U.S. stock indices gained back about half of Monday’s pullback on better-than-expected earnings out of Home Depot and a measure of European investor sentiment jumped to the highest reading in three years.
The news out of Home Depot turned futures around yesterday morning, although the results were only positive on a relative basis, as we pointed out in Monday’s letter – HD’s 2009 EPS guidance improved as the company now expects earnings to fall in a range of 15-20% vs. the prior forecast of a 20-26% decline; hardly a situation that should get anyone excited but it doesn’t seem to take much these days, my how things change when stocks are on the rise.
It was that European investor confidence reading that likely played a greater role in driving bids higher, specifically German investor confidence, as what is known as the ZEW index jumped well more than anticipated. The ZEW is a gauge that aims to predict economic prospects six months in advance. The figure rose to 56.1 for August from 39.1 in July. (The ZEW’s gauge of current economic conditions rose to -77.2 from -89.3 in July; to offer some perspective, the all-time low of -92.8 was hit in May. Needless to say, views about the current situation remain flimsy).
Market Activity for August 18, 2009
Housing Starts
The Commerce Department reported that housing starts fell 1% in July after a significant bounce during the previous two months – up 6.5% in June and 15% in May, which was off of the all-time low hit in April. Housing starts came in at 581,000 units at an annual pace last month from 587,000 units in June. The market was expecting starts to increase to 599K.
A decline in starts should be viewed as a good thing. While it is true that a rise in residential construction will help GDP in the short term, we don’t exactly need more supply within the housing market. Unfortunately, the decline came totally from the multi-family side of things, down 13.3% in July; single-family construction rose 1.7% after a 17.8% rise in June and a 5.4% increase in May.
I think the trading mentality within the stock market actually liked the pick up in single-family starts as the focus seems to be quite short-term in nature (and on this topic, just listen to how institutional money managers talk, they know this thing in short-lived based on a number of factors; they’re chasing this last hoorah before tax rates on capital returns rise and interest rates go higher – the bill to be paid for all of this fiscal stimulus, not to mention the increase in regulations to come).
But with the job market in the shape it is in, the most important factor with regard to home sales, we could be setting up for additional weakness in residential construction a few months out as the supply figures build from what are still elevated levels. Just as Chairman Bernanke explained in the spring, it takes GDP growth of 2.5% to keep the jobless rate constant. Odds are we won’t hit these levels of growth outside of one-two quarter pops as consumer activity heads back to it historic average. Thus, adding to home supply here will only delay the housing recovery.
Further, foreclosures remain a threat to supply. While a foreclosure-driven decline in prices does help sales, there are estimates that roughly $3.5 trillion worth of home properties are still at risk of default because the owners owe more than the property is worth. This is a double-edged sword that may also add to supply.
It would be much better to continue to allow for the inventory/sales ratio to keep heading south, we’ll be better off 12-18 months down the road
Housing permits, an indication for residential construction over the next few months, fell 1.8% in July after a 10% pop in June. Just as in housing starts, this decline in the permits data for July resulted from the multi-family side as permits for condos, townhouses and apartments fell 25.5%. Single-family permits rose 5.8%.
Producer Prices
On the inflation front, the Labor Department reported that the producer price index (PPI) fell a large 0.9% in July after a 1.8% rise in June. A 10% decline in the gasoline component was responsible for much of the move lower, but even the ex-energy reading dropped 0.4% last month. Basically residential gas and prescriptions were the only components to post an increase.
On a year-over-year basis, PPI posted its largest decline yet, down 6.8% as the figure is being compared to the height of last summer’s commodity-price spike that sent this inflation gauge to the highest level in 27 years. By November this trend will shift as the comparisons will be against flat to declining figures.
“Free to Choose” – never more insightful
Rose Friedman, wife of the late Milton Friedman, died yesterday at the age of 97. The two engaged in copious amounts of economic research and together authored one of the most seminal books of the last century, “Free to Choose.”
The work criticized interventionist government policies (explaining how it does damage to personal freedoms and prolongs economic downturns), explained inflation is not some Phillips Curve based phenomenon that is solely dependent upon a tight labor market but rather the result of rapid money supply growth, and that the welfare system creates “wards of the state” as opposed to “self-reliant individuals.”
Their work lives on.
Futures
We’re in another tug of war here, down Monday, up yesterday and futures are pointing to a lower open this morning. Stock indices are coming under pressure after the Shanghai Composite fell 4.30% last night. This puts the Chinese market down 20% over the past couple of weeks, right in bear market territory. Global stocks have pretty much followed the direction of the Shanghai Composite of late so we’ll see how U.S. markets react to this move in Chinese equities.
Have a great day!
Brent Vondera, Senior Analyst
The news out of Home Depot turned futures around yesterday morning, although the results were only positive on a relative basis, as we pointed out in Monday’s letter – HD’s 2009 EPS guidance improved as the company now expects earnings to fall in a range of 15-20% vs. the prior forecast of a 20-26% decline; hardly a situation that should get anyone excited but it doesn’t seem to take much these days, my how things change when stocks are on the rise.
It was that European investor confidence reading that likely played a greater role in driving bids higher, specifically German investor confidence, as what is known as the ZEW index jumped well more than anticipated. The ZEW is a gauge that aims to predict economic prospects six months in advance. The figure rose to 56.1 for August from 39.1 in July. (The ZEW’s gauge of current economic conditions rose to -77.2 from -89.3 in July; to offer some perspective, the all-time low of -92.8 was hit in May. Needless to say, views about the current situation remain flimsy).
Market Activity for August 18, 2009
Housing StartsThe Commerce Department reported that housing starts fell 1% in July after a significant bounce during the previous two months – up 6.5% in June and 15% in May, which was off of the all-time low hit in April. Housing starts came in at 581,000 units at an annual pace last month from 587,000 units in June. The market was expecting starts to increase to 599K.
A decline in starts should be viewed as a good thing. While it is true that a rise in residential construction will help GDP in the short term, we don’t exactly need more supply within the housing market. Unfortunately, the decline came totally from the multi-family side of things, down 13.3% in July; single-family construction rose 1.7% after a 17.8% rise in June and a 5.4% increase in May.I think the trading mentality within the stock market actually liked the pick up in single-family starts as the focus seems to be quite short-term in nature (and on this topic, just listen to how institutional money managers talk, they know this thing in short-lived based on a number of factors; they’re chasing this last hoorah before tax rates on capital returns rise and interest rates go higher – the bill to be paid for all of this fiscal stimulus, not to mention the increase in regulations to come).But with the job market in the shape it is in, the most important factor with regard to home sales, we could be setting up for additional weakness in residential construction a few months out as the supply figures build from what are still elevated levels. Just as Chairman Bernanke explained in the spring, it takes GDP growth of 2.5% to keep the jobless rate constant. Odds are we won’t hit these levels of growth outside of one-two quarter pops as consumer activity heads back to it historic average. Thus, adding to home supply here will only delay the housing recovery.
Further, foreclosures remain a threat to supply. While a foreclosure-driven decline in prices does help sales, there are estimates that roughly $3.5 trillion worth of home properties are still at risk of default because the owners owe more than the property is worth. This is a double-edged sword that may also add to supply.
It would be much better to continue to allow for the inventory/sales ratio to keep heading south, we’ll be better off 12-18 months down the road
Housing permits, an indication for residential construction over the next few months, fell 1.8% in July after a 10% pop in June. Just as in housing starts, this decline in the permits data for July resulted from the multi-family side as permits for condos, townhouses and apartments fell 25.5%. Single-family permits rose 5.8%.Producer Prices
On the inflation front, the Labor Department reported that the producer price index (PPI) fell a large 0.9% in July after a 1.8% rise in June. A 10% decline in the gasoline component was responsible for much of the move lower, but even the ex-energy reading dropped 0.4% last month. Basically residential gas and prescriptions were the only components to post an increase.
On a year-over-year basis, PPI posted its largest decline yet, down 6.8% as the figure is being compared to the height of last summer’s commodity-price spike that sent this inflation gauge to the highest level in 27 years. By November this trend will shift as the comparisons will be against flat to declining figures.
“Free to Choose” – never more insightful
Rose Friedman, wife of the late Milton Friedman, died yesterday at the age of 97. The two engaged in copious amounts of economic research and together authored one of the most seminal books of the last century, “Free to Choose.”
The work criticized interventionist government policies (explaining how it does damage to personal freedoms and prolongs economic downturns), explained inflation is not some Phillips Curve based phenomenon that is solely dependent upon a tight labor market but rather the result of rapid money supply growth, and that the welfare system creates “wards of the state” as opposed to “self-reliant individuals.”
Their work lives on.
Futures
We’re in another tug of war here, down Monday, up yesterday and futures are pointing to a lower open this morning. Stock indices are coming under pressure after the Shanghai Composite fell 4.30% last night. This puts the Chinese market down 20% over the past couple of weeks, right in bear market territory. Global stocks have pretty much followed the direction of the Shanghai Composite of late so we’ll see how U.S. markets react to this move in Chinese equities.
Have a great day!
Brent Vondera, Senior Analyst
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