Daily Market Reports | Aug 26 2010
By Greg Peel
The Dow closed up 19 points or 0.2% to 10,060 while the S&P fared better with a 0.4% gain to 1055 and the Nasdaq starred with a 0.8% gain.
On Tuesday night Wall Street plunged early on the dismal existing home sales numbers, recovered somewhat, but then picked up negative momentum again towards the close. In Dow terms the market did manage to close above 10,000 at a tenuous 10,040. The closing momentum was ominous given recent sessions have just about all seen a trend back to the starting point over the afternoon as day-traders square up.
It was thus a scary open last night when the Dow fell over 100 points from the bell and 10,000 looked to have been kissed goodbye. As US economic data have become increasingly negative over the past couple of months, one felt that another big capitulation sell-off might be just around the corner.
And Wall Street was given every reason to sell. On Tuesday existing home sales were down a greater than expected 27%, and last night the data showed July new home sales fell by a much larger than expected 12.4%. The number of new homes changing hands fell to below a seasonally adjusted 300,000 in the month for the first time since the data began being collected in 1963. And that number is not population-adjusted.
The average price of a new home (as opposed to an existing home) fell to US$204,000 or 2003 levels. Just think about that. You'd struggle to buy a bed-sit at the end of the runway in Sydney for A$230,000 and your 3-year variable rate mortgage would be around 6.5%. But you can buy a multi-bedroom brand new home in suburban California for A$179,000 on a Fannie Mae 30-year fixed rate mortgage of around 4.5%, yet nobody much wants to.
Which one's wrong?
Speaking of Fannie Mae, there was some surprise when the FHFA announced last night its Fannie/Freddie mortgagor house price index rose 0.9% in the June quarter – the first quarterly rise in three years. That might seem at odds with the above numbers, but then the above numbers reflect the sheer volume of pop-out houses built in distant Legoland suburbs during the boom. The year-on-year price is nevertheless down 1.6%.
There was more bad news to come with the release of July durable goods orders. Durable (as opposed to consumable) goods might be defined as goods bought as assets rather than expenses and include everything from computers to airliners. Indeed, economists had expected a 2.7% jump in durable goods orders in July – breaking a three month losing streak – given the month did feature some lumpy commercial aircraft orders.
Well they got their rise, but only by 0.3%. Take out the 13% gain in transport equipment and durable goods orders fell 3.8% which is the biggest drop (ex-trans) since the dark days of January 2009.
US economic data just get worse, and worse. How much can a koala bear?
Well it would appear a koala can bear enough to consider that a sub-10,000 Dow is worth buying on value. Or is it just buying on technicals? Perhaps the clue lies in the VIX.
As has oft been noted in this Report, a VIX volatility index (on the S&P 500) measure of 20 is considered the threshold of complacency, and below that number smart traders tend to buy cheap put option protection. The VIX had begun to drift down toward 20 again in the July bounce, but since the market has weakened again it had started to drift back up.
On the other side of the coin, a VIX above 30 is considered the threshold at which the market is looking a bit too worried. A level of 40 simply means oversold. Last night the VIX pushed close to 29 on the open, but then the stock buyers arrived.
I have also noted recently that on the downside, the stock buyers are clearly exploiting jumps in implied volatility to go long stock by shorting (selling) put options. It is the option market-makers who then buy the actual stock to hedge. Last night the VIX closed at 26.7 which was actually below Tuesday night's close of 27.5. Traders were selling puts.
This activity has formed part of my belief the market is most likely to drift in a range over 2010, albeit with ups and downs in between. We have nevertheless been looking rather perilous this week as US data continue to overshoot on the downside. But perhaps the most interesting development of the last two sessions has been share activity in leading homebuilder Toll Brothers. Existing home sales were down 27% and new sales down 12%, both setting records, yet Toll Bros shares are up 10% in that period, against the index tide.
And a funny thing happened in the US bond market last night. The Treasury auctioned US$36bn of five-year notes and while demand was solid, it was not as solid as expected. The settlement yield of 1.374% was still the lowest in history, but not as low as the market had expected. The ten-year benchmark yield thus rose for once, up 5 basis points to 2.54%.
A clue might lie in the spread of buyers. Foreign central banks bought 51%, up from a running average of 41%, while local bond dealers (as opposed to general domestic buyers) bought only 9%, down from 13%. Have we seen the top of bond prices? That would be a brave call in this market.
Despite US economic weakness, everything still seems to be going swimmingly in Germany. Economists had expected the August Ifo business sentiment index to show a fall to 106.0 from 106.2 in July but instead it rose to 106.7. The resultant strength in the euro meant the US dollar index ticked down slightly to 83.20. The Aussie risk indicator thus gained slightly to US$0.8837.
Gold has been managing to grind out a rise against a stronger dollar this week, so a bit of the dip in the dollar allowed gold to jump US$9.60 to US$1240.00/oz last night.
Oil took the dollar dip as a trigger to have an up-day after recent weakness, rising US89c to US$72.52/bbl despite a jump in weekly crude inventories. London could not overcome those weak US data, however, and base metals prices all fell around 1%.
The SPI Overnight rose 15 points or 0.4%.
Wall Street gets a reprieve from data releases tonight but locals should strap themselves in – today is the biggest day of the earnings season, with seemingly millions of companies reporting.
At least it looks like millions when one is responsible for FNArena Broker Call entries.
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