more than expected. Crude is now down 17% from the recent intraday high of $73 touched on June 29.
While crude stockpiles fell 2.9 million barrels, gasoline inventories climbed 1.9 million barrels – more than twice the level expected -- and distillates (heating oil and diesel) rose 3.74 million – a gain of just 1.83 million barrels was expected. In addition, total U.S. daily fuel demand averaged 18.4 million barrels in the past month, down 5.9% form the year-ago period. Distillate consumption fell 12% to the lowest level since July 1999.
Just as the stimulus plans, with regard to both the U.S. and China, had helped foster the rise in energy prices, now that the economy is failing to show the improvement expected people are beginning to question the effectiveness of these plans. This is now moving crude in the opposite direction. And speaking of oil trading…
Increasing Regulations on Commodity Trading
The government will consider greater regulation over energy markets at hearings this month. Specifically, they want to weed out the “speculators” that drive prices higher. They leave out that this essential aspect of the market also drives prices lower at other points in time and is pretty important to the price discovery process.
The government seeks to reduce the use of commodity swaps, which are derivatives used to hedge positions. While regulators will surely allow large consumers (such and airlines and other transportation companies) and producers of energy to have nearly unlimited positions, they will go after the scapegoat of hedge funds and investment banks. When prices are rising, these are the easy targets and in this current environment of populism, the regulators will likely get their way in putting onerous restrictions on commodity trading for these players.
I would also point out that performance chasers are also a reason for spikes in commodity prices (such as all of those pension funds that jumped into the energy market last summer), but that doesn’t exactly make them rogue traders. Further, a burdensome regulatory regime will drive participants out of the market and less liquidity doesn’t exactly make for a better pricing mechanism – the swings could be more dramatic than would otherwise be the case. Ah, the world of unintended consequences.
It’s always easy for politicians to point the finger at others, even when it is the ignorance and short-sighted nature of Washington that causes most of society’s problems. I wish more people would consider that it just may be reckless and insensible policy that causes traders to make the bets they do. When supplies are tight, demand is strong and energy policy is ignorant of geopolitical realities, just maybe the market is simply adjusting to the situations in place at any given moment in time. Just as politicians fail to realize how utterly stupid it sounds to call for less foreign dependence on energy, while simultaneously restricting the production of domestic energy, they also fail to look inward. All the regulations in the world can’t stop poor policy decisions from causing adverse consequences for the consumer and the country in general.
So go ahead with your regulatory regime, you geniuses of how the world works. You still won’t be able to stop energy prices from adjusting to mistaken policy decisions; you won’t be able stop traders from expecting commodity prices to rise and then jumping onto that train when you signal hundreds of billions of dollars in infrastructure spending is coming; you won’t be able to stop foreign governments from buying up commodities (thus pushing the prices higher) as a way to hedge against the falling value of their dollar positions – unless, of course, we bring back price controls, but then shortages ensue. Say hello to That ‘70s Show! Eventually though, quixotic notions run into the brick wall of reality. We’ve learned these lessons; apparently we need to be taught again. Oh, joy.
Have a great day!
Brent Vondera
It appeared to be a better-than-expected consumer credit report for May, which was released around 2:00 CDT, that helped boost stocks late in the session. This is not normally a heavily-watched report but with consumer activity in the shape it is in, these readings garner increased attention. The report out of the Federal Reserve showed consumer credit shrank $3.2 billion at an annual rate; it was expected to drop by $8.8 billion. Revolving credit (such as credit cards), fell $2.9 billion, while non-revolving (such as car loans) came in essentially flat. The average maturity on car loans rose to 62.9 months and the loan-to-value increased to 93% in May. Yow!
Health-care and consumer-related shares helped to buoy stocks with their late-session surge. Financial shares weighed on the broad S&P 500 index – the sector, which makes up 13.2% of the index, lost 1.7% for the session.
More than two stocks fell for every one that rose on the NYSE Composite. Roughly 1.3 billion shares traded on the Big Board, about 7% below the three-month average – while relatively weak again, yesterday’s volume was the most in seven sessions.
Market Activity for July 8, 2009
Mortgage ApplicationsThe Mortgage Bankers Association reported its mortgage apps index rose 10.9% for the week ended July 3 as refinancing activity jumped 15.2% and purchases rose 6.7% despite a 30-year fixed mortgage rate that held at 5.34% for a second week. (Just to explain to new readers, we do not view a 5.00% fixed rate as onerous per se, from a historical perspective this is super low as anything below 7.5% is viewed as very attractive from a long-term perspective. However these days people have become accustomed to view anything above 6.00% as high and with the job market in the shape it is in, we’ve seen it is rather unusual to see such a large increase in refis and purchases at a rate higher than 5.00%)
I can’t explain the jump in refis, maybe enough people who had been holding out for the long mortgage rates to come back below 5.00% threw in the towel and went for it. On the purchases side, it’s not quite as surprising as foreclosure-driven price declines have enticed buyers – average existing home prices are 25% off the peak hit in the summer of 2006.
Crude-OilOil for August delivery fell for a sixth session, lower by 4.4% to $60.17 per barrel, as the latest Energy Department report showed fuel inventories rose more than expected. Crude is now down 17% from the recent intraday high of $73 touched on June 29.
While crude stockpiles fell 2.9 million barrels, gasoline inventories climbed 1.9 million barrels – more than twice the level expected -- and distillates (heating oil and diesel) rose 3.74 million – a gain of just 1.83 million barrels was expected. In addition, total U.S. daily fuel demand averaged 18.4 million barrels in the past month, down 5.9% form the year-ago period. Distillate consumption fell 12% to the lowest level since July 1999.Just as the stimulus plans, with regard to both the U.S. and China, had helped foster the rise in energy prices, now that the economy is failing to show the improvement expected people are beginning to question the effectiveness of these plans. This is now moving crude in the opposite direction. And speaking of oil trading…
Increasing Regulations on Commodity Trading
The government will consider greater regulation over energy markets at hearings this month. Specifically, they want to weed out the “speculators” that drive prices higher. They leave out that this essential aspect of the market also drives prices lower at other points in time and is pretty important to the price discovery process.
The government seeks to reduce the use of commodity swaps, which are derivatives used to hedge positions. While regulators will surely allow large consumers (such and airlines and other transportation companies) and producers of energy to have nearly unlimited positions, they will go after the scapegoat of hedge funds and investment banks. When prices are rising, these are the easy targets and in this current environment of populism, the regulators will likely get their way in putting onerous restrictions on commodity trading for these players.
I would also point out that performance chasers are also a reason for spikes in commodity prices (such as all of those pension funds that jumped into the energy market last summer), but that doesn’t exactly make them rogue traders. Further, a burdensome regulatory regime will drive participants out of the market and less liquidity doesn’t exactly make for a better pricing mechanism – the swings could be more dramatic than would otherwise be the case. Ah, the world of unintended consequences.
It’s always easy for politicians to point the finger at others, even when it is the ignorance and short-sighted nature of Washington that causes most of society’s problems. I wish more people would consider that it just may be reckless and insensible policy that causes traders to make the bets they do. When supplies are tight, demand is strong and energy policy is ignorant of geopolitical realities, just maybe the market is simply adjusting to the situations in place at any given moment in time. Just as politicians fail to realize how utterly stupid it sounds to call for less foreign dependence on energy, while simultaneously restricting the production of domestic energy, they also fail to look inward. All the regulations in the world can’t stop poor policy decisions from causing adverse consequences for the consumer and the country in general.
So go ahead with your regulatory regime, you geniuses of how the world works. You still won’t be able to stop energy prices from adjusting to mistaken policy decisions; you won’t be able stop traders from expecting commodity prices to rise and then jumping onto that train when you signal hundreds of billions of dollars in infrastructure spending is coming; you won’t be able to stop foreign governments from buying up commodities (thus pushing the prices higher) as a way to hedge against the falling value of their dollar positions – unless, of course, we bring back price controls, but then shortages ensue. Say hello to That ‘70s Show! Eventually though, quixotic notions run into the brick wall of reality. We’ve learned these lessons; apparently we need to be taught again. Oh, joy.
Have a great day!
Brent Vondera
1 comment:
Wow. Thanks for the information!
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