Tower Private Advisors
Capital Markets Recap
April 10, 2009
- Earnings season starts with a bang
- Boring economics, nice pictures
This week, the Dow 30 rose by 65.79 points, or 0.82%, to 8,083.38. The S & P 500 (SPX) rose by 14.06 points, or 1.67%, to close at 856.56. The NASDAQ Composite rose by 30.67 points, or 1.89%, to 1,652.54. The S & P Mid-cap index rose by 11.92 points, or 2.27%, to close at 536.43. The Russell 2000 small-cap index rose by 12.07 points, or 2.65%, to close at 468.20. Finally, the Morgan Stanley EAFE (Europe Australasia & Far East) index rose by 4.51 points, or 0.74%, to close at 615.78.
The 10-year note rose by 0.01% to a yield 0f 2.92%. The 30-year bond rose by 0.03% to 3.78%.
West Texas Intermediate Crude Oil (aka light, sweet crude) futures fell this week. The front month contract fell by $0.27, or 0.51%, to $52.24. Natural Gas continued to follow its bear market script; it fell by $0.19/mmbtu, or 5.02%, to $3.61.
Gold futures retreated this week, falling by $14.00, or 1.56%, to $883.30/ounce. See the ”Critical Juncture” post from earlier in the week by clicking here. Finally, the U.S. Dollar Index gained back more ground, rising by 1.62, or 1.93%, to $85.79.
Sun Microsystems–George Gilder darling of the late ’90s–was left jilted at the altar by IBM. According to Bloomberg, that was the result of ”executive payouts.” The company’s Unix workstations and mainframes were the go-to workhorses of the internet era, but no longer do they have that distinction. Instead, the changing of the stock’s ticker from SUN to JAVA suggests the company’s lead offering–and, no, it’s not high-priced coffee, but a software language of the internet. It seems that the marriage with IBM would have been a good partnership for Sun, but thosepayouts trumped everything else–of at least that’s one take on it. At it always does, Alcoa kicked off the earnings season with a dismal report. In post-market trading the shares rose nicely, only to fall back and waffle in Wednesday’s action. By week’s end, however, the stock had risen by 13.6%. It should make for an interesting earnings season, as the news is causing to induce vomiting, but may result in seemingly-contradictory performance. Such is the power of lowered Wall Street expectations. A few more dismal reports like Alcoa’s and more of the cash could come from the sidelines. Next Friday we get General Electric‘s results and they could be electrifying depending on the market’s mood. The slightest bit of good news and the shares will be up by another double-digit gain. Such is the power of a bellwether. Bed Bath & Beyond rose this week after it beat earnings estimates. Consumers aren’t supposed to be in the spending mood. Berkshire Hathaway lost its triple-A debt rating this week. The bond market was unfazed, apparently having been expecting the news, as the company’s bonds traded at the same level all week. Barclays is expected to sell its rapidly growing iShares business. Like a hedge fund in a liquidity squeeze, the company sold what it could sell not what it might have wanted to. Wells Fargolit up stocks yesterday by preannouncing quarterly earnings that were better than Wall Street expected. The company has yet to officially release the earnings, however. Walmart, on the other hand, announced March sales that failed to impress Wall Street, and that stock gave back a few bucks.
Expect to see more market-moving news in the weeks ahead as we wade through what will undoubtedly be one of the worst reporting seasons in recent memory. Perversely, stocks, however, do best in environments when analyst expectations are the most dismal, if for no other reason than their rear-view mirror approach to forecasting earnings.
There were just a few economic reports of note this week.
The Mortgage Bankers Association released its Mortgage Applications index. It rose modestly but remains below its 2009 highs. There has been a sharp uptick in purchase applications. This index is broken down into two components, one of refinance applications, the other of purchase applications, and while the former has risen quite sharply, the latter has reflected the gloom of the housing market. As the graph below (click for full-sized version) illustrates, however, purchase applications have picked up recently while refi applications have grown less slowly.
The Trade Deficit fell to its lowest level since 1999, to which the chart below attests. This was part of the Trade Balance report. Although deficit doesn’t seem to go with balance, it a balance of payments. Whereas we have a deficit in trade, we have a surplus in capital inflows, and this is the worst time to have a narrowing trade deficit, as it gives foreigners fewer of our dollars to recycle into things like Treasury notes, which are being issued right and left to fund our deficit spending. That could prove worrisome, and so could more of that Buy American nonsense.
Initial Jobless Claims (654,000) were less than the consensus estimate (660,000) and lower than the upwardly-revised reading of last week (674,000). You can judge for yourself from the chart below, however whether this is good news, or just a pause–for now–in the bad. To see real improvement, we need to look for readings that are lower than other lows, the classic definition of a trend. To help with that, I’ve added a couple of dotted lines to indicate those levels. Until then, ignore the talking heads saying the situation is improving. It is not.
The Minutes from the FOMC’s March Meeting were released this week, and it’s really some dry stuff. Let’s avoid all that and just check out a word cloud of the statement. It’s much more interesting that way, and you can get a decent ideas of the highlights by the size of the words. You can create these yourself at www.wordle.com.
Monday - nothin’
Tuesday – the Producer Price Index for March is released in its usual core and headline versions. On both levels, prices in March are expected to have been unchanged. On a year-over-year basis, headline producer prices are expected to have fallen by 2.0%, largely the result of lower energy prices. We know that because at the core level producer prices are expected to have risen by (+)4.0%. Business Inventories are expected to have contracted again for the sixth month in a row. Both Business and Wholesale inventories–the latter reported this week–have traced out the typical recessionary path, as the chart below (click for full size) depicts. This will eventually produce one of the earliest boosts to GDP as businesses decide not to allow inventories to fall further.
Wednesday – the Consumer Price Index for the month of March is reported, and expectations for both the headline and core rates are for a flattish increase of 0.1%. From 12 months ago, the headline level of prices is expected to be perfectly flat. Again, this reflects lower energy prices. The first of two economic releases, the Empire State Manufacturing index, is released this day. It’s likely–like a lot of releases these days–to be less bad, but far from showing improvement. Capacity Utilization and Industrial Production, both of which series look absolutely dismal. The best that can be said of the former is that once it bottoms, we can be fairly certain the recession has handed. In other words, it has little leading tendency, it tends to be a coincident indicator of the economy, like employment. Industrial Production is made up of readings from Manufacturing, Utilities, and Mining. Utilities tend to be heavily dependent on the weather and can, accordingly, be easily skewed. It suffered its largest drop in nineteen years in February. Other than the MBA Mortgage Applications index, released earlier on this day, but for which no estimates are available, the NAHB‘s Housing Market Index gives us the first look at housing, with the release of its builder survey for April. Economists look for the slightest improvement in the index, from nine to 10 on a 0 – 100 scale. At 2:00, the Federal Reserve releases its Beige Book, which reports on economic activity in all 12 of the Fed’s districts. No estimates are available, nor is a headline figure, per se.
Thursday – As usual, Initial Jobless Claims are released. Economists expect claims to have rebounded from this week’s drop. Economists, as a group, don’t expect employment to begin to improve until at least mid-2010, so that may color their expectations for the near term. Housing Starts and Building Permits in the month of March are announced. The former is expected to have declined from its February spurt, as is the latter. February building permits were revised up from 547,000 to 564,000. We haven’t seen too many revisions for the better in a long time. The Census Bureau estimates that 1.2 million new households will be formed in 2009, while the estimate for March housing starts is 540,000, or 45% of new households. At February’s end, there existed 12.2 months of new home inventory, based on the then-current rate of sales. The average inventory level since 1999 has been about six monthsworth, and prior to the spike in inventories that began in 2006, only about 4.5 months of inventory was average. The best thing that could happen for the economy in general–homebuilders may disagree–is for new home starts to go to zero. Let’s leave it as, until inventories get to a more reasonable level, the faster that housing starts approach zero the better. The second regional economic report of the week, the Philly Fed report, is released. Like the New York version, it’s expected to have gotten less worse but is also a long way from showing improvement. The stock market, in contrast, appears to equate an improvement in the second derivative with outright improvement. The best that can be said of any economic release is that the economy is stabilizing, but at rotten levels.
Friday – first-half April University of Michigan Consumer Confidence is released. If the rally in stocks can be maintained for a couple more weeks, it’s very likely that we’ll see a sizeable bounce in consumer confidence. Click here for a look at the right way to view consumer confidence–at least from the perspective of your investment portfolio.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
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