U.S. stocks, after beginning the session lower following the sell-off overseas, rallied late in the morning session yesterday driven by energy and basic material shares as crude prices rallied. The broad market, as measured by the S&P 500, was able to hold onto most of that momentum to the close. The rise in Exxon and Chevron shares accounted for 33% of the Dow’s move on the day.
So, stocks and oil continue to move in tandem. A couple of months back we talked about that at some point this relationship would turn to one that is inverse in nature as the market sees higher energy prices as just another ballast that will ground the consumer. Well, that hasn’t occurred yet but it’s a matter of time.
Most other commodity prices halted their early-session slide, a move lower that was fostered by fears of weakening demand in China. The reversal pushed most metals and agricultural prices to positive territory on the day.
(On China, even though their stimulus program is robust and specifically targeted to infrastructure projects, analysts are beginning to wonder if that economy can keep growth going at an appropriate pace despite weakness from the most powerful consumers in the world. Export-driven economies in Asia will have a rough time hitting growth levels that a 67% run up in the Shanghai Composite – occurring in five months time -- appeared to price in. China just does not yet have domestic consumer activity that is able to offset reduced U.S. consumer purchases and the 20% decline in that index over the past couple of weeks seemed to be acknowledging that reality. Nevertheless, the Shanghai Composite bounced back last night after Chinese regulators allowed initial public offerings after a nine-month moratorium. That’s what is being reported as the cause for last night’s rally. No one really actually knows as it’s a highly volatile market, sometimes pushed up or down due to cultural superstitions.)
Back in the U.S., there was also speculation that the government will announce an additional stimulus package on top of the $787 billion monstrosity that is currently in play and some pointed to this talk as having an effect on the market’s turnaround. I can’t believe this speculation has much merit considering the uproar that’s begun over current levels of government spending.
Eight of the 10 major industry groups gained ground on the session, financial and industry shares were the laggards.
Market Activity for August 19, 2009
Mortgage Applications
The Mortgage Bankers Association released its weekly mortgage apps index yesterday, which showed a 5.6% rise for the week ended August 14 after a 3.5% decline in the prior week. Refinancing activity led the index higher as refis rose 6.9% after falling 7.2% in the week ended August 7. Purchases, which make up a little less than half of the index right now, also increased, up 3.9% for the week.
The 30-year fixed mortgage rate fell back to 5.15% last week (from 5.37% in the week of August 7) and one would have expected a bit more of pop in the index at this low level of interest – the 30-year mortgage rate has averaged 5.26% over the past month, yet the mortgage apps index is up just 0.2% for the past four weeks. The weak job market is certainly weighing on things.
On Friday we get the actually existing home sales figures for July. There’s roughly a 4-6 week lag between contract closings (the point at which existing home sales are recorded) and applications. Home purchases, as measured by the mortgage apps index, rose about 7% in late-May/June. Pending home sales, an additional figure, rose 3.6% in June. So both of these readings point to an existing home sales number that should rise nicely, that is if contracts didn’t fall apart sometime in the process. Considering the pace of job losses (even if off of their very deep monthly declines) there’s an outsized chance of contract cancelations.
Crude
Oil for September delivery rose back above $72 per barrel after the weekly Energy Department report showed crude stockpiles declined the most in more than a year, plunging 8.4 million barrels – a drop of 1.2 million was forecast.
The biggest factor in the inventory decline was a slide in imports, down 15% to 8.53 million barrels. That marks the largest drop since last September when Hurricanes Ike and Gustav hit the Gulf coast, shutting down the ports. The reason for the reduction in imports was due to nervousness among refiners over the outlook for gasoline demand so they reduced purchases, according Energy Security Analysis.
Nevertheless, crude inventories sit at 343.6 million barrels, which is roughly 6.5% above the five-year average of 320 million.
The Consumer
We’ve spent a good deal of time explaining that consumer activity as a percentage of GDP will move back to its historic average of 65% from the current 71% -- a level of consumer spending that was fostered by very easy credit conditions, a formerly low unemployment rate (averaged just 5.1% 2004-2008), solid real income gains and a wealth effect that steamed along as the stock market hit a record high in October 2007 and home prices were on a tear.
Now, however, all of this has changed as credit standards are tighter (and appropriately so), the jobless rate sits at a 26-year high, incomes are stagnant, and home and stock prices are well off of their peaks -- down 20% for homes on average and the S&P 500 is 36% below its apex, a reverse wealth effect. See chart below. (Household net worth will show some bounce due to the rally in stock prices, the figure will not be updated until we get the final revision to second-quarter GDP).
Certainly the inventory dynamic and massive government spending will offer some boost to the GDP figures a quarter out and this could last for three-four quarters. But the largest segment of the economy will continue to weigh on economic growth, that is just the reality.
The market needs to come to grips with this situation. And then, we’ll have to pay for the way the government has increased debt issuance via massive spending, and monetary policy that has also (even if the Fed really had no other choice) worked to hurt the dollar.
At the current level of interest rates, there is only one direction in which they will move over time. In addition, we’ll have tax rates on labor income, dividends, and capital returns moving higher by the end of 2010. In addition to that, many in Congress are talking about raising the Social Security tax wage base and implementing value-added taxes – talk about concrete boots. Slip the economy a mickey such as this and it will go back to sleep. We shouldn’t lose sight of these very likely headwinds; risk must be properly assessed even if the current level of interest rates encourages the opposite.
Have a great day!
Brent Vondera, Senior Analyst
So, stocks and oil continue to move in tandem. A couple of months back we talked about that at some point this relationship would turn to one that is inverse in nature as the market sees higher energy prices as just another ballast that will ground the consumer. Well, that hasn’t occurred yet but it’s a matter of time.Most other commodity prices halted their early-session slide, a move lower that was fostered by fears of weakening demand in China. The reversal pushed most metals and agricultural prices to positive territory on the day.
(On China, even though their stimulus program is robust and specifically targeted to infrastructure projects, analysts are beginning to wonder if that economy can keep growth going at an appropriate pace despite weakness from the most powerful consumers in the world. Export-driven economies in Asia will have a rough time hitting growth levels that a 67% run up in the Shanghai Composite – occurring in five months time -- appeared to price in. China just does not yet have domestic consumer activity that is able to offset reduced U.S. consumer purchases and the 20% decline in that index over the past couple of weeks seemed to be acknowledging that reality. Nevertheless, the Shanghai Composite bounced back last night after Chinese regulators allowed initial public offerings after a nine-month moratorium. That’s what is being reported as the cause for last night’s rally. No one really actually knows as it’s a highly volatile market, sometimes pushed up or down due to cultural superstitions.)
Back in the U.S., there was also speculation that the government will announce an additional stimulus package on top of the $787 billion monstrosity that is currently in play and some pointed to this talk as having an effect on the market’s turnaround. I can’t believe this speculation has much merit considering the uproar that’s begun over current levels of government spending.
Eight of the 10 major industry groups gained ground on the session, financial and industry shares were the laggards.
Market Activity for August 19, 2009
Mortgage ApplicationsThe Mortgage Bankers Association released its weekly mortgage apps index yesterday, which showed a 5.6% rise for the week ended August 14 after a 3.5% decline in the prior week. Refinancing activity led the index higher as refis rose 6.9% after falling 7.2% in the week ended August 7. Purchases, which make up a little less than half of the index right now, also increased, up 3.9% for the week.
The 30-year fixed mortgage rate fell back to 5.15% last week (from 5.37% in the week of August 7) and one would have expected a bit more of pop in the index at this low level of interest – the 30-year mortgage rate has averaged 5.26% over the past month, yet the mortgage apps index is up just 0.2% for the past four weeks. The weak job market is certainly weighing on things.
On Friday we get the actually existing home sales figures for July. There’s roughly a 4-6 week lag between contract closings (the point at which existing home sales are recorded) and applications. Home purchases, as measured by the mortgage apps index, rose about 7% in late-May/June. Pending home sales, an additional figure, rose 3.6% in June. So both of these readings point to an existing home sales number that should rise nicely, that is if contracts didn’t fall apart sometime in the process. Considering the pace of job losses (even if off of their very deep monthly declines) there’s an outsized chance of contract cancelations.Crude
Oil for September delivery rose back above $72 per barrel after the weekly Energy Department report showed crude stockpiles declined the most in more than a year, plunging 8.4 million barrels – a drop of 1.2 million was forecast.
The biggest factor in the inventory decline was a slide in imports, down 15% to 8.53 million barrels. That marks the largest drop since last September when Hurricanes Ike and Gustav hit the Gulf coast, shutting down the ports. The reason for the reduction in imports was due to nervousness among refiners over the outlook for gasoline demand so they reduced purchases, according Energy Security Analysis.
Nevertheless, crude inventories sit at 343.6 million barrels, which is roughly 6.5% above the five-year average of 320 million.
The ConsumerWe’ve spent a good deal of time explaining that consumer activity as a percentage of GDP will move back to its historic average of 65% from the current 71% -- a level of consumer spending that was fostered by very easy credit conditions, a formerly low unemployment rate (averaged just 5.1% 2004-2008), solid real income gains and a wealth effect that steamed along as the stock market hit a record high in October 2007 and home prices were on a tear.
Now, however, all of this has changed as credit standards are tighter (and appropriately so), the jobless rate sits at a 26-year high, incomes are stagnant, and home and stock prices are well off of their peaks -- down 20% for homes on average and the S&P 500 is 36% below its apex, a reverse wealth effect. See chart below. (Household net worth will show some bounce due to the rally in stock prices, the figure will not be updated until we get the final revision to second-quarter GDP).
Certainly the inventory dynamic and massive government spending will offer some boost to the GDP figures a quarter out and this could last for three-four quarters. But the largest segment of the economy will continue to weigh on economic growth, that is just the reality.The market needs to come to grips with this situation. And then, we’ll have to pay for the way the government has increased debt issuance via massive spending, and monetary policy that has also (even if the Fed really had no other choice) worked to hurt the dollar.
At the current level of interest rates, there is only one direction in which they will move over time. In addition, we’ll have tax rates on labor income, dividends, and capital returns moving higher by the end of 2010. In addition to that, many in Congress are talking about raising the Social Security tax wage base and implementing value-added taxes – talk about concrete boots. Slip the economy a mickey such as this and it will go back to sleep. We shouldn’t lose sight of these very likely headwinds; risk must be properly assessed even if the current level of interest rates encourages the opposite.
Have a great day!
Brent Vondera, Senior Analyst
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