U.S. stocks lost ground on Friday, wiping out the weekly gain on the S&P 500. A decline in commodity prices and an earnings miss from railroad giant Burlington Northern sent shares of basic material, energy and industrial shares lower.
The Burlington Northern news signaled that freight demand has yet to rebound and this reversed some pre-market excitement that had stocks looking up before the official trading session opened – that early morning enthusiasm was fueled by strong results from Amazon.com.
All 10 of the major sectors lost ground on the session, with basic material share as the worst-performing group and tech as the best – the S&P 500 that tracks technology shares declined just 0.31%.
Plans to increase regulations on the banking industry are really kicking up too, there was a lot of talk about the Fed taking control of keeping banks in line – that’s enough to scare anyone -- and this may have also weighed on the market. We already have an issue with a lack of credit expansion, and even though this is a natural and frankly needed occurrence with credit quality in the tank, if medium and small businesses can’t get the financing they need it will burden job creation. If the regulatory regime goes too far, credit expansion will be suppressed -- yet another issue for this recovery.
Market Activity for October 23, 2009
Britain’s Surprise, the Dollar, and the Fed
Friday I noted that the U.K unexpectedly remained in recession during the third quarter, marking the sixth quarter of contraction – the longest since these records began in 1955.
This reality may cause the Bank of England to expand its quantitative easing campaign (purchases of government bonds – gilts in the U.K.), which would be a reversal from comments BofE Governor King made early this week when suggesting the central bank would pull back from QE. As a result, the pound got pounded (it had rallied hard earlier in the week on the King statements, but gave back all of those gains Friday morning).
The greenback got a nice boost as a result, rising against the euro and rallying hard against the pound.
As we mentioned early last week, it was going to be interesting to listen to Fed comments as various Fed officials were giving a total of nine speeches over the past several days – two of those coming from Chairman Bernanke. It’s interesting because there is quite a bit of contention going on within the Fed, some want to begin to gently raise rates and others say it is way too soon. The speeches revealed that this divergence in opinion remains the case.
From a short-term perspective, it is way too soon to raise rates, but if things get out of control and the greenback moves down to DEFCON 3 (solidly into the 74 handle on the Dollar Index – which we’re very close to at 75.30 on DXY this morning) and then to DEFCON 2 (matching the all-time low of 71 on Dollar Index) we won’t have the luxury of keeping monetary policy floored and the Fed will have to reverse course swiftly and abruptly – that will throw us back into a nasty situation.
Bernanke and Vice Chairman Kohn are the most dovish, as measured by their statements. If the other members of the FOMC (the Fed’s rate-setting committee) fail to convince Bernanke that he better start talking mildly higher rates and then get to gently increasing fed funds to 1.00% in short order, we may see DEFCON 2 sooner than most currently imagine. We need to remember that 1.00% fed funds is still very accommodative and it is ridiculous to remain at emergency levels (zero interest rate policy) or there will be other emergencies that arise. The dollar can’t depend on weakness within other currencies as the thing that helps it rally.
There is no way to get ourselves out of this corner without taking some punishment (and the Fed is backed into a corner here). However, the longer we cower in the corner, afraid to take some jabs and undoubtedly a couple of body blows, the more likely it is that we’ll get thrashed with a series of very heavy head shots. The Fed needs to act, it won’t be pleasant, but it will be worse the longer they wait.
Existing Home Sales
The rush to take advantage of the first-time homebuyers’ tax credit boosted existing home sales to the highest level in more than two years. Purchases of existing homes jumped 9.4% to 5.57 million units at a seasonally-adjusted annual rate (SAAR), outpacing the consensus estimate by 220,000 units. Purchases of single-family units only also rose 9.4%, to 4.89 million SAAR.
I’m using single-family only for the charts below because the headline number includes condos and those figures only go back to 1999.
While this increase is absorbing some supply, we’ll see over the next couple of months worth of data that the tax credit, in large part, front-loaded home purchases, borrowing sales from the future. We’ll wait to see if the credit is extended, and maybe even expanded (possibly to all homebuyers and the amount of the credit increased as the industry is begging Congress), but for now the primary determinant of home sales will fall back on its key element – labor market conditions.
I’ll also point out that these home sales figures are seasonally adjusted. This is appropriate in most cases, but if there ever was a time to look at the non-seasonally adjusted reading it is this time. Why? Because home sales normally fall significantly in September as the seasonal buying season (May-August) ends. This September though the non-seasonally adjusted decline in sales was not as severe – no doubt because the tax credit essentially extended the home-buying season. Hence, when adjusting to seasonality it makes the increase appear more substantial.
The supply of existing homes has tumbled (as measured by the pace of sales) back to 7.8 months’ worth at an annual rate from a 22-year high of 11.3 months’ worth back in June 2008. (For clarity, in case anyone is interested, the supply of homes was just as elevated back in early-mid 1980s as the 1981-82 recession affected home sales in the early part of that decade and interest rates remained in double-digit territory until crashing below 10% in 1985).
We have accomplished erasing much of the excess supply, but the trend is unlikely to continue; the supply of homes will rise again before eventually trending lower in a sustained manner. If sales decline due to the expiration of the tax credit, and supply is boosted by another wave of foreclosures, also a likely scenario, we’ll see some increase in the figure again.
The median price of a single-family existing home fell 1.2% in September, falling to $174,900 from $177,100 in August. From the year-ago period, the median price has declined 8% and is 24.5% off of the peak ($230,900) hit in July 2006.
Futures
Stock-index futures are higher this morning as traders look to do some buying after Friday’s sell-off. International bourses have also helped pre-market trading in the U.S. Futures were flat very early this morning but as Asian stocks shook off some of their early-session weakness to move positive that compelled European stocks to advance and is helping U.S. stock futures.
As we get ready to say hello again to $3 gasoline (unless the U.S. dollar catches a bid), adding yet another challenge to the consumer, and another major commercial real estate lender has filed for bankruptcy it’s remarkable that stocks are higher in pre-market.
The increasing troubles in commercial real estate are not sneaking up on anyone, yet stocks seem to have an aloof attitude to this reality. If an inability to refinance debt continues, we’ll see plenty more bankruptcies on the commercial side. It’s going to take a while to get through the problems in overall real estate markets, and that may surprise some people who think we’re on a sustainable upward trajectory, specifically with regard to the residential side of things. Surely, everyone understands the commercial side has much deeper losses to deal with still.
Have a great day!
Brent Vondera, Senior Analyst
The Burlington Northern news signaled that freight demand has yet to rebound and this reversed some pre-market excitement that had stocks looking up before the official trading session opened – that early morning enthusiasm was fueled by strong results from Amazon.com.
All 10 of the major sectors lost ground on the session, with basic material share as the worst-performing group and tech as the best – the S&P 500 that tracks technology shares declined just 0.31%.
Plans to increase regulations on the banking industry are really kicking up too, there was a lot of talk about the Fed taking control of keeping banks in line – that’s enough to scare anyone -- and this may have also weighed on the market. We already have an issue with a lack of credit expansion, and even though this is a natural and frankly needed occurrence with credit quality in the tank, if medium and small businesses can’t get the financing they need it will burden job creation. If the regulatory regime goes too far, credit expansion will be suppressed -- yet another issue for this recovery.
Market Activity for October 23, 2009
Britain’s Surprise, the Dollar, and the FedFriday I noted that the U.K unexpectedly remained in recession during the third quarter, marking the sixth quarter of contraction – the longest since these records began in 1955.
This reality may cause the Bank of England to expand its quantitative easing campaign (purchases of government bonds – gilts in the U.K.), which would be a reversal from comments BofE Governor King made early this week when suggesting the central bank would pull back from QE. As a result, the pound got pounded (it had rallied hard earlier in the week on the King statements, but gave back all of those gains Friday morning).
The greenback got a nice boost as a result, rising against the euro and rallying hard against the pound.
As we mentioned early last week, it was going to be interesting to listen to Fed comments as various Fed officials were giving a total of nine speeches over the past several days – two of those coming from Chairman Bernanke. It’s interesting because there is quite a bit of contention going on within the Fed, some want to begin to gently raise rates and others say it is way too soon. The speeches revealed that this divergence in opinion remains the case.
From a short-term perspective, it is way too soon to raise rates, but if things get out of control and the greenback moves down to DEFCON 3 (solidly into the 74 handle on the Dollar Index – which we’re very close to at 75.30 on DXY this morning) and then to DEFCON 2 (matching the all-time low of 71 on Dollar Index) we won’t have the luxury of keeping monetary policy floored and the Fed will have to reverse course swiftly and abruptly – that will throw us back into a nasty situation.
Bernanke and Vice Chairman Kohn are the most dovish, as measured by their statements. If the other members of the FOMC (the Fed’s rate-setting committee) fail to convince Bernanke that he better start talking mildly higher rates and then get to gently increasing fed funds to 1.00% in short order, we may see DEFCON 2 sooner than most currently imagine. We need to remember that 1.00% fed funds is still very accommodative and it is ridiculous to remain at emergency levels (zero interest rate policy) or there will be other emergencies that arise. The dollar can’t depend on weakness within other currencies as the thing that helps it rally.
There is no way to get ourselves out of this corner without taking some punishment (and the Fed is backed into a corner here). However, the longer we cower in the corner, afraid to take some jabs and undoubtedly a couple of body blows, the more likely it is that we’ll get thrashed with a series of very heavy head shots. The Fed needs to act, it won’t be pleasant, but it will be worse the longer they wait.
Existing Home Sales
The rush to take advantage of the first-time homebuyers’ tax credit boosted existing home sales to the highest level in more than two years. Purchases of existing homes jumped 9.4% to 5.57 million units at a seasonally-adjusted annual rate (SAAR), outpacing the consensus estimate by 220,000 units. Purchases of single-family units only also rose 9.4%, to 4.89 million SAAR.
I’m using single-family only for the charts below because the headline number includes condos and those figures only go back to 1999.
While this increase is absorbing some supply, we’ll see over the next couple of months worth of data that the tax credit, in large part, front-loaded home purchases, borrowing sales from the future. We’ll wait to see if the credit is extended, and maybe even expanded (possibly to all homebuyers and the amount of the credit increased as the industry is begging Congress), but for now the primary determinant of home sales will fall back on its key element – labor market conditions.
I’ll also point out that these home sales figures are seasonally adjusted. This is appropriate in most cases, but if there ever was a time to look at the non-seasonally adjusted reading it is this time. Why? Because home sales normally fall significantly in September as the seasonal buying season (May-August) ends. This September though the non-seasonally adjusted decline in sales was not as severe – no doubt because the tax credit essentially extended the home-buying season. Hence, when adjusting to seasonality it makes the increase appear more substantial.
The supply of existing homes has tumbled (as measured by the pace of sales) back to 7.8 months’ worth at an annual rate from a 22-year high of 11.3 months’ worth back in June 2008. (For clarity, in case anyone is interested, the supply of homes was just as elevated back in early-mid 1980s as the 1981-82 recession affected home sales in the early part of that decade and interest rates remained in double-digit territory until crashing below 10% in 1985).
We have accomplished erasing much of the excess supply, but the trend is unlikely to continue; the supply of homes will rise again before eventually trending lower in a sustained manner. If sales decline due to the expiration of the tax credit, and supply is boosted by another wave of foreclosures, also a likely scenario, we’ll see some increase in the figure again.The median price of a single-family existing home fell 1.2% in September, falling to $174,900 from $177,100 in August. From the year-ago period, the median price has declined 8% and is 24.5% off of the peak ($230,900) hit in July 2006.
Futures
Stock-index futures are higher this morning as traders look to do some buying after Friday’s sell-off. International bourses have also helped pre-market trading in the U.S. Futures were flat very early this morning but as Asian stocks shook off some of their early-session weakness to move positive that compelled European stocks to advance and is helping U.S. stock futures.
As we get ready to say hello again to $3 gasoline (unless the U.S. dollar catches a bid), adding yet another challenge to the consumer, and another major commercial real estate lender has filed for bankruptcy it’s remarkable that stocks are higher in pre-market.
The increasing troubles in commercial real estate are not sneaking up on anyone, yet stocks seem to have an aloof attitude to this reality. If an inability to refinance debt continues, we’ll see plenty more bankruptcies on the commercial side. It’s going to take a while to get through the problems in overall real estate markets, and that may surprise some people who think we’re on a sustainable upward trajectory, specifically with regard to the residential side of things. Surely, everyone understands the commercial side has much deeper losses to deal with still.
Have a great day!
Brent Vondera, Senior Analyst
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