This time of year is almost always subdued, although things can get interesting on occasion due to the lack of volume; the market can become especially news-driven when there is an event with which to trade on. Thankfully, the failed act of terrorism, the targeting of civilians by an enemy combatant, didn’t offer such a scenario. (But I’ve got to say, and long-time readers know that I’ve been very concerned about our security efforts for a long time, when you have someone go from Nigeria to Amsterdam to the U.S. without luggage -- and on top of that our unwillingness of inability to revoke the visa even after his own father warned that his son may have been radicalized -- we don’t seem terribly serious about this problem; a problem that will grow over time if not properly checked. When one thinks about risk-management within the investment world, this issue has been and must remain a serious element of that risk assessment.)
Telecom shares, the worst-performing sector for the year, led the advance. In fact, all seven of the 10 major industry groups that rose on the session outperformed the broad market. The three that failed to close in positive territory were consumer discretionary, financials and industrials – ranked 3, 4 and 5 in terms of 2009 performance
The $44 billion Treasury auction went fine, not as well as previous auctions but ok. The rate was pushed higher, 1.089% (what a wonderful yield for two years) compared with the 1.077% at which the when-issued was trading just ahead of the auction. The bid-to-cover ratio (measure of demand) came in at 2.91, the previous auction had a bid-to-cover of 3.16 and the four-auction average is 3.07. The indirect bidding (foreign buyers, including central banks) came in at 35%; it had averaged 43% over the past four auctions. In general though, no big deal. Tomorrow’s $32 billion seven-year auction should be the tougher test, but we shouldn’t run into too much trouble, not yet at least. If inflation concerns arise, or the bond market begins to believe that this expansion is for real, that’s when the market will fully shun these levels of interest rates and trouble in financings this deficit spending may begin.
Market Activity for December 28, 2009
Holiday SalesMasterCard Advisors’ SpendingPulse has holiday sales up 3.6% from the year-ago period – their definition of the shopping season is the timeline Thanksgiving-Christmas, others extend it out to year end. This look by MasterCard does include food and health-care expenditures, which means there is some H1N1 vaccine in the number. There was also an extra shopping day this year (28 days between Thanksgiving and Christmas vs. last year’s 27), adjust for that and sales rose 1%. Severe winter weather across most of the country also helped to boost sales – while many concentrated on how this event hurt in-store traffic, it surely boosted online sales of winter apparel enough to offset the physical-store weakness.
According to SpendingPulse, E-Commerce sales are up 15.5% since Black Friday (day after Thanksgiving), relative to the year-ago period; electronics sales are up 5.9%; jewelry sales higher by 5.6%; footwear up 5.0%; luxury (ex. jewelry) is up 0.8%; apparel down 0.4% and department stores down 2.3% -- again, clearly this is a function of online activity stealing some sales due to the weather. Last year’s holiday shopping season was the worst since 1970, according to the International Council of Shopping Centers.
The final week of the year is also an important one as it accounts for roughly 15% of total holiday sales, according to Dana Telsey of Telsey Advisory Group.
China Watches Inflation, But It’s Just Talk for Now
Chinese Premier Wen Jiabao, in a rare interview, discussed inflation risks over the weekend – pointing to a surge in real estate prices and credit expansion (doubling over the past year as virtually every other economy shows credit is contracting). Wen stated that the Chinese government will address the issue before it becomes a problem. That’s what everyone always thinks, but it is too late by the time politicians begin to address it, at which point the measures necessary to ultimately tamp harmful levels of inflation are intensely detrimental.
We’ll watch for the Chinese to clamp down on credit by tightening standards. For now, they explicitly state that aggressive stimulus measures will remain in place, which propelled the Shanghai Exchange and other Asian markets over the past two sessions.
The Chinese leader also expressed that they will not cede to foreign pressure and allow their currency to appreciate – meaning they will not remove the peg to the U.S. dollar. So much for Mr. Mandarin himself (Tim Geithner) going over to China last month to smooth over the Chinese – nice try. Maybe they allow the currency to float for other reasons, but by explicitly stating that foreign governments’ calls to do so will have no bearing on their decision-making process Wen makes quite the public political statement.
Government Still Can’t Pull Back, But Will Have to Eventually
The Treasury Department has removed a $200 billion limit on aid to Fannie and Freddie and promised to cover their losses through 2012. So, just as the Federal Reserve plans to end it purchases of mortgage-backed securities by the close of first-quarter 2010, Treasury will be their to pick up the slack. Washington is extremely concerned that higher mortgage rates will result when the Fed exits from their purchase program, and the damage this will do to a housing market that has become conditioned to sub-5.00% rates, as well they should be.
The two government agencies underwrite nine out of every 10 new residential mortgages, twice the level prior to the crisis. The housing market may still be in decline if not for the government backing, but such actions carry their own risks. You can’t attempt to backstop everything, sometimes you just have to let the market find the bottom. Increased government involvement has done more harm within the labor market than may have otherwise been the case. Firms know what follows this level of deficit spending – higher tax rates.
As Lender Processing Services (a major provider of mortgage data) has been explaining for a while now, the mortgage delinquency problem is moving upstream. The level of deteriorating loans with credit scores above 680 are making up a larger percentage of all defaults. It’s no longer about sub-prime, but the traditional drag on housing (high unemployment) is now becoming a larger problem for the market. Of the loans that were current at the end of the prior year but now 60 days-plus delinquent as of September of the following year, > 680 FICO mortgages made up 40% of that number (750,000 of the 1.831 million loans). This is up from 35% in the prior year
It seems that the cost of this government support is going to be very costly. It masks the problems in the short term, but they will become evident over time.
Week’s Data
We were without a major data release Monday, but get back to it this morning with the S&P CaseShiller Home Price Index (October) and the Conference Board’s consumer confidence reading (December). CaseShiller is always a heavily watched release; we’ll see if the index can manage a fifth-straight monthly increase and continued improvement on the y/o/y figure, expected to be down 7.15% after September y/o/y decline of 9.36%. The confidence reading is expected to improve to 53.0 for December from 49.5 in the prior month. The figure needs to break above a reading of 60 in order to move past recessionary levels – the 40-year average is 95.8.
On Wednesday we get the Chicago Purchasing Manager Index, the gauge of factory activity out of the largest manufacturing region. The number is expected to slip from November’s reading, but remain in expansion mode nonetheless. It will need to meet expectations as two of the three regionals we’ve gotten for the month thus far have not been good.
We’ll round it out on Thursday with the weekly jobless claims data. The figure is expected to hover around the 450K level, and it should. The problem for claims at this point is the continuing numbers, which continue to rise.
Other Notes
Today marks 20 years since the Nikkei 225 (Japan’s main stock exchange) hit its all-time high of 38,915. Currently that bourse resides at 10,638. This is what can happen when an economy, still the world’s second-largest but probably not for long, implements terrible policy for an extended period of time. For sure Japan has structural issues, namely birthrates that are close to non-existent – not even close to replacement levels. But strong economic and monetary policy would have sparked economic growth, jobs, and encouraged immigration, thus easing or even completely offsetting the population problem.
GM is offering Saturn and Pontiac dealers $7,000 to clear these closed-out models from inventory. This will certainly boost December auto sales but is nothing more than another round of front-loading sales. Just as the clunker-cash program stole sales from the future, this program – although necessary to get discontinued models out the door – will do the same.
Have a great day!
Brent Vondera, Senior Analyst
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