Wkly. Rcp. & Otlk. – 09.25.09

Tower Private Advisors

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Capital Markets Recap

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If the chart above is any indication, it doesn’t take much of a move in the dollar to send stocks reeling.  In fact, the NASDAQ notched a buying climax this week.  That’s a move when an index or security both notches a 52-week high and closes the week down.  It doesn’t mean it’s all done, but that it’s at least time for a breather.  It bears watching.  Gold, as you’ll notice above, wasn’t able to remain above $1,000/ounce, which, if you read this dispatch regulary, does not surprise you. 

This Week

Cut to the chase:  housing stumbles, while jobless claims and consumer confidence improve.  Economists miss badly on almost all  fronts.

We received four housing data points, and three of the four were weaker than expected and weaker than the prior release.   The wide-coverage House Price Index for July rose by 0.3%, whereas economists expected 0.5%.  That was worse than–no, wait, better than . . . June showed a 0.5% increase, but that was revised down with the July data to just 0.1%, so technically, this month’s represents an improvement.  But the economists were still wrong.  Hah!  The dismal scientists expected Existing Home Sales to register 5.35 million, while the actual figure was 5.10 million and the prior figure was 5.24 million.  If you look to headlines to explain market action–and that’s probably okay to do in pre-market futures activity–then Thursday’s activity can be explained like this:  the market opened up on stronger than expected jobless data and then sold off on the release of the housing data.  Inventories of Unsold Existing Homes fell to 8.2 months’ worth, the lowest since late 2006.  There was some commentary about prices, but at least the inventory’s being cleared out.  Today, New Home Sales for the month of August were released.  Depending on how you look at the prior month’s release (433M revised down to 426M) it was either an improvement, at 429,000, or a deterioration.  For now, so long as the revisions are negative–which makes it likely this week’s data will be revised down–we’ll consider the data negatively.  The last bit of housing data came in the form of MBA Mortgage Applications index.  It rose by 12.8%, helped by the national 30-year mortgage rate falling below 5%.

Durable Goods Orders didn’t please markets on Friday.  Instead of the 0.4% increase in the headline rate, orders contracted by 2.4%, and the core rate fared badly, too.  Economists expected Durable Goods net of Transportation orders to rise by 1.0%; instead it was perfectly flat.  July data was revised up by 0.1%.  Initial Jobless Claims fell, confounding economists.  Instead of 550,000 new jobless claims, claims fell to 530,000.  Our analytic engine, which estimates jobless claims (new readers:  it’s a sham), said 547,000.  The lemmings economists revised their forecast upward to 550,000 from 546,000 (hah!) and that means our estimate edged out the economists again.  Not surprisingly, Continuing Claims, the rolls of those continuing to receive employment benefits, fell nicely, but a large number of former claimants began receiving emergency benefits.  In short, it’s not hiring that’s reducing the rolls, it’s time.  Leading Economic Indicators rose as expected, the fifth straight month of positive readings.  Finally, University of Michigan Consumer Confidence rose unexpectedly, which is to say economists didn’t expect it.  Instead of the 70.5 reading they expected, the index’s final reading for September rose to 73.5, well above the mid-month reading of 70.2.  Now, consumers need to transfer that confidence to their wallets and go shopping.

Next Week

What to watch:  only one report matters next week.  It’s the most relevant report for the average American.  Nonfarm payrolls are reported on Friday, and with it comes the single-most relevant data point to Joe the Plumber, the unemployment rate.  Never mind that it’s historically been a lagging indicator.

Monday - two regional economic activty indexes, from the Chicago and Dallas Federal Reserve Banks, will be released, likely to little fanfare.

Tuesday – the first of three housing data points comes in the form of the Case Shiller Home Price Index for July.  The year-over-year change is expected to be -14.20%.  It’s going to be a while before we see that figure turn positive. On Tuesday, we’ll be lucky to see a positive seven-month change.  The monthly change in June was positive for the first time since early 2006.

Wednesday – economists are expecting a modest negative revision to second-quarter GDP.  The first revision took us to (-)1%; the wise guys expect it have been revised to (-)1.2%.  In the event you weren’t clear on it, much of the data in the early release(s) is estimated using available data and some fancy computer modeling.  The revisions are made as the estimated data becomes actual.   Shouldn’t provide much fireworks.  A little later in the morning we get the Chicago Purchasing Managers Index.  It’s expected to have stepped further into positive territory, but it won’t matter, either, with what’s on tap on Friday.  Oh, and we should get a hint of that with the release of the ADP Employment Change index.  It’s expected to have improved from -298M to -195M.

ThursdayPersonal Income and Spending  are announced.  Spending it expected to have taken a jump upward (+1.1%), while income is only expected to be up by 0.1%, both mark increases.  We’ll take a close look at the Savings Rate for signs of further deleveraging (savings rate up).  At the same time Initial Jobless Claims  will be released.  Economists expect they rose by 5,000 (to 535M) and they guess Continuing Claims will be up by 43M.  Our forecasting model (previous week’s figure + change in the previous week’s figure + revisions) calls for 521,000.  If we beat the economists this week, we’ll be looking at the lowest jobless claims since early January.  Later in the morning, ISM Manufacturing Survey is released.  Economists think it’ll continue further into positive territory (to 54.0 from 52.9).  We’ll be sure to look at the component indexes to see if things like New Orders, Prices, and the like are improving.  Pending Home Sales completes the housing trinity, but I don’t feel like commenting on what’s expected, and neither will anyone else since Friday is the first Friday of the new month, and that means payrolls are announced.  That report will the week’s most important.

Friday – Nonfarm Payrolls are announced.  Economists expect that 187,000 jobs were lost in September, which will be an improvement from August’s 216,000 loss.  They also expect that 55,000 manufacturing jobs were lost, also an improvement from August’s 63,000 loss.  The Unemployment Rate is expected to have added another 0.1% to 9.8%.  The Average Work Week is expected to be unchanged at 33.1 hours.  Aside from Temporary Employment, the work week needs to be watched closely in this environment as it should be a leading indicator of improvement in the economy.  Not that it will matter, but later in the morning Factory Orders will be announced.

Many regrets for the less than substantive dispatch this week.

Graig Stettner, CFA, CMT – VP & Portfolio Manager – Tower Private Advisors

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