With economic growth coming in fits and starts, the Federal Reserve will not be shy about doing what it can to prop up the economy. The printing presses are working overtime so the Fed can inject more money into the economy and purchase even more Treasuries. All of this is good news for stocks, at least in the near-term, as speculation that the Fed wants to add to its Treasury holdings helped stocks manage some small gains on Monday. The S&P 500 extended three consecutive weekly gains by adding 0.2% today.
The big economic data point that was out today was September existing home sales, which showed a surprise 10% increase, according to the National Association of Realtors. Since the July low at 3.84 million units, existing home sales have jumped 18% since then and inventory has been whittled down to just under 11 months.
Sounds good, right? Well, even with the 10% gain, single-family home sales are still almost 20% below where they were a year ago. Prices are down more than 3% since and as the charts below illustrate, the real estate market in the U.S. has been in a tailspin for several years with only artificial help in the form of help from Uncle Sam keeping the situation from being much worse.
Home Sales Chart
Home Inventory Chart
The G-20 wrapped up its meeting and in what cannot be described as a surprise, the U.S. Dollar Index was up to its old tricks and that is moving lower. The index is down more than 7% since August, which has helped the S&P 500 gain 13% in the same time frame. Adding to the anecdotes that illustrate just how weak the greenback is, it fell to a 15-year low against the yen today, according to Bloomberg News.
What is happening is that the rest of the world is expecting the Fed, the Bank of England and the Bank of Japan to engage in some more quantitative easing, you know, because the first go round was successful. For now that means it is safer to be long stocks and commodities and short the dollar.
Here is another shocker and I hope you can sense the sarcasm. Financials were again the worst performers in the S&P 500 today. Save for a 2.4% jump in Citigroup (C), the third-largest U.S. bank, which came at the hands of Goldman Sachs adding to Citi to the widely followed conviction buy list, the rest of the group was pretty ugly.
Bank of America (BAC) shed 2.45% and touched a new 52-week low today. The stock now trades at 0.53x book value. JPMorgan Chase gave up 1.7% and is within earshot of a new 52-week low. The shares trade at less than 1x book value. Wells Fargo (WFC) dropped 1.5%. At least that name trades for 1.22x book value.
Believe it or not, Citi may be one of the more compelling options in the sector. The bank has yet to be tied to the foreclosure mess and its international exposure is another point in the stock's favor.
It was a quiet day on the mergers and acquisitions front, especially for a Monday. The big deal of the day was news that private equity giant Carlyle Group is in talks to acquire CommScope (CTV), a telecom equipment maker, for $3 billion. That news sent shares of North Carolina-based CommScope up by more than 30%. Carlyle's $31.50 per share offer values CommScope at a 36% premium to where the stock closed on Friday.
What is important here is not so much that CommScope is being acquired, which is only important to those that are long the stock, but the fact that private equity is back and back in a big way. The financial crisis spelled doom for leveraged buyouts and while that style of M&A is not back to its 2005-2006 levels, private equity firms have committed $133 billion to new deals thus far in 2010, more than double the sum at this time last year, according to Bloomberg data.
While there have been 14 deals of over $1 billion in the telecom space over the past five years, according to Bloomberg data, CommScope cautioned that no official deal has been reached and there can be no assurances that the talks with Carlyle will result in an official takeover.
Staying in the tech sector, Texas Instruments (TXN) delivered third-quarter results after the market closed, saying that net income jumped 60% as post-recession demand picked up. The company said it earned $859 million, or 71 cents a share, compared with $538 million, or 42 cents a share, a year earlier. Revenue surged 30% $3.74 billion. Analysts were expecting a profit of 69 cents a share on revenue of $3.69 billion.
Analog chips, which are used in mobile phones and other electronic devices, as usual were the big driver for TI in the third quarter, accounting for $1.581 billion in sales, up 35% from a year earlier. Sales of chips used in cars and communications surged 47% to $579 million.
All would seem well with those results, but TI warned that fourth-quarter results would not be as rosy. The fourth quarter is usually the weakest time of the year for tech companies and TI does not expect this year will be any different, citing weak consumer demand.
For the current quarter, TI expects to earn 59 cents to 67 cents a share on revenue of $3.36 billion to $3.64 billion. Analysts were forecasting a profit of 63 cents a share on sales of $3.51 billion. That news had TI shares down by just over 1% in after-hours trading.
Texas Instruments Chart
Looking at the charts, the S&P 500 got off to a fine start this morning, easily making its way beyond resistance at 1185 to trade as high as 1196, but when all was said and done, the index closed less than a point above its intractably low to finish just barely above 1185. Even when 1185 is taken care of the, S&P 500 will face resistance again at 1195. The 1175 area should be support.
S&P 500 Chart
A similar pattern was seen with the Dow as the blue-chip index easily made its way above resistance at 11,200 early in the trading session only to give up those gains as the day went along. After trading as high as 11,247, the Dow's close at 11,164 can certainly be considered a disappointment.
There are plenty of Dow components reporting earnings this week with DuPont (DD) kicking the week's reports off tomorrow. Procter & Gamble (PG) follows on Wednesday and three Dow components follow on Thursday. In other words, this would be an ideal week for the Dow to close above that resistance at 11,2000.
The Nasdaq is facing significant resistance at 2520 and was able to trade above 2500 for a little while today, but it may be a source of concern that the index closed barely above its low of the day and actually closed below its opening level. Looking at some of the rapid price appreciation recently seen among the Nasdaq's most important constituents, it would not be surprising to see some profit taking here. If the index fails to make its way to 2520, a decline to 2450 would not be unreasonable.
It was a ho-hum day for small caps as the Russell 2000 did what the other indexes and that is to tantalize us with a move an important resistance level only to close below that area. In this case, the Russell 2000 traded as high as 714, above resistance at 710, but could only muster a close just below 708. The Russell 2000 has bumped into 710 a couple of times and if it can clear that level, that would be a fresh buy signal because next resistance looms a long way off at 740.
Russell 2000 Chart
It would not be surprising to see stocks take a knee this week and just trade in a tight range heading into Election Day and the Fed meeing on November 3. The best case scenario for the election's outcome is probably priced in as highlighted by the fact that if you want to head over to Intrade and bet on the Republicans taking the House, you will not make much money as those contracts are showing the chances of the Republicans controlling the House are 90%.
Once we get into next week, it becomes a matter of QE2. If the Fed goes back for more of this dubious policy, then stocks will continue to rally. If not, the result could be painful.