There is a war underway between economists over the conflicting economic numbers. Some say a recovery underway and others are warning of an impending recession. Unfortunately we will not know who is correct until some point in the distant future. The recession bears are pointing to reports like today's Durable Goods and inverted yield curve while growth proponents point to a continued surge in corporate profits, low unemployment and a firming housing sector. The equity markets are being pulled by both sides like a rope in a tug of war. With only 21 trading days left in 2006 the year is rapidly drawing to a close and there is little or no chance of resolving the recovery or recession question in that period. This could mean the rest of 2006 may be a rocky road for equities.
Dow Chart - Weekly
Nasdaq Chart - Weekly
The markets were rocked at the open by the -8.3% drop in the Durable Goods report for October and the sharpest drop since July-2000. The market reaction was a knee jerk prompted by the headline but it was entirely unjustified. If you recall the Durable Goods for September spiked +8.7% in another completely unexpected event. When that report broke most analysts expected the numbers to reverse in the current report. Analysts felt it was a statistical glitch caused by a +28% spike in aircraft orders that would be corrected the following month. Okay, it corrected as expected and the net for the two months is still a +0.4% gain and right inline with normal expectations. The internals were right inline with normal growth patterns with shipments rising +0.6% compared to a drop of -2.7% in the prior month. Back orders rose +1.2% although less than the +4.1% rise from the prior month it was the 9th consecutive month of gains. The majority of order losses came from the airline sector with a drop of -44% after that +28% gain in the prior month. Aircraft orders are typically very volatile given their high dollar value and random timing. The second largest decline came in computer orders with a -25.6% drop. This was the primary focus for traders as they felt this was a more telling indicator of economic activity. Personally I still believe the drop in computer sales is related to the delay in Microsoft's Vista operating system. Almost nobody wants to buy new equipment and be forced to pay for Windows XP only to have a new operating system arrive 60 days later. Those planning to buy computers are simply holding off on that purchase until Vista is released and probably for several weeks after that release just to make sure there are no problems.
On the positive side Existing Home Sales rose slightly in October from 6.21 million to 6.24 million on an annualized basis. While one month does not make a trend it is encouraging and could be further signs of a bottom forming. The price of existing homes fell again for the third consecutive month to an average of $221,000. This represents a -3.5% drop in existing home prices over the last 12 months. Inventory of unsold homes rose to a 7.4 months supply and the most since 1993. The +0.5% rise in sales was also bolstered by an upward revision of +0.3% in the September number. Despite the small gains sales are still -12% below year ago levels. Helping the housing market is the sharp drop in interest rates. Yields on the ten-year note fell to 4.485% this morning and the lowest level since January. This is a positive signal for those waiting for a sign before buying a new home. The Mortgage Bankers purchase applications index has begun moving back up again on this drop in rates.
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Despite the small rise in home sales we saw Consumer Confidence fall unexpectedly to 102.9 in today's report. This was a drop from the last reading of 105.1 and well below the consensus for a further rise to 106. The decline was led by a -2.7 drop in the expectations component and a lesser -1.5 drop in the present conditions component. These changes are not material but underlying consumer buying trends also weakened. The number of consumers planning on buying a car fell to the second lowest level on record while those considering purchasing a home also slipped. Those planning on buying a major appliance rose due to expectations of holiday electronics purchases. Those flat screen TVs are flying off dealer shelves. The strong jobs market is a growing challenge with a rise in those perceiving jobs are hard to get.
The last economic report for the day was the November Richmond Fed Survey, which jumped to +7 from -2 in October. This +9 point gain put the index back in positive territory after the first dip below zero since the Dec/Jan pause, which dipped to -4. Shipments and New Orders both rebounded to +6 from -7 and -1 respectively. Order backlogs improved only slightly to -11 from -13. The Jobs component rose from +6 to +10 indicating employers are hiring in expectations for business conditions to improve. The Richmond Survey joined the Philly Fed and New York surveys, both of which also improved in November.
On Wednesday we will see the first GDP revision for Q3 with an expected rise to +1.8% from the initial reading of +1.6%. New Home sales for October will also be released with expectations for a slight drop to 1,050,000 from 1,075,000 homes on an annualized basis. The Fed Beige book, an indicator of economic conditions on a national basis will also be released at 2:PM.
Ben Bernanke took center stage with a noon speech where he provided a balanced look for the economy. He said economic growth would continue to be under trend for the rest of 2006 but would return to trend in 2007. Trend is normally seen as 3.0-3.5% growth. He did note that there was some weakening in economic conditions but emphasized that this was expected and needed to push inflation lower. He said the core inflation rate was still uncomfortably high but moderating. The Fed continues to watch the job market for signs of wage inflation. He also said the economy could rebound faster than currently thought driven by strong jobs growth, the decline in unemployment and increasing capital investment. If that should happen Bernanke warned that it could supply additional inflationary pressures requiring further action by the Fed. Overall Bernanke's speech was balanced with a nod towards slower growth but a reminder that the Fed was ready to raise rates again if a quick rebound in growth rekindled inflation pressures. Ten-year yields spiked significantly from the morning lows once Bernanke took to the stage and made his cautious comments. The equity markets also rebounded from a morning loss once the speech was aired. Expectations for a rate cut prior to March were diminished but chances were already slim to begin with. Overall this was a market neutral to slightly positive speech that should remove the Fed as a factor for the rest of the year although we are likely to see further caution around the December Fed meeting on Dec-12th.
Former Fed Chairman Alan Greenspan also spoke saying the worst of the housing adjustment is over and reiterated his prior stance. He also said he was not concerned about the falling dollar as long as the economy remained flexible. These comments also helped provide support for the afternoon session.
Also moving the markets today was a profit warning from Nokia and Palm. Nokia cut its profit estimates for the next two years based on falling profit margins and slowing industry growth in global phone sales to +10% and slightly less than prior forecasts. Nokia said the more mature European, North American and Latin American markets were expected to grow by less than 10%. Margins were expected to drop to 15% from 17%. NOK only lost -22 cents but remains nearly -$1 below last Thursday's high after two days of sharp drops.
PALM also warned on earnings for the current quarter. PALM said earnings would be more in the range of 10-11 cents rather than previous guidance of 15-18 cents. They blamed a delay in the Treo 750 smart phone for the drop. Analysts were quick to downgrade PALM saying the shipping delay came at the worst time just ahead of the holiday season. Palm lost -1.18 or -8% on the news. RIMM also lost ground after the PALM warning and a downgrade from BMO Capital to neutral on valuation. RIMM had risen from $63 to $142 since August.
Apple rose +2.27 after UBS noted that iPod sales were strong for the holiday season and outpacing the new Zune player offered by Microsoft. Google, at $489, also recovered +4.75 of its loss from Monday but that is even more spectacular given its drop to $477 this morning. That is a +$12 rebound for the day. Strong rebounds from Monday's drop were also seen in CME, GS and BSC.
Harrah's Entertainment (HET) spiked +1.91 after news broke that Penn National Gaming (PENN) may consider making a higher offer for HET than the $15.5 billion offered by Apollo Management and Texas Pacific Group. For my money Harrah's is the premier casino company and the bidding could go even higher. Apollo and TPG said they had been taking their time doing the due diligence because they knew the PENN group was considering a bid.
January Crude Chart - 120 min
Oil prices rose to $61 for the second day of strong gains and came to rest right at strong resistance. Pushing oil and natural gas higher was a warning of colder weather over the next two weeks, terrorist attacks in Iraq and a Dec-14th meeting for OPEC. OPEC is already making noises about a further cut but analysts feel it is just an effort to talk prices up rather than a material chance of a cut. In Iraq a mortar attack on an oil facility started a major fire that shut off the supply of crude to a major refinery. Officials said it could be offline for weeks. Oil inventories are due out tomorrow and expectations are mixed. TFS Energy is expecting a build in all categories while JP Morgan is expecting a draw in all categories. Fimat is only expecting a draw in gasoline supplies. Gasoline should show a decline as dealers replenish supplies from the Thanksgiving travel holiday. With a new forecast of colder weather across most of the US the demand for heating oil and natural gas should increase. The December natural gas contract expired today and closed at its high for the month at $8.29. The energy complex dipped intraday after oil made its high at $61.20 after news appeared suggesting the sanctions on Iran would be weaker than expected. Once that news faded oil resumed its upward path to close right at $61. Assuming we don't have an unexpected rise in crude inventories tomorrow we could be on the verge of a breakout in crude prices. A continued fall in the dollar would almost guarantee a further rise in oil prices since it would take more dollars to buy the same barrel of oil. That is good for those of us who have been long oil in anticipation of the historical winter bounce.
I just returned from a three-week road trip with a stop in New Orleans where the Blanchard Investor Conference was held. I was greeted with Monday's -158 point decline in the Dow and better than -54 point drop in the Nasdaq. That is a heck of a day to return to the markets. I had felt the markets were stretching their luck after weeks of slowly creeping higher and this dip took most of the extreme bullishness away. The drop took the Dow back to strong support at 12100 and the S&P to 1380. Despite the large short interest that support held. Unfortunately Tuesday's rebound was lackluster but at least there was no follow through to Monday's selling. We appeared to be poised on the edge of the proverbial cliff and everyone is holding their breath to avoid tipping the scales to the sell side. I was asked today if investors should be buying calls or puts. I said yes. The market direction for the next week could be perilous but there are pockets of strength. It will be a stock pickers market with gains to be made with both calls and puts. Energy stocks continue to be strong and I would be a call buyer in that sector. Brokerage and exchange stocks would be another place to dip buy. I would avoid retailers and any high profile stocks in other sectors with strong gains over the last quarter. We are approaching the period where we could see an increase in tax selling towards year-end. Most estimates for the year-end S&P were in the 1385-1400 range with some as high as 1425. Having November close near 1400 could be a sell signal for many fund managers. With little more to gain and a lot of profits to lose the trigger fingers are going to be itchy. Bonuses are paid on profits taken and not profits lost. By any metric the +185 point S&P gain since June (+15%) is very strong and until the economy actually starts posting some stronger results we could be very close to a short-term top.
S&P-500 Chart - Daily
Using the S&P as our market guide we have decent support at 1380 followed by stronger support at 1360. I would not be concerned about any further drops as long as 1360 holds. A dip to that level would be a short term buy signal for me. I am neutral with a slightly bullish bias at 1380 and I would be bearish at 1400 and above. We could be looking at a volatile range between now and year-end. Longer term I would be looking to go short on any weakness after Dec-31st. We are due for a major correction and early January would be my target for that event.
As I stated earlier I was on the road for
the last three weeks and I appreciate
and want to thank Linda and Keene for filling in for me on the market
commentary. Because many of our readers are highly mobile I have a couple
recommendations for your future travels. I have stayed in a lot of hotels in my
life and two of my best stays were during this trip. If you venture to Branson
Missouri I would highly recommend the Chateau on the Lake for your stay. A truly
great hotel! In New Orleans I stayed at Harrah's new hotel across
from their downtown casino. This was also a major upgrade in casino lodging and
definitely a five star stay. Their goal is to exceed expectations and they did
it in every way. Lastly I strongly recommend the Garmin Nuvi 660 navigator if
you are in the market for a GPS companion. I have had other makes and this one
puts them all to shame. Because of my disappointment with prior devices I
researched literally dozens of models before making my selection. I can honestly
it was one of the best $800 purchases I ever made. With a larger screen for
those of us with aging eyesight and six million points of interest including
restaurants, hotels, etc, it proved to be worth its weight in gold. It has more
features than I could ever remember and it is so user friendly a caveman could
use it. It charted the way for more than 4000 miles of driving without a single
error. Pardon me for my shameless plugs for these products but I felt those
planning future trips
would appreciate a heartfelt unpaid testimonial. If I can
slam Overstock.com as a stock in these pages or recommend Marathon Oil for your
retirement account a couple of personal recommendations should not be out of