U.S. stocks ended the week lower on Friday as disappointing results from General Electric and Bank of America weighed on investors sentiment. The latest consumer confidence reading, deteriorating when it was expected to remain flat compared to the previous month, didn’t help matters. For the week, the broad market managed a 1.5% gain.
Friday’s consumer confidence measure and Bank of America’s earning report dovetailed in that they both illustrated the headwinds the consumer will face for some time to come. Bank of America’s non-performing loans fell 9.1% from the previous quarter, driven by credit-card and home-equity loan defaults. This is a direct result of the highest jobless rate in 26 years, and surely what’s keeping consumer confidence readings at recessionary levels. You can bet confidence will take an additional hit once an unemployment rate of 10% headlines the news – we’re likely to hit that mark before year end since the figure is already at 9.8%.
(I’m not sure the market has completely come to grips with the rather high possibility that credit (loans) will continue to contract. Banks are still hoarding capital as credit quality deteriorates. The zero-percent policy from the Fed is not helping this situation either as it’s a no brainer for banks simply to borrow for nothing and buy Treasury securities. This helps banks hold onto capital as loan losses continue to grow, but means you can forget about credit expansion, and that has big implications for growth. Six months ago I was thinking this hoarding of capital situation would have eased by now; it has not and I’m not seeing an end in sight until we can get a sustained economic rebound.
These events offset a very nice industrial production reading. This very important indicator has risen for three-straight months now from the deepest contraction in IP since 1946. Most of this bounce has been driven by auto assemblies. Machinery orders jumped in the previous month, suggesting we’d get some help from business spending, but the figure slumped again in this latest reading. Over the next couple of months, all we may have going to boost IP is colder weather (helping the utility segment) and higher commodity prices (boosting mining activity). But until business spending comes back IP will remain choppy.
Financials led the market lower on Friday. Consumer staples was the best performing sector.
Decliners beat advancers by nearly a 4-to-1 margin on the NYSE Composite. Volume was higher than the six-month average, a pretty rare occurrence these days and probably not something you want to see on a down session (it would be nice to see big volume on a rally day).
Market Activity for October 16, 2009
Foreign U.S. Security Purchases
Net foreign purchases of long term U.S. assets rose $28.6 billion in August. Treasury security purchases increased $23.9 billion, slower than the $31 billion increase in July. Purchases of U.S. stocks rose $10.5 billion, much slower than the $28.6 billion increase in July. Purchases of U.S. corporate bonds fell $6.6 billion, a bit of an improvement from the $11 billion decline in July – but still a decline.
This data is obviously not real time as it is a couple of months old, but it’s definitely worth watching for the trend. It’s important to consider that the U.S. dollar (as measured by the Dollar Index – gauged against six major currencies) was near 80 in August, now it looks to be on its way to the record low (since the index’s inception in 1967) of 71.
It will be interesting, and vital, to watch the trend in foreign purchases of U.S. assets now that USD is headed back down. I’ve heard many people talk about how U.S. financial asset purchases by foreigners will increase because the lower dollar value means that these assets are on sale. That may be true if the dollar begins to rise again. However, if it continues lower (or even is perceived to head lower) that “on sale” situation turns into a rout when foreigners convert back to their home currency.
Industrial Production
Federal Reserve figures showed industrial production (IP) rose 0.7% in September (way better than the 0.2% increase expected), marking the third-straight month of increase following the deepest and longest contraction in production since coming out of WWII.
There are three main components of this data: manufacturing, utility and mining activity.
Manufacturing production rose 0.9% (this component makes up 79% of the overall reading), boosted by another huge month for auto assemblies. The production of motor vehicles & parts rose 8.1% after August’s 6.1% increase. This sub-component alone accounted for half of the total rise in IP. Machinery production fell 0.9% and computer and electronics production increased 0.5%.
Utility production fell 0.7% after a large 1.9% increase in August (this component makes up roughly 10% of the total IP index). Mining activity rose 0.7%, surely boosted by higher selling prices as commodity prices have been in rally mode (this component makes up the remaining 10% of the IP index).
So, what does the next couple of months look like? I would expect the reading to relapse a bit as the main driver of IP over the past three months – auto assemblies – will fall off.
Auto sales for September returned to low levels after August’s clunker-cash pop. Colder weather will help the utility component, but some of the weather-related rise will be offset by higher vacancy rates. Mining should continue to run too, but with autos weighing on the largest segment of IP (manufacturing) I think one should expect some weakness in the months ahead. The caveat would be a rebound in machinery production, but I just don’t get the sense that business is confident enough to increase orders.
Capacity utilization rose to 70.5% from 69.8%, still very weak and gives Bernanke & Co. cover as they believe (by their current statements and past actions) that there is little cost to pay for keeping monetary policy aggressively easy. I believe history proves otherwise. There are plenty of future costs to bear and it is not just all about wage-push inflation (or lack thereof, which is what the Fed means when they implicitly state that low capacity utilization rate offers them a green light to keep policy floored); we shall see.
Here’s an illustration of the continued weakness of capacity utilization:
University of Michigan Confidence
This number surprised on the down side as the University of Michigan’s consumer sentiment reading fell back below 70 (the number was expected to roughly remain at the September reading of 73.5).
The headline reading fell to 69.4 in October and the economic outlook (consumers’ prospects for the state of things six months out) fell to 67.6 from 73.5. Even at these low levels, this is not a great surprise considering the labor market situation. And as the jobless rate continues to rise, this will keep a foot on the throat of consumer expectations.
These consumer confidence readings haven’t had much bearing on the stock market historically. I for one have found them pretty much worthless in the past, as long-time readers may recall. But these days, with a lack of credit expansion (therefore we cannot count on easy credit to drive the economy out of recession as it had over the last two cycles) and a jobless rates that resides at a 26-year high (and will test the post-WWII record) these consumer confidence readings carry much more meaning for, and bearing on, stocks.
October 19
Today marks the 22nd anni of the 1987 market crash. The Dow lost 22.6% on the day; the broad S&P 500 plunged 20.5%. Declines of that magnitude were obviously quite shocking; but to borrow from the debut album of Jane’s Addiction, nothing’s shocking anymore in the world of financial markets after what we’ve gone through.
Have a great day!
Brent Vondera, Senior Analyst
Friday’s consumer confidence measure and Bank of America’s earning report dovetailed in that they both illustrated the headwinds the consumer will face for some time to come. Bank of America’s non-performing loans fell 9.1% from the previous quarter, driven by credit-card and home-equity loan defaults. This is a direct result of the highest jobless rate in 26 years, and surely what’s keeping consumer confidence readings at recessionary levels. You can bet confidence will take an additional hit once an unemployment rate of 10% headlines the news – we’re likely to hit that mark before year end since the figure is already at 9.8%.
(I’m not sure the market has completely come to grips with the rather high possibility that credit (loans) will continue to contract. Banks are still hoarding capital as credit quality deteriorates. The zero-percent policy from the Fed is not helping this situation either as it’s a no brainer for banks simply to borrow for nothing and buy Treasury securities. This helps banks hold onto capital as loan losses continue to grow, but means you can forget about credit expansion, and that has big implications for growth. Six months ago I was thinking this hoarding of capital situation would have eased by now; it has not and I’m not seeing an end in sight until we can get a sustained economic rebound.
These events offset a very nice industrial production reading. This very important indicator has risen for three-straight months now from the deepest contraction in IP since 1946. Most of this bounce has been driven by auto assemblies. Machinery orders jumped in the previous month, suggesting we’d get some help from business spending, but the figure slumped again in this latest reading. Over the next couple of months, all we may have going to boost IP is colder weather (helping the utility segment) and higher commodity prices (boosting mining activity). But until business spending comes back IP will remain choppy.
Financials led the market lower on Friday. Consumer staples was the best performing sector.
Decliners beat advancers by nearly a 4-to-1 margin on the NYSE Composite. Volume was higher than the six-month average, a pretty rare occurrence these days and probably not something you want to see on a down session (it would be nice to see big volume on a rally day).
Market Activity for October 16, 2009
Foreign U.S. Security PurchasesNet foreign purchases of long term U.S. assets rose $28.6 billion in August. Treasury security purchases increased $23.9 billion, slower than the $31 billion increase in July. Purchases of U.S. stocks rose $10.5 billion, much slower than the $28.6 billion increase in July. Purchases of U.S. corporate bonds fell $6.6 billion, a bit of an improvement from the $11 billion decline in July – but still a decline.
This data is obviously not real time as it is a couple of months old, but it’s definitely worth watching for the trend. It’s important to consider that the U.S. dollar (as measured by the Dollar Index – gauged against six major currencies) was near 80 in August, now it looks to be on its way to the record low (since the index’s inception in 1967) of 71.
It will be interesting, and vital, to watch the trend in foreign purchases of U.S. assets now that USD is headed back down. I’ve heard many people talk about how U.S. financial asset purchases by foreigners will increase because the lower dollar value means that these assets are on sale. That may be true if the dollar begins to rise again. However, if it continues lower (or even is perceived to head lower) that “on sale” situation turns into a rout when foreigners convert back to their home currency.
Industrial Production
Federal Reserve figures showed industrial production (IP) rose 0.7% in September (way better than the 0.2% increase expected), marking the third-straight month of increase following the deepest and longest contraction in production since coming out of WWII.
There are three main components of this data: manufacturing, utility and mining activity.
Manufacturing production rose 0.9% (this component makes up 79% of the overall reading), boosted by another huge month for auto assemblies. The production of motor vehicles & parts rose 8.1% after August’s 6.1% increase. This sub-component alone accounted for half of the total rise in IP. Machinery production fell 0.9% and computer and electronics production increased 0.5%.
Utility production fell 0.7% after a large 1.9% increase in August (this component makes up roughly 10% of the total IP index). Mining activity rose 0.7%, surely boosted by higher selling prices as commodity prices have been in rally mode (this component makes up the remaining 10% of the IP index).
So, what does the next couple of months look like? I would expect the reading to relapse a bit as the main driver of IP over the past three months – auto assemblies – will fall off.
Auto sales for September returned to low levels after August’s clunker-cash pop. Colder weather will help the utility component, but some of the weather-related rise will be offset by higher vacancy rates. Mining should continue to run too, but with autos weighing on the largest segment of IP (manufacturing) I think one should expect some weakness in the months ahead. The caveat would be a rebound in machinery production, but I just don’t get the sense that business is confident enough to increase orders.
Capacity utilization rose to 70.5% from 69.8%, still very weak and gives Bernanke & Co. cover as they believe (by their current statements and past actions) that there is little cost to pay for keeping monetary policy aggressively easy. I believe history proves otherwise. There are plenty of future costs to bear and it is not just all about wage-push inflation (or lack thereof, which is what the Fed means when they implicitly state that low capacity utilization rate offers them a green light to keep policy floored); we shall see.
Here’s an illustration of the continued weakness of capacity utilization:
University of Michigan Confidence
This number surprised on the down side as the University of Michigan’s consumer sentiment reading fell back below 70 (the number was expected to roughly remain at the September reading of 73.5).
The headline reading fell to 69.4 in October and the economic outlook (consumers’ prospects for the state of things six months out) fell to 67.6 from 73.5. Even at these low levels, this is not a great surprise considering the labor market situation. And as the jobless rate continues to rise, this will keep a foot on the throat of consumer expectations.
These consumer confidence readings haven’t had much bearing on the stock market historically. I for one have found them pretty much worthless in the past, as long-time readers may recall. But these days, with a lack of credit expansion (therefore we cannot count on easy credit to drive the economy out of recession as it had over the last two cycles) and a jobless rates that resides at a 26-year high (and will test the post-WWII record) these consumer confidence readings carry much more meaning for, and bearing on, stocks.October 19
Today marks the 22nd anni of the 1987 market crash. The Dow lost 22.6% on the day; the broad S&P 500 plunged 20.5%. Declines of that magnitude were obviously quite shocking; but to borrow from the debut album of Jane’s Addiction, nothing’s shocking anymore in the world of financial markets after what we’ve gone through.
Have a great day!
Brent Vondera, Senior Analyst
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