Nine of the 10 major industry groups closed higher on the day, telecoms being the only loser. Health-care, financials and tech were the top performers.
The broad market currently resides at its highest level since October 1, 2008, surging 72% from the March 2009 abyss – capturing just more than half of the losses from the October 9, 2007 peak. We’ll now watch to see if the S&P 500 can make it back to its pre-Lehman collapse level of roughly 1240, just 8.3% higher and we’ll hit it.
The bulls remain in charge as the direction of stocks is more a function of earnings and interest rates than employment and GDP. Net bullishness (the difference between bullish and bearish sentiment) as measured by the American Association of Individual Investors has hit its highest level since February 2007.
Interest rates are certainly extremely low; the profit story has yet to play out -- expectations are very optimistic. The market cares little about the unemployment rate or GDP right now simply because the longer these figures remain weak (actually depressed in terms of employment and lackluster in terms of GDP thus far) the longer traders expect interest rates to remain very low. But the market should be giving a little more consideration to the jobs picture. Employers will likely wait quite a long time before they aggressively begin to hire again – they’ll want to book several quarters of good profit growth first. Besides, resource utilization rates are very low and that means they can squeeze more work out of existing employees; therefore, they will delay boosting payrolls in a meaningful manner – not to mention the delaying effects due to uncertainty about tax rates and health-care costs per worker; policymakers can remove this uncertainty in one fell swoop if they cared to do so.
While the slashing of payrolls is good for profits in the short-term, it doesn’t help final demand rebound – tough for this to occur at peak post war unemployment rates – and leads me to question the durability of earnings growth.
In addition, high joblessness doesn’t help mortgage-default rates or overall credit quality to improve. As default rates remain high, this puts additional pressure on bank capital ratios – banks will be hesitant to lend as they fear an erosion in capital adequacy ratios. This spells trouble for credit expansion.
Market Activity for January 13, 2010
Dollar, Fed Speak and a Little OilThe U.S. dollar got a lift in early trading on hawkish comments from Fed officials. Federal Reserve Bank Presidents Plosser and Fisher (Plosser from the Philly Fed Bank and Fisher from Dallas) commented on how the FOMC should not be deterred from tightening policy by a sluggish job market or other unfortunate realities.
Plosser focused on the need to hike rates in a timely manner. He stated that: “economic slack is neither a necessary or sufficient condition to ensure low inflation.” (That kind of anti-Keynesian talk won’t get him invited to any Federal Reserve dinner parties.)
Fisher focused more on allowing the economy to adjust on its own at this point. He commented on the perils of holding interest rates artificially low, which has certainly been the case as the Fed’s $1.25 trillion in MBS has pushed mortgage rates lower -- and Treasury yields too as investors sell MBS to the Fed and buy Treasuries with the proceeds. He also engaged in a bit of digression, moving onto fiscal policy (which is obviously out of his jurisdiction), as he brilliantly stated: “While it appears urgent, if not agreeable, to use massive public spending to stimulate an economy under duress, an economy cannot sustain long-term growth under the weight of significant fiscal burdens. At some point, what is considered a temporary economic prosthesis becomes a hindrance to the workings of the private sector.”
Neither of these two are current FOMC members, so they don’t have a vote on policy.
The market apparently didn’t view these comments as siren songs as the dollar rebound was extremely short-lived and headed back down to close the session lower.
Even though we have Fed officials out there talking up the exit story on occasion, the voting members continue to infer that monetary policy will remain floored for some time still. You listen to the latter for policy guidance. Personally, I find myself in the Plosser/Fisher camp.
Moving on, the dollar weakness didn’t stop crude from falling as the February contract fell back below $80 (closed at $79.67/barrel) after the weekly Energy Department report showed stockpiles rose twice as much as expected. Total fuel demand was down 1% from the same week last year. There is really no improvement in transportation demand and that is a key indicator to watch for economic progress.
And speaking of transportation, ASI/Transmatch’s latest data on weekly freight carloads showed extreme weakness continues. The chart below is on a four-week rolling average basis.
Mortgage Applications
The Mortgage Bankers Association reported that its mortgage applications index jumped 14.3% for the week ended January 8. This followed a 0.5% rise in the prior week.
The increase was all on the refinancing side as the segment bounced 21.8% and accounted for 71.5% of all applications during the week. This bounce follows three weeks in which refinancing activity fell 38.4%. Purchases were up just 0.8%; the separate purchases index remains floored. After a rebound in home purchases during the first 10 months of 2009, the index has slid back to levels that were first hit in 1997.
The rate on the fixed 30-year mortgage averaged 5.13% for the week, down from 5.18% in the previous week.
Beige Book
The Federal Reserve’s latest analysis of economic conditions showed that activity improved in 10 of their 12 districts (up from eight in the previous report), but remained at a low level. The assessment was for the period November 21-Janaury 4. Labor markets did remain weak across the board and real estate markets are causing a serious drag on things – but of course these are widely known. Richmond and Philadelphia were the two districts that reported activity was not much changed from the last Beige Book.
Most districts reported that consumer spending was slightly greater during the holiday season relative to year ago, but well off 2007 levels – districts noted that since sales were so weak in 2008 compared to 2007 that the 2009 gains did not represent a meaningful shift in trend. Retail inventory levels remain very lean in nearly all districts. Auto sales held steady or increased slightly from the previous report. Reports on tourism were mostly flat or weak. Overall, consumers were described as cautious, prices sensitive and necessity-driven.
Manufacturing activity increased or held steady. Among districts reporting near-term expectations, the factory outlook was optimistic, but spending plans remain cautious. Most activity was reportedly driven by auto assemblies and exports to Asia.
Home sales increased in most districts, but mainly for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, according to the Fed. Residential construction remained at low levels in most districts. The report mentioned that the tax credit boosted sales in November and led to an unusual slowdown in December. Commercial real estate was still weak in all districts with rising vacancy rates and falling rents.
Since the last report loan demand continued to decline or remained weak in most districts – and would have been worse if not for refinancing activity and auto loans. Credit quality continued to deteriorate.
Price pressures remained subdued, though metals prices increased and some districts reported higher agricultural prices.
Have a great day!
Brent Vondera, Senior Analyst
The rate on the fixed 30-year mortgage averaged 5.13% for the week, down from 5.18% in the previous week.
Beige Book
The Federal Reserve’s latest analysis of economic conditions showed that activity improved in 10 of their 12 districts (up from eight in the previous report), but remained at a low level. The assessment was for the period November 21-Janaury 4. Labor markets did remain weak across the board and real estate markets are causing a serious drag on things – but of course these are widely known. Richmond and Philadelphia were the two districts that reported activity was not much changed from the last Beige Book.
Most districts reported that consumer spending was slightly greater during the holiday season relative to year ago, but well off 2007 levels – districts noted that since sales were so weak in 2008 compared to 2007 that the 2009 gains did not represent a meaningful shift in trend. Retail inventory levels remain very lean in nearly all districts. Auto sales held steady or increased slightly from the previous report. Reports on tourism were mostly flat or weak. Overall, consumers were described as cautious, prices sensitive and necessity-driven.
Manufacturing activity increased or held steady. Among districts reporting near-term expectations, the factory outlook was optimistic, but spending plans remain cautious. Most activity was reportedly driven by auto assemblies and exports to Asia.
Home sales increased in most districts, but mainly for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, according to the Fed. Residential construction remained at low levels in most districts. The report mentioned that the tax credit boosted sales in November and led to an unusual slowdown in December. Commercial real estate was still weak in all districts with rising vacancy rates and falling rents.
Since the last report loan demand continued to decline or remained weak in most districts – and would have been worse if not for refinancing activity and auto loans. Credit quality continued to deteriorate.
Price pressures remained subdued, though metals prices increased and some districts reported higher agricultural prices.
Have a great day!
Brent Vondera, Senior Analyst
1 comment:
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http://frscalls.blogspot.com/2010/01/another-look-at-2009-railroad-traffic.html
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