Capital Markets Recap
May 22, 2009
U.S. credit rating at risk . . . again
Freaked out formatting
Here’s a look at how equity markets fared this week.
|Current||Last Week||$ Chg||% Chg|
|DJ Industrial Average||8,277.32||8,268.64||8.68||0.10%|
|S&P Mid Cap 400||551.27||545.72||5.55||1.02%|
|NASDAQ Composite Index||1,692.01||1,680.14||11.87||0.71%|
|Dow Jones World & Region – World x U.S.||160.99||154.84||6.15||3.97%|
As is often the case, the point-to-point changes obscure the intraweek volatility. For example, between intraday high and low for the week, the Dow swung by 459.75 points, while the S & P 500 swung by 47.69 points. Also masked was the S & P 500′s failed attempt at piercing its 200-day moving average, a level many consider the difference between bear and bull market. On the other hand, the 870 support level held. If it hadn’t, we would have been looking for a drop to 840, which might have shaken the confidence of the underinvested, Johnny Come Latelys. Click here for a look at the chart of the action. Other than the continuing worry about volume not confirming the rally, this week’s high was lower than last week’s, as that previous chart showed.
Here is a look at the volume conundrum. What the volume conundrum says is that investors think either that A) the rally has no legs, and/or B) it’s about all over with. If you’re in one of those camps, I highly suggest you watch the video found by clicking on the image below.
|Current||Last Week||$ Chg||% Chg|
|30-year Treasury Bond||4.31||4.08||0.23||5.69%|
Treasury yields backed up considerably this week, when the Federal Reserve failed to purchase as many bonds as participants had expected, this in light of the FOMC minutes, which said the Federal Reserve intended to continue its quantitative easing (i.e. printing money) program. The credit rating issue mentioned below didn’t help things. Unfortunately for the budding recovery in equities, Treasury bonds are a necessary partner.
Commodities continued to benefit from the declining dollar, which is looking very bearish. On the other hand, the move in the dollar is waaaay overdone, and you can expect a rebound in it shortly. Investor sentiment is very bearish, the dollar is technically oversold (click here for a chart), and the dumb money is all over it (witness last week’s Japanese version of this phenomenon). That’s not to suggest one should be bullish on the dollar–at least not in time frames measured beyond weeks. The long-term fundamental picture is not a pretty one. Already, Brazil and China have agreed to transact mutual business in their own currencies.
We do, however, like the outlook for China and suggest you sit back and watch this short video of one of our favorite commentators on commodities, Jim Rogers.
|Current||Last Week||$ Chg||% Chg|
|Light Crude Oil – Continuous Contract||61.05||56.34||4.71||8.36%|
|Natural Gas – Continuous Contract||3.60||4.10||-0.50||-12.08%|
|Gold – Continuous Contract||951.20||931.30||19.90||2.14%|
|United States Dollar Index||80.01||83.02||-3.02||-3.64%|
A couple of sovereign debt issuers were warned about their precarious financial situations. Standard & Poor’s retained the United Kingdom’s AAA debt rating, but changed its outlook to negative from stable. The agency’s main concern appeared to be over an increase in the country’s debt:GDP rating from the current 55% to 100%, which would, “in S & P’s view be incompatible with a AAA rating.” The outlook would be revised back to “stable” if the country’s finances were improved “or if fiscal outturns are more benign than we currently anticipate.” The other country, the United States of Hubris, appeared to not be worried about the possible downgrade, at least that’s how Reuters saw it in a headline today: “White House Says Not Concerned About a U.S. Rating Cut.” To be fair, this isn’t the first time this fear has surfaced, but if the foreign exchange market is a reliable voting booth, currency traders are voting with their currency swaps, as indicated by the performance of the dollar, above. Who can blame them? In the aftermath of the Chrysler bankruptcy, we’ve shown bond investors that debt covenants can be torn up for the sake of political expediency. It was our policies that produced the housing crisis the produced the current financial crisis and Great Repression.
Oh, never mind all that, Golden Boy Tim Geithner is coming to the rescue. He said in a May 21 Bloomberg interview that “the Obama administration is committed to reducing the federal budget deficit after concerns arose the the U.S. debt rating may eventually be threatened with a downgrade. From a look at smiling mug, you can see why Bloomberg added the odd age notation in the following excerpt from a recent story.
Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”
Baby face, or not, he’d better get to work, as you can see from the following worrisome looks at our debt picture. Click on each for a closer look. The first shows the trajectory of our national debt, the second is GDP, the third is a ratio of the two, with the worry level that S &P mentioned for the U.K. added in. Keep in mind, too, that this is only the on-balance sheet debt, not the Enron/Citigroup sort of off-balance-sheet stuff, like Social Security and Medicaid–you know, the But-I-paid-in stuff that you insist to your grandchildren is due you.
Here’s a breath of fresh air for Bank of America investors: the Bloomberg terminal this week had the following headline: Bank of America’s Lewis to Sit Out Consolidation Wave. Well, that’s refreshing. Maybe he’s learned his lesson, having rolled over for Bernanke and Paulson in proceeding with the Merrill Lynch purchase, which was preceded by the impossibly-poorly-timed acquisition of Countrywide Financial at the tail end of the housing boom. More likely, with both hands in Bank of America’s capital coffers, Uncle Sam won’t brook the idea.
Big layoffs continued this week, with stories of Hewlett-Packard’s plan to eliminate 2% of its worldwide workforce and American Express’s intention of cutting loose 4,000. This week, Goldman Sachs, JP Morgan Chase, and Morgan Stanley, all applied to repay their TARP funds. The omniscient, omnipotent Treasury department said that would only be possible after insuring that each could raise additional capital by raising unsecured debt.
As expected the NAHB Housing Market Index improved a couple of pointsto the consensus expectation of 16. Homebuilders in all regions of the country but the midwest (flat) reported improved sentiment. The Future Sales index improvedas well, but, troublingly, actual Traffic of prospective buyers was unchangedfrom April. It would have been nice to see a fundamental reason for the improvement in builder sentiment. Instead, we’re left to wonder if builders’ spirits weren’t bouyed by the general improvement in mood outside of housing. Still, on a scale of 0 – 100, the current reading is 16, which hardly counts for an ebullient mood amongst the builders. Housing Starts fell to 458,000 (annual basis), well below economist estimates of 520,000. Building Permits fell to an annual pace of 494,000, again below the dismal scientists’ estimate of 530,000. (It’s a wonder that economics is called the Dismal Science, when its practitioners are perenially so optimistic.) Recall from last week’s dispatch that what sounds bad for builders is good for the industry ultimately.
I don’t mean to throw cold water on your happiness parade, but with 10.7 months of new home inventory, we don’t need upticks in building permits and starts.
Unfortunately–with respect to last week’s excerpt–the weakness came solely from multi-family (i.e. apartment building) starts. Single-unit starts were up by 2.79%; 2-4 unit starts were down by 62.50%; 5+ units were down by 4.22%.
Lastly for housing, the MBA Mortgage Applications index rose by 2.3% after having fallen in the prior week. 30-year national mortgage rates continue to hover a shade below 5.00%.
Initial Jobless Claims registered 631,000 new claims (economists expected 625,000) for unemployment insurance, and last week’s reading was revised upward to 643,000 (from 637,000). Recall that we want to see a series of confirming lower lows and lower highs, and that the most recent lower high was 645,000, so even with last week’s revision we remained under it. The closely-watched 4-week moving average of claims also continues in a modestly-downward trend.
Leading Economic Indicators improved to 1.0% (0.8% expected) from March’s -0.2% (revised from -0.3%). This was the first increase in seven months. Ned Davis Research pointed out that the increase was the best in four years. Of the ten indicators in the series, seven improved in April. They were:
Interest rate spreads
Index of consumer expectations
Initial jobless claims (average of)
Weekly manufacturing hours
Index of supplier deliveries
New orders for consumer goods and materials
Lastly, the Philly Fed index improved by four points to -22.6, although economists expected the reading to improve to -18.0. There were a number of bright spots in the release. First, some background. The Philly Fed is broken into two sections: current activity and future activity, with a number of components to each. The current activity portion, aka General Business Activity Index, improved slightly–less worse, that is. As to components, Number of Employees posted a near record single-month increase, although still just an improvement to less bad, and the Average Employee Workweek had a similarly-robust improvement. The Future Activity Index was resplendent with enthusiasm, as it improved to a level last seen in 2004.
Tuesday – The CaseShiller Home Price Index and National Home Price Index are reported. The former is the usual 20-metro area price data, while the latter purports to capture the majority of the nation. Both indexes are still expected to post -18% year-over-year declines. The Dallas and Richmond Federal Reserve Banks both release manufacturing indexes for their respective regions. These are the first of four regional activity indexes. The remaining two are due on Friday.
Wednesday – the Federal Housing Finance Agency releases its quarterly Home Price Index. This index purports to be the broadest measure of home prices for the country, and it’s done nothing but go down since late 2005. What’s more, it has accelerated for the last five quarters. The National Association of Realtors may provide some hope when it releases its Existing Home Sales figures. Economists expect that the annual rate of sales rose from 4.57 million to 4.65 million. If so, that will represent a very modest bounce, not one that produces a higher high, which so often can indicate a trend change.
Thursday – Durable Goods Orders are announced, and they are expected to have increased modestly in April (0.5%), but a look at the year-over-year change in the index–still running at all-time bad, since 1956–is scary. And when transportation orders are excluded, another decline (0.3%) is expected. Initial Jobless Claims are due out. They’re expected to have risen by 4,000 to 635,000. Again, we’ll watch 641,000, which is the recent, lower high. The last piece of housing data comes in the form of New Home Sales, which are expected to rise to 363,000 (from 356,000), but as you can see from the next graph, the magnitude of the decline makes such a bounce virtually meaningless.
Friday – We get our second look at Q1 GDP in the Preliminary release. Economists expect that the release will have been revised to the better (-5.5% v. -6.1%), while Personal Consumption is expected to have been revised lower. The Chicago Purchasing Managers Index is released, and it’s expected to have edged closer (42.0 from 40.1) to expansion territory, in keeping with what we’ve seen in other data. Finally, University of Michigan Consumer Confidence is released. It is expected to have made the smallest of all possible increases (68.0 v. 67.9), but we shouldn’t forget the powerful effect of still rising stock prices.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.