U.S. stocks endured a broad-based decline on Monday, despite good economic prints on the day, as fear spread that the global economy will remain weaker than expected.
U.S. market sentiment took a hit after the Asian markets dealt with their most pronounced weakness in several months the night before, and the pessimism extended into the official trading session. It will be interesting to watch if buying comes back in after a 5%-10% move lower (if that even occurs yet – there seems to be an awful lot of people waiting for any pullback as a chance to get back in) or we retrench in a more substantive manner after the 52% surge off of the nefarious March 9 low of 666 on the S&P 500.
Indeed, headlines touching on the possibility that stock markets have gotten ahead of economic realities have abounded over the past week after the latest retail sales report showed the “cash for clunkers” spurred bounce in auto sales was not even enough to lift overall sales. A consumer that will need to reduce debt levels as the unemployment rate sits at a 26-year high and incomes remain stagnate for an extended period is a major concern for economic growth prospects.
Health-care stocks were the best performing group on the session as full-blown single-payer healthcare appears dead, for now. The grassroots-driven assault on this treacherous agenda is the best news I’ve seen in nine months. For the record, these comments are purely my own and I do not speak for the firm in this regard.
Financials led all major industry groups to the downside as 30-day credit-card delinquencies remained high. The 30-day delinquency rate did increase at a slower pace (4.2% in July vs. 4.4% in June at AmEx; 8.43% vs. 8.75% at Discover; 13.81% vs. 13.86% at Bank of America) but not enough to help the bank stocks.
Market Activity for August 17, 2009
Empire Manufacturing
New York–area factory activity, as measured by the Empire Manufacturing index, posted some really nice numbers on Monday. The overall index jumped to 12.08 for August after basically flat-lining in July and enduring 15 months of decline.
Among the survey’s sub-indices: New orders moved to 13.83 from 10.42. Shipments came in at 14.11 from 10.97. Delivery times fell at a lower rate, -10.64 vs. -14.58. The average workweek declined at a softer pace as well, -6.38 vs. -19.79 in July.
We should see the factory gauges pick up steam, and the broad ISM figure will even make it to expansion mode, as auto production picks up and that overall inventory dynamic we’ve talked about for a couple of months now eventually occurs. But it may very well slip again after a few months of increase as the car subsidizations expire in December. This is also true for consumer activity as the big rebound in auto sales adds to debt levels and borrows from future spending.
Treasury Inflow Capital (TIC) Report
Longer-term Treasury market inflows for June, a report that is always two months in arrears, showed net foreign inflows rose $90 billion (much greater than the $17.5 billion increase that was expected). Sponsorship in the Treasury market remains very good, as is evident via the very low interest-rate environment (higher bonds prices mean lower yields as the two are inversely related).
Although on the short-term side, inflows into T-bills fell $11 billion in June – maybe a portent of things to come as we look out a couple of quarters.
At some point, it is difficult to see demand for Treasury securities continuing at this pace absent some major geopolitical event or other situation that keeps the safety trade rolling. When the global market is no longer willing to purchase U.S. government bonds at yields of just 1% (on the 2-yr Treasury) to 4.35% (on the 30-year) as investors and governments demand higher protection against future inflation, these inflows will slow substantially. And speaking of dollar-denominated assets…
The Dollar
The greenback rallied yesterday, which is the trend these days when the equity market’s sell off – it’s all about the safety trade, even if that trade is defined differently today with economic “Armageddon” behind us now.
(And on this topic of severe economic weakness, I found a comment from Holman Jenkins in yesterday’s WSJ editorial page apropos to the current environment: “Recall that the deepest damage in the 1930s was not done by a misallocation of capital during the bubble years, but by the destructive political imperatives unleashed in the bubble’s aftermath.” This is certainly a concern that must be acknowledged as we look out over the next couple of years).
But back to the dollar, as we’ve discussed many times before, this is a rather disturbing trend. Under more sound scenarios, the dollar would rally on expectations regarding U.S. economic growth. The fact that the converse is in effect, that it takes a state of concern for the dollar to find a bid, is not a good sign for old green. When the bill for the way we’ve dealt with this credit-market led recession (higher tax rates and the move to higher interest rates – if this combination occurs it will cause the deplorable double dip) the dollar will endure a period of sustained weakness before rising again as those higher interest rates encourage the next phase of demand for dollar-denominated assets.
Fed Extends TALF
The Federal Reserve decided to extend the TALF (Term Asset Backed Loan Facility) for six months as the asset-backed and commercial mortgage-backed markets remain impaired. There is $165 billion in commercial loans that will have to be rolled this year and the Fed knows this will be an issue for the economy. The credit channels would remain very tight if not for government back-stopping and other assistance.
Funny how Bernanke & Co. waited a few days to announce this extension, it’s becoming a trend to omit this stuff from the FOMC meeting comments.
Futures
Stock-index futures are on the rise as I type, reversing early-morning weakness, as Home Depot’s earnings results beat expectations and management bumped its fiscal 2009 guidance. The company now believes adjusted earnings per share from continuing operations to be down in a range of 15%-20%, the prior forecast was for a decline of 20%-26%.
Have a great day!
Brent Vondera, Senior Analyst
U.S. market sentiment took a hit after the Asian markets dealt with their most pronounced weakness in several months the night before, and the pessimism extended into the official trading session. It will be interesting to watch if buying comes back in after a 5%-10% move lower (if that even occurs yet – there seems to be an awful lot of people waiting for any pullback as a chance to get back in) or we retrench in a more substantive manner after the 52% surge off of the nefarious March 9 low of 666 on the S&P 500.
Indeed, headlines touching on the possibility that stock markets have gotten ahead of economic realities have abounded over the past week after the latest retail sales report showed the “cash for clunkers” spurred bounce in auto sales was not even enough to lift overall sales. A consumer that will need to reduce debt levels as the unemployment rate sits at a 26-year high and incomes remain stagnate for an extended period is a major concern for economic growth prospects.
Health-care stocks were the best performing group on the session as full-blown single-payer healthcare appears dead, for now. The grassroots-driven assault on this treacherous agenda is the best news I’ve seen in nine months. For the record, these comments are purely my own and I do not speak for the firm in this regard.
Financials led all major industry groups to the downside as 30-day credit-card delinquencies remained high. The 30-day delinquency rate did increase at a slower pace (4.2% in July vs. 4.4% in June at AmEx; 8.43% vs. 8.75% at Discover; 13.81% vs. 13.86% at Bank of America) but not enough to help the bank stocks.
Market Activity for August 17, 2009
Empire ManufacturingNew York–area factory activity, as measured by the Empire Manufacturing index, posted some really nice numbers on Monday. The overall index jumped to 12.08 for August after basically flat-lining in July and enduring 15 months of decline.
Among the survey’s sub-indices: New orders moved to 13.83 from 10.42. Shipments came in at 14.11 from 10.97. Delivery times fell at a lower rate, -10.64 vs. -14.58. The average workweek declined at a softer pace as well, -6.38 vs. -19.79 in July.We should see the factory gauges pick up steam, and the broad ISM figure will even make it to expansion mode, as auto production picks up and that overall inventory dynamic we’ve talked about for a couple of months now eventually occurs. But it may very well slip again after a few months of increase as the car subsidizations expire in December. This is also true for consumer activity as the big rebound in auto sales adds to debt levels and borrows from future spending.
Treasury Inflow Capital (TIC) Report
Longer-term Treasury market inflows for June, a report that is always two months in arrears, showed net foreign inflows rose $90 billion (much greater than the $17.5 billion increase that was expected). Sponsorship in the Treasury market remains very good, as is evident via the very low interest-rate environment (higher bonds prices mean lower yields as the two are inversely related).
Although on the short-term side, inflows into T-bills fell $11 billion in June – maybe a portent of things to come as we look out a couple of quarters.
At some point, it is difficult to see demand for Treasury securities continuing at this pace absent some major geopolitical event or other situation that keeps the safety trade rolling. When the global market is no longer willing to purchase U.S. government bonds at yields of just 1% (on the 2-yr Treasury) to 4.35% (on the 30-year) as investors and governments demand higher protection against future inflation, these inflows will slow substantially. And speaking of dollar-denominated assets…
The Dollar
The greenback rallied yesterday, which is the trend these days when the equity market’s sell off – it’s all about the safety trade, even if that trade is defined differently today with economic “Armageddon” behind us now.
(And on this topic of severe economic weakness, I found a comment from Holman Jenkins in yesterday’s WSJ editorial page apropos to the current environment: “Recall that the deepest damage in the 1930s was not done by a misallocation of capital during the bubble years, but by the destructive political imperatives unleashed in the bubble’s aftermath.” This is certainly a concern that must be acknowledged as we look out over the next couple of years).
But back to the dollar, as we’ve discussed many times before, this is a rather disturbing trend. Under more sound scenarios, the dollar would rally on expectations regarding U.S. economic growth. The fact that the converse is in effect, that it takes a state of concern for the dollar to find a bid, is not a good sign for old green. When the bill for the way we’ve dealt with this credit-market led recession (higher tax rates and the move to higher interest rates – if this combination occurs it will cause the deplorable double dip) the dollar will endure a period of sustained weakness before rising again as those higher interest rates encourage the next phase of demand for dollar-denominated assets.
Fed Extends TALF
The Federal Reserve decided to extend the TALF (Term Asset Backed Loan Facility) for six months as the asset-backed and commercial mortgage-backed markets remain impaired. There is $165 billion in commercial loans that will have to be rolled this year and the Fed knows this will be an issue for the economy. The credit channels would remain very tight if not for government back-stopping and other assistance.
Funny how Bernanke & Co. waited a few days to announce this extension, it’s becoming a trend to omit this stuff from the FOMC meeting comments.
Futures
Stock-index futures are on the rise as I type, reversing early-morning weakness, as Home Depot’s earnings results beat expectations and management bumped its fiscal 2009 guidance. The company now believes adjusted earnings per share from continuing operations to be down in a range of 15%-20%, the prior forecast was for a decline of 20%-26%.
Have a great day!
Brent Vondera, Senior Analyst
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