U.S. stocks extended their losing streak to four sessions and Wednesday’s losses accelerated to the close, but looking on the bright side the downside was nothing when considering yesterday was the 80th Anni of the two days that kicked off the 1929 crash.
Certainly, the 5% pullback since the near-term high hit on October 19 (also a meaningful date – the day of the 1987 crash) is hardly consequential considering the significant 60% rally from the March lows. Undoubtedly we’ll get an actual correction, even with the Fed’s unprecedented monetary stimulus that has encouraged money to flow into everything from stocks, to bonds (gov’t and corporate), to gold, oil and copper – it’s unlikely we have ever seen such correlation before. But this move to the downside cannot be defined as a correction yet – a decline of 10% or more is needed to use this term to define the trend.
The broad market began the session slightly lower but the slide was on once the new home sales data printed a number that was not even close to expectations, which added to concerns that stock prices have gotten ahead of the realities on the ground.
The Dow Transportation Average continues to get slammed and this time, unlike the slight pullback in June-early/July, the trannies have declined at twice the pace of the overall market. Transports are a very good indication with regard to the degree of the cycle and their earnings reports show things have bounced from the doldrums but the underlying businesses remain weak, which is why the prices are taking a hit. The group may be portending more weakness to come over the very near term for the broad market.
Financials was the worst-performing sector on the day, not far behind were basic material, energy and consumer discretionary shares. Telecoms were the only sector to buck the day’s trend after Qwest reported good results at its business-markets unit.
The bad news buck has rallied for five days now. As we keep saying, and I don’t enjoy typing such things, the safety trade and overall concerns regarding the pace of expansion is all the U.S. dollar has going for it at this time.
Market Activity for October 28, 2009
Earnings Season
Third-quarter earnings season results are quietly eroding as reports from the sectors that have been hardest hit by this economic maelstrom roll in (I’m referring to industrials, energy and basic material sectors). Overall earnings results, which appeared to be holding in at single-digit declines, have moved to the negative teens (down 17% thus far regarding ex-financial results).
Based on the percentage of hardest hit sectors that still have to report Q3 results will end up roughly 16% lower (down 22%-23% on the ex-financial reading). We’ve concentrated on the ex-financial sector reading for two years now as bank earnings were crushed by the bursting of the housing market bubble. Now the sector is being temporarily propped up by the Fed’s ZIRP (zero interest-rate policy) as it helps to mask credit-quality woes. So, the ex-financial reading remains the figure to concentrate on.
Indeed, 80% of S&P 500 members that have reported thus far have beat expectations, but those were low-ball estimates. S&P 500 profits have declined for nine-straight quarters now, a post-WWII record. At this stage of the game, profits should be down in the low single-digits at worst, especially since firms have aggressively shed costs as payrolls have been slashed. The fact that earnings declines remain much worse is quite telling.
Mortgage Applications
The Mortgage Bankers Association’s index of applications fell for a third straight week, with large declines over the past two weeks. Apps fell 12.3% in the week ended October 23, following a 13.7% decline in the prior week.
The index was led lower by a 16.2% plunge in refinancing activity (which was down 16.8% in the previous week) as the 30-year fixed rate mortgage remained above 5.00%. And maybe it’s more than that, possibly the vast majority of homeowners who can refi already have. Purchases fell 5.2%, after a 7.6% drop in the previous week and a 5.0% decline in the week ended October 9.
Durable Goods Orders
The Commerce Department reported that durable goods orders rose 1.0% in September (in line with expectations), following a rather large 2.6% decline in August. Excluding transportation (which is an especially volatile aspect of the report), orders rose 0.9% -- also right in line with expectations.
Transportation orders rose 1.1% as defense orders jumped 12.5% in September. Vehicles and parts fell 0.1% and commercial aircraft orders were down 2%.
Ex-trans orders were boosted by a nice 7.9% bounce in machinery orders (following a 0.8% rise in August and a 7.7% decline in July), but was weighed down by a 0.2% decline in computer, electronic orders and a 0.9% drop in electrical equipment orders.
The shipments of durable goods, not the orders, is what flows into the GDP report and that figure rose 0.8% in September and 6.6% at an annual rate for the third quarter. So, durable goods will contribute to the GDP report for Q3, which we’ll get today. The business spending side won’t though, as this figure fell 8.3% at an annual rate during Q3. It should, however, help out in the fourth quarter as orders for this segment rose, so the shipments should show up in the Q4 GDP reading.
The report also showed that manufacturers continue to cut inventories – the durable goods inventory-to-shipments ratio fell to 1.77 from 1.80 months worth. The pace of inventory liquidation was significantly slighter than that of the previous quarter (almost impossible not to be as the inventory slashing that occurred in the second quarter set a record – this data goes back to 1947) and that’s all it takes for inventories to make a statistical contribution to GDP.
New Home Sales
New home sales unexpectedly declined for the first time in five months in September, a sign that the housing recovery will loss momentum as the tax credit currently in place has essentially expired. (The expiration is officially November 30 right now, but the contract needs to close by that date and originations in back-half of September would have had little chance of meeting that date – so potential buyers didn’t chance it.) This decline ended a four-month streak of increasing home sales.
Sales fell to 402,000 at an annual rate, or 3.6%, after printing 417,000 in August. The market had expected new home sales to jump to 440,000 for September, so quite a large miss.
The figure was led lower by a 10% drop in the South and a 10.6% decline in the West. These are the two main regions for new homes, making up 70% of the market. Surely, the expiration of California’s new home tax credit in August resulted in the pullback in the West region. New home sales jumped 34% in the Midwest (this region makes up 17% of the market) and were flat in the Northeast (makes up just 10% of the new home market).
The median price of a new home rose 2.5% for the month (which didn’t prove very helpful for sales) but is down 9.1% from the year-ago period, coming in at $204,800 vs. $225,200 in September 2008.
The supply of new homes, relative to the pace of sales, was unchanged at 7.5 months worth of supply.
In short, the first-time homebuyers federal tax credit and the California new home tax credit certainly front-loaded sales and I believe it is reasonable to believe that there will be a degree of hangover that must be dealt with over the next few months as a result. This sums up basically every policy actions Washington has taken to combat the housing and economic recessions – there will be blowbacks to deal with as the agenda is extremely short-term in nature.
Today’s Data
This morning we get the first look at Q3 GDP along with initial jobless claims.
GDP is going to show that the longest and most severe recession in the post-WWII era has ended, so we can be thankful for that. The number is expected to show economic growth came in at a 3.2% real annual rate. I think it is likely we’ll get a number even better than this, a range of 3.5%-4.0% is definitely possibly as the one-time/one-quarter events of “cash for clunkers” and the homebuyers’ tax credit (which led sales higher and fomented an increase in home building) propelled GDP. The latest out of Washington on the home tax credit front is the $8,000 credit will be extended to April 30 and even people who have lived in a home for five years will be offered a $6500 tax credit if they choose to move. This is just more front-loading though and makes the hangover that much worse. For the fourth quarter GDP, we better start to see a big pick up in inventory rebuilding or the next economic figure will disappoint – of course you need final demand to make a comeback before firms aggressively rebuild stockpiles and demand will prove lacking due to the aggressive nature of job cuts and overall languid labor market.
The jobless claims figures will need to show a trend down to 500K, currently stuck in the 525K-550K range. If these two figures beat expectations the market should find reason to rally, especially after the recent pullback. However, if both fail to meet or beat the recent return to the safety trade will continue.
Have a great day!
Brent Vondera, Senior Analyst
Certainly, the 5% pullback since the near-term high hit on October 19 (also a meaningful date – the day of the 1987 crash) is hardly consequential considering the significant 60% rally from the March lows. Undoubtedly we’ll get an actual correction, even with the Fed’s unprecedented monetary stimulus that has encouraged money to flow into everything from stocks, to bonds (gov’t and corporate), to gold, oil and copper – it’s unlikely we have ever seen such correlation before. But this move to the downside cannot be defined as a correction yet – a decline of 10% or more is needed to use this term to define the trend.
The broad market began the session slightly lower but the slide was on once the new home sales data printed a number that was not even close to expectations, which added to concerns that stock prices have gotten ahead of the realities on the ground.
The Dow Transportation Average continues to get slammed and this time, unlike the slight pullback in June-early/July, the trannies have declined at twice the pace of the overall market. Transports are a very good indication with regard to the degree of the cycle and their earnings reports show things have bounced from the doldrums but the underlying businesses remain weak, which is why the prices are taking a hit. The group may be portending more weakness to come over the very near term for the broad market.
Financials was the worst-performing sector on the day, not far behind were basic material, energy and consumer discretionary shares. Telecoms were the only sector to buck the day’s trend after Qwest reported good results at its business-markets unit.
The bad news buck has rallied for five days now. As we keep saying, and I don’t enjoy typing such things, the safety trade and overall concerns regarding the pace of expansion is all the U.S. dollar has going for it at this time.
Market Activity for October 28, 2009
Earnings SeasonThird-quarter earnings season results are quietly eroding as reports from the sectors that have been hardest hit by this economic maelstrom roll in (I’m referring to industrials, energy and basic material sectors). Overall earnings results, which appeared to be holding in at single-digit declines, have moved to the negative teens (down 17% thus far regarding ex-financial results).
Based on the percentage of hardest hit sectors that still have to report Q3 results will end up roughly 16% lower (down 22%-23% on the ex-financial reading). We’ve concentrated on the ex-financial sector reading for two years now as bank earnings were crushed by the bursting of the housing market bubble. Now the sector is being temporarily propped up by the Fed’s ZIRP (zero interest-rate policy) as it helps to mask credit-quality woes. So, the ex-financial reading remains the figure to concentrate on.
Indeed, 80% of S&P 500 members that have reported thus far have beat expectations, but those were low-ball estimates. S&P 500 profits have declined for nine-straight quarters now, a post-WWII record. At this stage of the game, profits should be down in the low single-digits at worst, especially since firms have aggressively shed costs as payrolls have been slashed. The fact that earnings declines remain much worse is quite telling.
Mortgage Applications
The Mortgage Bankers Association’s index of applications fell for a third straight week, with large declines over the past two weeks. Apps fell 12.3% in the week ended October 23, following a 13.7% decline in the prior week.
The index was led lower by a 16.2% plunge in refinancing activity (which was down 16.8% in the previous week) as the 30-year fixed rate mortgage remained above 5.00%. And maybe it’s more than that, possibly the vast majority of homeowners who can refi already have. Purchases fell 5.2%, after a 7.6% drop in the previous week and a 5.0% decline in the week ended October 9.
Durable Goods Orders
The Commerce Department reported that durable goods orders rose 1.0% in September (in line with expectations), following a rather large 2.6% decline in August. Excluding transportation (which is an especially volatile aspect of the report), orders rose 0.9% -- also right in line with expectations.
Transportation orders rose 1.1% as defense orders jumped 12.5% in September. Vehicles and parts fell 0.1% and commercial aircraft orders were down 2%.
Ex-trans orders were boosted by a nice 7.9% bounce in machinery orders (following a 0.8% rise in August and a 7.7% decline in July), but was weighed down by a 0.2% decline in computer, electronic orders and a 0.9% drop in electrical equipment orders.
The shipments of durable goods, not the orders, is what flows into the GDP report and that figure rose 0.8% in September and 6.6% at an annual rate for the third quarter. So, durable goods will contribute to the GDP report for Q3, which we’ll get today. The business spending side won’t though, as this figure fell 8.3% at an annual rate during Q3. It should, however, help out in the fourth quarter as orders for this segment rose, so the shipments should show up in the Q4 GDP reading.
The report also showed that manufacturers continue to cut inventories – the durable goods inventory-to-shipments ratio fell to 1.77 from 1.80 months worth. The pace of inventory liquidation was significantly slighter than that of the previous quarter (almost impossible not to be as the inventory slashing that occurred in the second quarter set a record – this data goes back to 1947) and that’s all it takes for inventories to make a statistical contribution to GDP.
New Home Sales
New home sales unexpectedly declined for the first time in five months in September, a sign that the housing recovery will loss momentum as the tax credit currently in place has essentially expired. (The expiration is officially November 30 right now, but the contract needs to close by that date and originations in back-half of September would have had little chance of meeting that date – so potential buyers didn’t chance it.) This decline ended a four-month streak of increasing home sales.
Sales fell to 402,000 at an annual rate, or 3.6%, after printing 417,000 in August. The market had expected new home sales to jump to 440,000 for September, so quite a large miss.
The figure was led lower by a 10% drop in the South and a 10.6% decline in the West. These are the two main regions for new homes, making up 70% of the market. Surely, the expiration of California’s new home tax credit in August resulted in the pullback in the West region. New home sales jumped 34% in the Midwest (this region makes up 17% of the market) and were flat in the Northeast (makes up just 10% of the new home market).The median price of a new home rose 2.5% for the month (which didn’t prove very helpful for sales) but is down 9.1% from the year-ago period, coming in at $204,800 vs. $225,200 in September 2008.
The supply of new homes, relative to the pace of sales, was unchanged at 7.5 months worth of supply.In short, the first-time homebuyers federal tax credit and the California new home tax credit certainly front-loaded sales and I believe it is reasonable to believe that there will be a degree of hangover that must be dealt with over the next few months as a result. This sums up basically every policy actions Washington has taken to combat the housing and economic recessions – there will be blowbacks to deal with as the agenda is extremely short-term in nature.Today’s Data
This morning we get the first look at Q3 GDP along with initial jobless claims.
GDP is going to show that the longest and most severe recession in the post-WWII era has ended, so we can be thankful for that. The number is expected to show economic growth came in at a 3.2% real annual rate. I think it is likely we’ll get a number even better than this, a range of 3.5%-4.0% is definitely possibly as the one-time/one-quarter events of “cash for clunkers” and the homebuyers’ tax credit (which led sales higher and fomented an increase in home building) propelled GDP. The latest out of Washington on the home tax credit front is the $8,000 credit will be extended to April 30 and even people who have lived in a home for five years will be offered a $6500 tax credit if they choose to move. This is just more front-loading though and makes the hangover that much worse. For the fourth quarter GDP, we better start to see a big pick up in inventory rebuilding or the next economic figure will disappoint – of course you need final demand to make a comeback before firms aggressively rebuild stockpiles and demand will prove lacking due to the aggressive nature of job cuts and overall languid labor market.
The jobless claims figures will need to show a trend down to 500K, currently stuck in the 525K-550K range. If these two figures beat expectations the market should find reason to rally, especially after the recent pullback. However, if both fail to meet or beat the recent return to the safety trade will continue.
Have a great day!
Brent Vondera, Senior Analyst
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