U.S. stocks spent nearly the entire session lower on Monday as disappointing earnings results from Verizon, and to a lesser extent Aetna, appeared to offset the biggest jump in new home sales in eight years. But it’s tough to keep a good market down, the major indices rallied in the final minutes of trading to close higher.
Verizon’s results received a lot of attention yesterday and seemed to be the main reason stocks spent much of the day below the cut line. Between the company’s enterprise business (illustrating the business community remains in caution mode) and phone line (showing the troubled nature of both households and business) segments, the results weren’t helpful for the more optimistic of economic outlooks.
Financials, industrials, material and energy stocks led the way – material stocks got a boost from another big day for Dr. Copper; the metal continues to suggest reflation is in the works; energy caught a bid as oil extended its winning streak to nine sessions. Our dear dollar, down again.
Information technology, utility and consumer staple shares struggled. These areas weren’t down by much but were the only three of the major industry groups that failed to show green.
Market Activity for July 27, 2009
Shrinking Loan Activity
An analysis by the Wall Street Journal shows that total loans at the top 15 U.S. banks (which account for 47% of federally insured deposits) fell 2.8% in the second quarter. More than half of the loan volume came from refinancing activity and renewing existing credit lines, not new loans.
This is why we caution taking too much from indicators such as a very steep yield curve – under normal circumstances such a large difference between the rate at which banks borrow and the level at which they loan money would make for a green light in terms of economic activity, but this is not a normal contraction. Another factor leading to lower loan activity is the fact that the demand for loans is also down. Commercial and industrial (C&I) loans are off 14% at an annual rate year-to-date, as measured by the St. Louis Federal Reserve Bank.
Loan activity will eventually rebound of course, but it will take time and in the meantime will put pressure on economic growth.
New Home Sales
The Commerce Department reported that new home sales jumped 11% in June to 384,000 at an annual pace, blowing by the estimate for just 352,000 (although the 36,000 new homes that were sold in the entire country last month was less than the 45,000 foreclosure filings in California alone during June).
This marks the third-straight month of increase, just as existing home sales have recorded, yet the three-month average of 356,000 remains below the December reading of 374,000. (That December reading is a number we’re watching as a level to gauge future sales activity against as the actual low put in on new home sales that occurred in January was due to harsh weather conditions, and the weak results in April and May were likely affected by two months of very rainy conditions, so I view the December figure as the weather-adjusted low).
Sales of new homes are down 21% from the year-ago period, but falling prices (down a huge 5.8% in June) and near record low mortgage rates are now helping to offset high levels of joblessness.
In terms of region, new home sales jumped 43% in the Midwest, 29% in the Northeast (although not much of a player in the new home market) and 23% in the West (the combination of plunging prices and California’s additional $10K tax credit for new home purchases is driving sales in this region). Sales declined 5% in the South, the largest market for new homes.
The median price of a new home fell 12% to $206,200 from $234,300 in June 2008.
The inventory-to-sales ratio remains elevated, but the three-month rally in sales and a huge decline in construction have made very nice progress in pushing this number lower. The inventory-to sales ratio for new homes declined to 8.8 months’ worth, down from 10.2 in May. Let’s hope the labor market has made a significant turn for the better several months out because the housing market will need it when the tax credits expire and very low interest rates are no longer with us.
The new-home sales report kicked off a big week of data.
Today
Case/Shiller Home Price Index (May) – it’s so outdated but gets a lot of attention; C/S should show another month of mild improvement but its heavy exposure to foreclosure-riddled areas will keep it depressed relative to other housing indicators
Conference Board’s Consumer Confidence Survey (July) – expect it to fall after the big June job losses, although rising stock prices should offer some support
Wednesday
Mortgage Applications (w/e July 24)
Durable Goods (June) – expect it to fall after two months of gain, businesses are not yet close to spending and consumer-appliance sales will remain subdued
Thursday
Initial Jobless Claims (w/e July 25) – watch it move higher as firms continue to shed jobs; it will be interesting to see how continuing claims react after two weeks of big declines, a function of benefits expiring?
Friday
GDP (initial estimate for Q2) – expect a decline of 1.5%-2.0%, marking the fourth-straight quarter of decline; prior to this contraction we have not had more than two-straight negative quarters going back to WWII
Chicago Purchasing Managers Index (July) – it should move mildly higher but remain in contraction mode with auto production weak
In addition to this data we’ll get a number of Treasury auctions totaling $200 billion in debt issuance – these auctions are typically non-events but are closely watched now with massive government borrowing and the heavy debt issuance that results. The day that one of these auctions “fail,” people say no to a sub-4% 10-year note, will mark another trouble spot for the equity markets.
Have a great day!
Brent Vondera, Senior Analyst
Verizon’s results received a lot of attention yesterday and seemed to be the main reason stocks spent much of the day below the cut line. Between the company’s enterprise business (illustrating the business community remains in caution mode) and phone line (showing the troubled nature of both households and business) segments, the results weren’t helpful for the more optimistic of economic outlooks.
Financials, industrials, material and energy stocks led the way – material stocks got a boost from another big day for Dr. Copper; the metal continues to suggest reflation is in the works; energy caught a bid as oil extended its winning streak to nine sessions. Our dear dollar, down again.
Information technology, utility and consumer staple shares struggled. These areas weren’t down by much but were the only three of the major industry groups that failed to show green.
Market Activity for July 27, 2009Shrinking Loan ActivityAn analysis by the Wall Street Journal shows that total loans at the top 15 U.S. banks (which account for 47% of federally insured deposits) fell 2.8% in the second quarter. More than half of the loan volume came from refinancing activity and renewing existing credit lines, not new loans.
This is why we caution taking too much from indicators such as a very steep yield curve – under normal circumstances such a large difference between the rate at which banks borrow and the level at which they loan money would make for a green light in terms of economic activity, but this is not a normal contraction. Another factor leading to lower loan activity is the fact that the demand for loans is also down. Commercial and industrial (C&I) loans are off 14% at an annual rate year-to-date, as measured by the St. Louis Federal Reserve Bank.
Loan activity will eventually rebound of course, but it will take time and in the meantime will put pressure on economic growth.
New Home Sales
The Commerce Department reported that new home sales jumped 11% in June to 384,000 at an annual pace, blowing by the estimate for just 352,000 (although the 36,000 new homes that were sold in the entire country last month was less than the 45,000 foreclosure filings in California alone during June).
This marks the third-straight month of increase, just as existing home sales have recorded, yet the three-month average of 356,000 remains below the December reading of 374,000. (That December reading is a number we’re watching as a level to gauge future sales activity against as the actual low put in on new home sales that occurred in January was due to harsh weather conditions, and the weak results in April and May were likely affected by two months of very rainy conditions, so I view the December figure as the weather-adjusted low).
Sales of new homes are down 21% from the year-ago period, but falling prices (down a huge 5.8% in June) and near record low mortgage rates are now helping to offset high levels of joblessness.In terms of region, new home sales jumped 43% in the Midwest, 29% in the Northeast (although not much of a player in the new home market) and 23% in the West (the combination of plunging prices and California’s additional $10K tax credit for new home purchases is driving sales in this region). Sales declined 5% in the South, the largest market for new homes.
The median price of a new home fell 12% to $206,200 from $234,300 in June 2008.
The inventory-to-sales ratio remains elevated, but the three-month rally in sales and a huge decline in construction have made very nice progress in pushing this number lower. The inventory-to sales ratio for new homes declined to 8.8 months’ worth, down from 10.2 in May. Let’s hope the labor market has made a significant turn for the better several months out because the housing market will need it when the tax credits expire and very low interest rates are no longer with us.The new-home sales report kicked off a big week of data.Today
Case/Shiller Home Price Index (May) – it’s so outdated but gets a lot of attention; C/S should show another month of mild improvement but its heavy exposure to foreclosure-riddled areas will keep it depressed relative to other housing indicators
Conference Board’s Consumer Confidence Survey (July) – expect it to fall after the big June job losses, although rising stock prices should offer some support
Wednesday
Mortgage Applications (w/e July 24)
Durable Goods (June) – expect it to fall after two months of gain, businesses are not yet close to spending and consumer-appliance sales will remain subdued
Thursday
Initial Jobless Claims (w/e July 25) – watch it move higher as firms continue to shed jobs; it will be interesting to see how continuing claims react after two weeks of big declines, a function of benefits expiring?
Friday
GDP (initial estimate for Q2) – expect a decline of 1.5%-2.0%, marking the fourth-straight quarter of decline; prior to this contraction we have not had more than two-straight negative quarters going back to WWII
Chicago Purchasing Managers Index (July) – it should move mildly higher but remain in contraction mode with auto production weak
In addition to this data we’ll get a number of Treasury auctions totaling $200 billion in debt issuance – these auctions are typically non-events but are closely watched now with massive government borrowing and the heavy debt issuance that results. The day that one of these auctions “fail,” people say no to a sub-4% 10-year note, will mark another trouble spot for the equity markets.
Have a great day!
Brent Vondera, Senior Analyst
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