Basic material, tech and energy shares led the advance. Financials were the worst-performing sector; health-care stocks slipped also as these were the only sectors of the major 10 that closed in negative territory.
Volume was extremely weak, which is always the case for the session prior to Christmas Eve, but even more so than is typical as just 740 million shares traded on the Big Board – something closer to 900 million has been the norm. Today is a holiday-shortened session and most traders are long gone so we’re likely to just go through the motions unless the day’s economic releases (jobless claims and durable goods orders) print readings that are far from expectations.
The U.S. dollar ended a six-day rally.
Market Activity for December 23, 2009
$80 Looks to be Back in PlayCrude-oil for January rose 3% to $76.67/barrel yesterday after the weekly energy report showed supplies fell more than expected. Crude stockpiles slid 4.84 million barrels last week, a fall of 1.6 million was expected, as consumption of gasoline rose 0.9% from the prior week to 9.05 million/day and distillate fuels (diesel and heating oil) rose 5.2% over the previous week – some of this was obviously due to colder weather, especially in the Northeast.
Not all of the decline in stockpiles was a result of increased demand, though it is nice to see gasoline consumption 2% higher than the ultra-weak levels of a year ago. While refinery utilization rose to 80%, this is still rock-bottom as 88% is the long-term average and 83% was viewed as the floor prior to the beating the economy’s taken over the past year. Also, oil imports fell another 0.8% in the latest week to 7.71 million barrels, the lowest level since September 2008 when Hurricanes Gustav and Ike punished the Gulf Coast and shut down the ports.
Mortgage Applications
The Mortgage Bankers Association reported that applications fell 10.7% in the week ended December 18, the first decline in four weeks. Both purchases and refinancing got clocked, down 11.6% on purchases and 10.1% for refis. The 30-year fixed rate mortgage rose to 4.92%.
The rate will move above 5.00% next week as Treasury yields have jumped, which means the Fannie and Freddie commitment rates also rose. Based on those moves the 30-year mortgage rate is going to 5.20% next week. This will be a nice little snapshot to show how housing will react to just marginally higher rates. It does not seem likely that a sustained move higher will present itself, in my opinion – not yet at least. But the housing market has become conditioned to 4.70-5.00% rates and thus the reaction will not be kind to 5.00%-plus, and higher, that is inevitable over time.
Personal Income and Spending
The Commerce Department reported that personal income rose 0.4% in November (a bit below the expected 0.5% increase), which marks the fifth-straight monthly increase. Over the past year, overall personal income is down 0.3% -- although that has been helped by a 15% rise in government transfer payments. Total compensation (which excludes rental, dividend, interest and proprietors income) is down 2.2% y/o/y, but off by 5.6% when we exclude transfer payments.
All of the components looked good in November. Compensation was up 0.3%, same for wage & salary. Proprietors income rose 1.2%, boosted by another huge bounce on the farm side – up 23.0%; non-farm proprietors income rose 0.5% for the month. Rental income added 0.6% in November. Interest income rose 0.2% and dividend income was higher by 0.9%. Government transfer payments rose 0.5%. On a year-over-year basis, rental income and government transfer payments are the only segments that are positive.
On this transfer payments situation, we have seen massive increases in both actual $ amounts (as the social safety net has become larger, we’ve seen two rounds of stimulus checks, and higher SS outlays due to an aging population) and as a percentage of personal income. The spike over the past year is largely due to the French-style extensions of unemployment benefits that now extend to as much as 99 weeks.
In summary, the 0.3% bounce in the wage & salary component was welcome news and let’s hope this is the start of something good. Even if firms are unlikely to add aggressively to payrolls (and aggressive additions is what it will take to move the unemployment rate meaningfully lower over the next year), some decent increases to existing workers’ paychecks is not out of the question. Still, the overall figures (total income and compensation) are looking better than would otherwise be the case due to the transfer payments. Such activity, government spending at these levels, is not sustainable and that does boost the risk that we face another disappointing trend a few months out. The “Gods of the Copybook Heading” will prevail as they always do. Bret Stephens of the WSJ Editorial Board brought this up earlier in the week and reflecting on Rudyard Kipling’s poetic reminder that common sense always prevails is all the more apropos today.
On the spending side, personal expenditures rose 0.5% (also below the expectation, which estimated a 0.7% increase) as outlays for goods rose 1.4% (holiday shopping) and service rose 0.4%. The cash savings rate held steady at 4.7%.
University of Michigan Confidence
The U of M consumer confidence reading for December was revised down to 72.5 from the preliminary print of 73.4 that was release two weeks ago. Still, this shows that confidence did improve from November’s weak 67.4.
The economic outlook reading (expectations six months out) was also revised down to 68.9 from 69.7.
New Home Sales
New home sales tumbled 11.3% in November (a 1.7% increase was expected) after a big downward revision for October (up just 1.8% vs. the 6.8% rise initially reported last month) to 355,000 units at a seasonally-adjusted annual rate. This is the lowest level since April and erases most of the bounce from the January low of 329,000 units. On a year-over-year basis, new home sales are down 9%.
This offers us a glimpse of what will occur when the tax credit expires. (Unlike existing home sales that are counted when a contract closes, new home sales are counted when a contract is signed. That is, while existing sales are effectively counting activity a month or two in the past when the purchase process began, the new home sales figure measures what actually occurred in the reporting month. Since buyers in November largely believed the credit had essentially expired – had to close by November 30 – this offers a glimpse of what things may look like without the subsidy.)
By region, sales were flat in the Northeast, up 21% in the Midwest, down 21% in the South (this region makes up over half of the new-home market) and off by 10% in the West (the West and South together make up 73% of the new-home market).
The median price actually rose 3.8% in November to $217,400, which was quite unhelpful.
The supply of new homes, as measured by the inventory-to-sales ratio (the number of months it takes to sell off existing supply at the current sales pace) rose to 7.9 from 7.2 in October.
Yesterday I mentioned that we should be careful in our expectations regarding the supply of homes when referring to the previously-owned home figures. The supply of existing homes fell substantially and has returned to a level that is pretty close to the longer-term average. However, when foreclosures begin to hit the market that supply number will rise again. But that’s not all as the market is likely to be hit by a double whammy – more houses hitting the market due to foreclosures along with a decline in sales. If what has occurred in new home sales shows up in existing (although unlikely to fully occur until the tax credit expires in April) then it will boost the inventory/sales ratio that much more.
Futures
Stock-index futures are higher this morning. We await the jobless claims and durable goods orders reports. Unless these numbers are much worse than expected, traders appear determined to push prices higher. We continue to hold above that 50% retracement level we’ve referred to over the past two days.
Merry Christmas!
Brent Vondera, Senior Analyst
