Daily Market Reports | Aug 05 2009
By Greg Peel
The Dow rose 33 points or 0.4% while the S&P gained 0.3% to 1005 and the Nasdaq managed a 0.1% rise.
After Monday’s big gain, Wall Street was more cautious last night as data and earnings reports flowed. The Dow traded in a range of only down 36 to up 35. With only ten minutes to go the average was flat.
The good news of the day came in the form of pending home sales. This measures contracts signed on the sale of existing homes and provides a one to two month lead indicator of the existing sales measure which is marked as sales are completed. Economists were expecting pending sales to rise 0.6% in June but instead they rose 3.6% to mark five consecutive months of gains. The last time that happened was in 2003.
This was naturally great news for a positively leaning Wall Street, but doubt crept in following quarterly earnings results from America’s two leading home builders. DR Horton posted its ninth straight quarterly loss, albeit a smaller loss in the second quarter 09 from the first. But analysts had expected an earnings per share fall of only US21c while the actual number was US45c. Pulte Homes reported a bigger loss in the second quarter than the first.
In an accompanying statement, Horton’s CEO noted “Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence”. Foreclosure filings rose to a record 1.5 million in the first half 09, and as unemployment continues to rise that number is expected to grow.
Indicative of the US housing rout was one familiar property which has just sold for US$18m after an asking price of US$28m was first posted. No doubt Mr Heffner will manage.
The other important data release last night were personal income and spending. The US consumer is the backbone of the US economy with a 70% contribution to GDP. You can talk all you like about green shoots and inventory rebuilding, but if the consumer remains reticent any subsequent economic growth can only be shallow. This is the opinion of Ben Bernanke, who is assuming only “sluggish” growth ahead, and is echoed by Glenn Stevens, who used the same words in his monetary policy statement yesterday which followed an announced bigger than expected drop in Australian July retail sales.
Nominal US personal spending rose 0.4% in June. That looks like good news, but this is a dollar figure and it was heavily influenced by the gasoline price which saw a fresh 2009 peak in June. On an inflation adjusted basis, spending fell 0.1%.
The more disturbing news was that personal incomes fell 1.3% in June. Not only have incomes marked eight straight months of decline, that decline is accelerating as unemployment grows. June’s reading was the steepest fall in four years. Economists noted that government stimulus hand-outs had provided support to the May reading, thus making June look worse than it might have been, but this was cold comfort given actual wages and salaries fell 0.4% in June.
Consumer spending figures are nevertheless expected to show another stimulus-related boost in July and August given the runaway success of the “cash for clunkers” program. The government has been caught on the hop by the 250,000 people who have traded in their old bombs to receive US$4500 off a new car, and legislation is now in Congress to quickly triple the initial stimulus allocation.
But the scheme won’t last forever, and indeed across the globe non-infrastructure related government stimulus will begin to subside now that economic Armageddon appears to have been averted. Australian economists are also subdued in their ongoing GDP growth expectations given the likely drop in consumer spending ahead now that the cash hand-outs are over and unemployment continues to tick up. They do not necessarily expect all three remaining quarters to show positive GDP growth in 2009.
The big question is therefore how high can this current rally reach before medium term GDP expectations are more than priced in? I noted yesterday that 1000 in the S&P 500 marked a 50% rally from the low and a 37% retracement to the 2007 peak. (The rally is measured from the bottom up and the retracement is measured from the top down.) A level of 1014 in the S&P 500 would mark a 38.2% retracement, which happens to be a famed Fibonacci ratio and a significant technical mark. The May rally in 2008 peaked at such a retracement.
An interesting factor of recent stock exchange trading is that the best performing sector in the recent surge has been the real estate investment trusts (REITs). The outperformance of this sector has come in contrast to higher US bond yields. Under normal circumstances, a rise in the AAA-rated Treasury yield would detract from investment in the much riskier REIT yield plays. But if any sector has been hardest hit by the credit crisis (along with banking) its the high-leverage REIT market. As trusts have battled each other to offload assets in a falling market in a desperate attempt to rein in gearing and make refinancing obligations, retail and commercial property values have been under pressure. Economists still fear the commercial property market may be the last, lagging shoe to drop.
And so REITs had not, until recently, joined too spectacularly in the spoils of the 50% rally. But the rally began with a lead from the banking sector and a surge in tech. Then came the “big name” growth stocks, which were soon followed by the cyclicals as signs of recovery trickled in. Even hard-hit home builders have enjoyed a recovery (in share price, not in earnings as the above suggests) given improving housing data. So if you have already made your money on the early and mid-rally movers (or, heaven forbid, been slow and missed out), and you believe that happy days are here again, which sector do you turn to next?
The one that hasn’t moved yet. Industry sources have noted that commercial rents and vacancy rates appear to have stabilised after their falls, which does provide incentive to pick up heavily beaten-down and high-yielding REITs. But is this also a sign of desperate late stock picking in a rally that has run away?
Commodities don’t seem at all worried about any overbought considerations. The US dollar index ticked slightly higher last night after posting its fresh 2009 low on Monday, but while London base metals initially took a dive as Wall Street wavered, they recovered towards the end of the session. Lead, tin and zinc all posted slight falls but aluminium and copper added another 1% and nickel another 2%. Copper is now at a ten-month high, as is zinc, while aluminium is at a nine-month high and nickel an eleven-month high.
Oil ticked down slightly, falling US16c to US$71.42/bbl.
It should have been a relatively quiet night for gold, but instead it posted a US$10.70 gain to US$966.90/oz. The reason for the surge – against a slightly higher US dollar – was a report issued by gold market consultant GFMS suggesting central banks under the Washington Agreement would only sell 140t of their allotted 500t of allowable gold sales this year (ending September). If so, it would mark the lowest level of legacy central bank sales since 1994. GFMS also noted that the supply of scrap gold plunged 40% in the second quarter from the first.
Drowsy gold bugs are now talking US$1000 again.
The Aussie was little changed last night at US$0.8406 while the SPI Overnight gained 11 points or 0.3%.
Wall Street is now possibly in a stall pattern ahead of Friday night’s employment numbers (barring any other unforeseen influences). Australia’s employment numbers are released tomorrow. Keep an eye out locally for the June trade balance today and earnings reports from AXA Asia-Pacific ((AXA)) and Seven ((SEV)).
