U.S. stocks failed to extend upon the six-session rally, although the decline was inconsequential, as JNJ posted better-than-expected bottom line results on lower research and marketing costs but revenue declined more than analysts has forecasted. The NASDAQ Composite bucked the trend in the Dow and S&P 500 as the tech-laden index managed a fractional gain.
Intel reported strong results, beating both on the top and bottom line estimates, but that news came after the bell so no help to yesterday’s trade. Gross margins blew past estimates of 53%, coming in at 57.6% for the quarter. The forecast for the current quarter is a big bang margin expansion to 62%. The results seemed to be fueled by Chinese demand that has been augmented by that government’s stimulus programs and PC makers placing orders on expectations Microsoft’s Windows 7 operating system (to be formally released on October 22) will get customers buying. Intel’s enterprise business remained weak.
As has been abundantly reported over the past 12 hours, Intel’s sequential (quarter-over-quarter) earnings results jumped 17%, the most in 30 years.
(I love watching the mercurial nature of the market, sequential comparisons have suddenly become all the rage. You couldn’t get anyone excited about year-over-year results back in 2002 (the correct way to compare earnings results) when corporate profits had begun the record-setting 20-quarter period of double-digit growth. Now, year-over-year results can fall against weak 2008 Q3 comparisons, revenues can remain punk and all anyone needs to get excited is sequential results these days. The ever-changing behavior of the market is quite the thing to chronicle.)
The major 10 sectors were spilt between gain and loss yesterday as basic material, consumer discretionary and telecoms led the five sectors that gained ground; financials, health-care and utilities led the losers.
The U.S. dollar was down again yesterday even as the ZEW (German investor confidence) unexpectedly fell and a member of the ECB (Europe’s central bank) stated there is no reason to change monetary policy. Both of these events ease any near-term pressure over interest-rate differential between the U.S. and Europe and should have been dollar positive. The fact that it wasn’t means we may be headed for 70 on the Dollar Index (DXY) – a level that would begin to sound the red alert signal to members of the Fed.
For now, the 75 handle on the DXY doesn’t have the bond market concerned. Bonds rallied, sending yields lower, on expectations that the Fed will remain on hold for a while – you have to go out to June 2010 for a majority opinion that the Fed will raise rates to a range of just 0.50% - 1.00%, according to fed funds futures. If this dollar trend continues, those expectations will change even as the nascent economic rebound remains soft – the economy won’t have the luxury of pedal-to-the-metal monetary policy, Bernanke and Co. will have to shift focus to rebuilding the perception of longer-term dollar stability.
Market Activity for October 13, 2009
Consumer Hindrance
The press is finally beginning to accept the fact that the consumer is going to be a major drag on the GDP figures over the next couple of years, and stricter and possibly less innovative credit products will exacerbate the situation – an article from the WSJ entitled “The ‘Democratization of Credit’ is Over – Now It’s Payback Time” offered an in depth account of this scenario (of course the piece includes the goofy anecdotals that always accompany financial articles but the overall point is spot on). The press also seems to be coming around to the reality that a prolonged period of payroll cost-cutting means a lack of final demand.
A consumer drag is simply the reality when the unemployment rate explodes to 10% (9.8% as of the latest reading but it will go above 10%). This is especially damaging at a time in which we’re coming off of a debt binge, fostered by a prolonged easy-money policy by the Fed. These debt levels were manageable at 5-6% unemployment, but at 9.8% and rising, well there will be a period of repair that will bring personal consumption as a percentage of GDP back to the historic average of 65.2% from over 70% at present.
(Dates are tough to read, data runs 12/1947 – 6/2009)
The government hasn’t helped things either. The vast majority of decisions that come out of Washington carry unintended consequences and the new credit-card laws will intensify the cutting of credit lines that accompany any period in which default rates soar. Congress is imposing a number of new rules on credit-card issuing companies, in the name of consumer protection, and as a result banks are slashing lines for those that need it the most right now.
We talked about this several months ago, models are already set up to cut credit lines based on overall default rates and this takes away the safety net that many had used credit cards for when they get into a bind. Those that need it most right now, those with weaker fundamental credit situations, will be at least marginally and at the worst totally locked out of the credit arena and this will show up in consumer spending over the next year. When the government puts more restrictions on banks it creates an environment in which it is not profitable to extend credit to those with lower credit scores. This may be a good thing longer term, the access to credit was way too loose anyway, but it does mean that we’ll have to endure of period of slower growth rates as a result. It’s important to understand this.
In addition to this, we may see continued troubles via the higher ranks of the consumer segment. We have another wave of foreclosures to get past and the upper tiers of the housing market are beginning to show the cracks are widening.
The top third of the housing market now accounts for 30% of total foreclosures, up from 16% when the housing recession began three years ago. The bottom third, which has been the main problem thus far, accounts for just 35% of all foreclosures, down from 55% in 2006, as reported by the WSJ. What’s even more troubling is that 46% of IO (interest-only) mortgages are at least 30 days delinquent, even though just 12% of these loans have reset. Most of these will reset in 2011, when rates may just be much higher. If we don’t get policies that help to turn this economy around a high level of joblessness is going to keep foreclosure rates elevated for some time to come and that cannot be helpful for consumer activity.
A move to keep tax rates at current levels (rate reductions are needed but we can’t expect that now) and an aggressive and permanent policy shift that allows businesses to write-down capital equipment purchases in the current year will give firms the confidence in the future to let go of some of their cash to engage in capital expenditures. This would be a huge job creator that would not only drive aggregate income but would also provide a windfall to the Treasury via a larger tax base. Slashing the corporate tax, which only hurts employment and is passed on to the consumer via prices, would also offer a big boost to job creation.
Conditions within the labor market will keep consumer activity mired and business spending delayed for a prolonged period if a sustained economic revival doesn’t occur. Consumer headwinds abound.
Economic Data
We haven’t had a major release for two days, but the rest of the week will bring some important numbers.
The monthly budget statement for September has been flashing on the economic calendar since Friday, but the deficit figure for the final month of the government’s fiscal year has yet to be released. The Treasury Department is expected to show a budget deficit of roughly $34 billion for the month. September closes out the government’s fiscal year and the deficit for 2009 will come in right around $1.5 trillion, or 11% of GDP – the previous postwar record is 5.6% hit in June 1983. The release is flashing on the screen again today, maybe the fourth time is the charm and we’ll get the official reading.
The big release today will be retail sales for September. The headline figure is expected to show a 2.1% decline. This will be the fallback from August’s big 2.7% increase that was sparked by clunker-cash auto sales and a back-to-school/sales tax holiday boost to clothing and electronics sales. The retail sales increase for August was the largest monthly reading since October 2001 when auto dealers offered zero-percent financing following the 9/11 attacks.
Thursday we’ll get initial jobless claims and CPI. Claims are expected to hold at last week’s level of 520K – a move back to 550K will likely spell trouble for stocks; conversely, it will probably take a significant move below 520K for this data to help stocks as readings above 500K are extremely elevated levels from a historical perspective. CPI is expected to show no problems. This reading will be for September consumer prices, it won’t be until November when the year-over-year comparisons start to show some problems for CPI and the monthly number illustrate some effect from the rebound in commodities.
Finally, on Friday we’ll get industrial production for September. IP has rebounded somewhat off of its worst contraction, both in terms of degree and duration, since 1946 when the economy was making the shift back from purely war-related production. The reading for September should show IP rose for a third-straight month, but over the following couple of readings production may prove to be choppy. The mining component may look good, boosted by higher selling prices – higher commodity prices. But manufacturing could very well slump again and the utility component, while helped by colder weather, will continue to show the effects of higher residential and office vacancy rates.
Futures
Stock-index futures are up big this morning on the Intel news and now JP Morgan’s results, just out as I type, destroyed the estimate. S&P 500 earnings results will still post another 20%-25% decline for the quarter when it all said and done. The Intel story was a special case as they received a boost from back-to-school, Chinese stimulus and the coming Windows 7 release. With regard to JP’s earnings, all banks in fact, the zero-interest rate policy by the Fed is helping to mask record loan default rates. When the Fed has to raise rates (and this is the dichotomy, if they raise rates to a more normal level it all falls apart; if they don’t the dollar continues to get hammered, which makes the necessary degree of rate hikes more severe and likely to arrive sooner than the market currently expects) the banking industry will show the continued troubles in loan quality.
As we’ve mentioned for a couple of months, we will get a two-quarter jump (I’ve actually referred to this as a big bang) in corporate profits due to massive cost-cutting. This move in year-over-year profit growth will begin in the current quarter (fourth-quarter earnings season – the current earnings season is for the third quarter, just to clarify things). But the Fed’s unwind of aggressive monetary easing, coupled with a lack of final demand (as the jobless rate remains high and consumers engage in more balance sheet repair) will bring a quick end to the profit revival.
For now though, the “let the good times roll” trend continues. We’ll be watching for that “psychological” level of 10,000 Dow to be hit, which will mark the eighth time we’ve moved past the 10,000 mark since initially doing so in January 1999. After eight moves back in forth, I’m not sure how psychological 10,000 actually is anymore.
Have a great day!
Brent Vondera, Senior Analyst
Intel reported strong results, beating both on the top and bottom line estimates, but that news came after the bell so no help to yesterday’s trade. Gross margins blew past estimates of 53%, coming in at 57.6% for the quarter. The forecast for the current quarter is a big bang margin expansion to 62%. The results seemed to be fueled by Chinese demand that has been augmented by that government’s stimulus programs and PC makers placing orders on expectations Microsoft’s Windows 7 operating system (to be formally released on October 22) will get customers buying. Intel’s enterprise business remained weak.
As has been abundantly reported over the past 12 hours, Intel’s sequential (quarter-over-quarter) earnings results jumped 17%, the most in 30 years.
(I love watching the mercurial nature of the market, sequential comparisons have suddenly become all the rage. You couldn’t get anyone excited about year-over-year results back in 2002 (the correct way to compare earnings results) when corporate profits had begun the record-setting 20-quarter period of double-digit growth. Now, year-over-year results can fall against weak 2008 Q3 comparisons, revenues can remain punk and all anyone needs to get excited is sequential results these days. The ever-changing behavior of the market is quite the thing to chronicle.)
The major 10 sectors were spilt between gain and loss yesterday as basic material, consumer discretionary and telecoms led the five sectors that gained ground; financials, health-care and utilities led the losers.
The U.S. dollar was down again yesterday even as the ZEW (German investor confidence) unexpectedly fell and a member of the ECB (Europe’s central bank) stated there is no reason to change monetary policy. Both of these events ease any near-term pressure over interest-rate differential between the U.S. and Europe and should have been dollar positive. The fact that it wasn’t means we may be headed for 70 on the Dollar Index (DXY) – a level that would begin to sound the red alert signal to members of the Fed.
For now, the 75 handle on the DXY doesn’t have the bond market concerned. Bonds rallied, sending yields lower, on expectations that the Fed will remain on hold for a while – you have to go out to June 2010 for a majority opinion that the Fed will raise rates to a range of just 0.50% - 1.00%, according to fed funds futures. If this dollar trend continues, those expectations will change even as the nascent economic rebound remains soft – the economy won’t have the luxury of pedal-to-the-metal monetary policy, Bernanke and Co. will have to shift focus to rebuilding the perception of longer-term dollar stability.
Market Activity for October 13, 2009
Consumer HindranceThe press is finally beginning to accept the fact that the consumer is going to be a major drag on the GDP figures over the next couple of years, and stricter and possibly less innovative credit products will exacerbate the situation – an article from the WSJ entitled “The ‘Democratization of Credit’ is Over – Now It’s Payback Time” offered an in depth account of this scenario (of course the piece includes the goofy anecdotals that always accompany financial articles but the overall point is spot on). The press also seems to be coming around to the reality that a prolonged period of payroll cost-cutting means a lack of final demand.
A consumer drag is simply the reality when the unemployment rate explodes to 10% (9.8% as of the latest reading but it will go above 10%). This is especially damaging at a time in which we’re coming off of a debt binge, fostered by a prolonged easy-money policy by the Fed. These debt levels were manageable at 5-6% unemployment, but at 9.8% and rising, well there will be a period of repair that will bring personal consumption as a percentage of GDP back to the historic average of 65.2% from over 70% at present.
(Dates are tough to read, data runs 12/1947 – 6/2009)
The government hasn’t helped things either. The vast majority of decisions that come out of Washington carry unintended consequences and the new credit-card laws will intensify the cutting of credit lines that accompany any period in which default rates soar. Congress is imposing a number of new rules on credit-card issuing companies, in the name of consumer protection, and as a result banks are slashing lines for those that need it the most right now.
We talked about this several months ago, models are already set up to cut credit lines based on overall default rates and this takes away the safety net that many had used credit cards for when they get into a bind. Those that need it most right now, those with weaker fundamental credit situations, will be at least marginally and at the worst totally locked out of the credit arena and this will show up in consumer spending over the next year. When the government puts more restrictions on banks it creates an environment in which it is not profitable to extend credit to those with lower credit scores. This may be a good thing longer term, the access to credit was way too loose anyway, but it does mean that we’ll have to endure of period of slower growth rates as a result. It’s important to understand this.
In addition to this, we may see continued troubles via the higher ranks of the consumer segment. We have another wave of foreclosures to get past and the upper tiers of the housing market are beginning to show the cracks are widening.
The top third of the housing market now accounts for 30% of total foreclosures, up from 16% when the housing recession began three years ago. The bottom third, which has been the main problem thus far, accounts for just 35% of all foreclosures, down from 55% in 2006, as reported by the WSJ. What’s even more troubling is that 46% of IO (interest-only) mortgages are at least 30 days delinquent, even though just 12% of these loans have reset. Most of these will reset in 2011, when rates may just be much higher. If we don’t get policies that help to turn this economy around a high level of joblessness is going to keep foreclosure rates elevated for some time to come and that cannot be helpful for consumer activity.
A move to keep tax rates at current levels (rate reductions are needed but we can’t expect that now) and an aggressive and permanent policy shift that allows businesses to write-down capital equipment purchases in the current year will give firms the confidence in the future to let go of some of their cash to engage in capital expenditures. This would be a huge job creator that would not only drive aggregate income but would also provide a windfall to the Treasury via a larger tax base. Slashing the corporate tax, which only hurts employment and is passed on to the consumer via prices, would also offer a big boost to job creation.
Conditions within the labor market will keep consumer activity mired and business spending delayed for a prolonged period if a sustained economic revival doesn’t occur. Consumer headwinds abound.Economic Data
We haven’t had a major release for two days, but the rest of the week will bring some important numbers.
The monthly budget statement for September has been flashing on the economic calendar since Friday, but the deficit figure for the final month of the government’s fiscal year has yet to be released. The Treasury Department is expected to show a budget deficit of roughly $34 billion for the month. September closes out the government’s fiscal year and the deficit for 2009 will come in right around $1.5 trillion, or 11% of GDP – the previous postwar record is 5.6% hit in June 1983. The release is flashing on the screen again today, maybe the fourth time is the charm and we’ll get the official reading.
The big release today will be retail sales for September. The headline figure is expected to show a 2.1% decline. This will be the fallback from August’s big 2.7% increase that was sparked by clunker-cash auto sales and a back-to-school/sales tax holiday boost to clothing and electronics sales. The retail sales increase for August was the largest monthly reading since October 2001 when auto dealers offered zero-percent financing following the 9/11 attacks.
Thursday we’ll get initial jobless claims and CPI. Claims are expected to hold at last week’s level of 520K – a move back to 550K will likely spell trouble for stocks; conversely, it will probably take a significant move below 520K for this data to help stocks as readings above 500K are extremely elevated levels from a historical perspective. CPI is expected to show no problems. This reading will be for September consumer prices, it won’t be until November when the year-over-year comparisons start to show some problems for CPI and the monthly number illustrate some effect from the rebound in commodities.
Finally, on Friday we’ll get industrial production for September. IP has rebounded somewhat off of its worst contraction, both in terms of degree and duration, since 1946 when the economy was making the shift back from purely war-related production. The reading for September should show IP rose for a third-straight month, but over the following couple of readings production may prove to be choppy. The mining component may look good, boosted by higher selling prices – higher commodity prices. But manufacturing could very well slump again and the utility component, while helped by colder weather, will continue to show the effects of higher residential and office vacancy rates.
Futures
Stock-index futures are up big this morning on the Intel news and now JP Morgan’s results, just out as I type, destroyed the estimate. S&P 500 earnings results will still post another 20%-25% decline for the quarter when it all said and done. The Intel story was a special case as they received a boost from back-to-school, Chinese stimulus and the coming Windows 7 release. With regard to JP’s earnings, all banks in fact, the zero-interest rate policy by the Fed is helping to mask record loan default rates. When the Fed has to raise rates (and this is the dichotomy, if they raise rates to a more normal level it all falls apart; if they don’t the dollar continues to get hammered, which makes the necessary degree of rate hikes more severe and likely to arrive sooner than the market currently expects) the banking industry will show the continued troubles in loan quality.
As we’ve mentioned for a couple of months, we will get a two-quarter jump (I’ve actually referred to this as a big bang) in corporate profits due to massive cost-cutting. This move in year-over-year profit growth will begin in the current quarter (fourth-quarter earnings season – the current earnings season is for the third quarter, just to clarify things). But the Fed’s unwind of aggressive monetary easing, coupled with a lack of final demand (as the jobless rate remains high and consumers engage in more balance sheet repair) will bring a quick end to the profit revival.
For now though, the “let the good times roll” trend continues. We’ll be watching for that “psychological” level of 10,000 Dow to be hit, which will mark the eighth time we’ve moved past the 10,000 mark since initially doing so in January 1999. After eight moves back in forth, I’m not sure how psychological 10,000 actually is anymore.
Have a great day!
Brent Vondera, Senior Analyst
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