Stocks just lounged around Wednesday, despite seemingly hopeful reports for housing and durable goods orders. Caution seems to be reigning after the heavy buying that sent stocks up over 40% since March. Investors, still remembering the pain and not wishing to tread too heavily on what may turn out to be thin ice, are apparently wondering whether the market can climb much higher in the absence of rock-solid evidence of economic growth. They seem to have already baked a housing recovery, much of it Federal-tax-credit driven, into their buy plans, while the capital goods orders were heavy on transportation, thanks to the Cash for Clunkers program. Take it for all in all, Wall Street should have stayed in bed:
MARKET INDEXES, WEDNESDAY, AUG. 26:
Declines in many industrial and material stocks were a drag on the market with commodities prices mostly flat. The long rally in commodities prices that started earlier this year has been comatose of late, partly on concerns of falling demand from China. Prices keep bumping their heads on the ceiling:
On the New York Stock Exchange, decliners outnumbered advancers by a fraction; on the Nasdaq, advancers had a slight lead.
DOW JONES INDUSTRIAL AVERAGE:
A big drawdown in gasoline stocks -- they fell 1.7 million barrels last week -- caused a fast $1 jump in oil prices, but even that fell back as investors digested the fact that demand is down 0.3% year over year. Crude inventories were up 200,000, and other distillates rose a bit as well, according to the Energy Information Administration's weekly report. The drop in gasoline reflects that refineries are operating at a just-okay 84.1% of capacity. October crude dropped 58 cents to settle at $71.47, in a chart that looks like the one for commodities:
As for the $39-billion 5-year Treasury note auction, demand was strong, with coverage (essentially that's bidder interest) at 2.51, above the long-term average. I guess the government isn't having much trouble financing its ballooning debt. Foreign and institutional investors took 56% of this issue, also not bad. The only negative of the sale from the government's point of view was that the yield came in a basis point above market expectations, at 2.494%. The yield on the benchmark 10-year Treasury note rose to 3.46% from 3.44% late Tuesday.
Incidentally, the yield curve is the flattest we've seen since the end of July, based on the difference between two- and 10-year yields. (Quick refresher: A normal yield curve shows that yields rise as maturities lengthen. The yield curve flattens when all maturities have similar yields. It tends to accompany uncertainty about the economy.)
5-YEAR TREASURY NOTES:
New home sales jumped a satisfying 9.6% in July, rising for the fourth straight month at the best clip since September of last year. On top of that, they beat expectations. The Commerce Department said sales rose to a seasonally adjusted annual rate (SAAR) 433,000 from an upwardly revised 395,000 or 9.1% in June; expectations were 390,000. Sales are now up more than 30% from the bottom in January, but are still 'way off from the fantasy-land peak of four years ago. And do we really want to see that kind of bubble again so soon?
The median sales price of $210,100, however, was off 11.5% from 2008 and down slightly from $221,400 in June. Well, at least they're selling, with sales gains concentrated in the South.
Last month's sales pace was the strongest since September. However, it's being pushed along by the tailwind of a federal tax credit that covers 10% of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify, so we might expect a slowdown after that. Builders and real estate agents are pressing Congress for the credit to be extended. Gee, ya' think they'll listen?
YAHOO RESIDENTIAL CONSTRUCTION INDEX, WEDNESDAY:
There were a mere 271,000 new homes for sale at the end of July, down from 280,000 in June. At the current sales rate, that represents 7.5 months of supply -- down from June's 8.5 months, the lowest since April 2007 and a real good sign, as this interesting self-explanatory months-of-inventory graph from calculatedrisk.com shows:
HOUSING INVENTORY IN AND OUT OF RECESSIONS:
Assuming this is real trend and not a tax-credit fluke, it could make builders more confident about moving along on new projects. That would lead to more jobs in the construction industry as well as to an increase in manufacturing orders for building supplies, which would translate into more jobs in those industries (and probably rising commodity prices). "These are crucial elements of a sustainable recovery," says the chief economist at Nomura Securities, which nobody can deny. Every new home built creates, on average, the equivalent of three jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the admittedly-not-disinterested National Association of Home Builders, but they're probably not far off the mark. Homebuilders' stocks are rising, and so is some housing infrastructure, like this wood-products company:
Shares of homebuilders were up for the second day. Other gainers in homebuilding and materials were Hovnanian Enterprises (HOV), up 9.4%; Standard Pacific (SPF), up 7.8%; D.R. Horton (DHI), up 5.6%, Beazer Homes (BZH), up 4.9% and Brazil's Gafisa, up 4.9%.
The Mortgage Bankers' Association's purchase index rose 1% last week, mainly on increased demand for government loans. It was the fourth straight jump for the longest streak since March. Since the mortgage purchase index can be assumed to lead new home sales, today's encouraging home sales reports shouldn't have been a pure surprise. Mortgage rates moved higher in the week with 30-year loans up 9 basis points to an average 5.24%, but even so it didn't slow things down. The refinance index rose 12.7% for a third straight gain.
In other decent news, the Census Bureau reported that total new orders for manufactured durable goods (the high-ticket ones you expect to last more than three years) increased $7.8 billion or 4.9% in July to $168.4 billion. It was the third increase in the last four months (June fell 1.3%), and the largest percentage increase since July 2007. New nondefense orders for capital goods jumped $4.6 billion or 8.6% to $57.5 billion; new defense orders were up $1.3 billion or 14.8% to $9.8 billion. Excluding the 18.4% increase in transportation goods, orders rose 0.8 percent, which was shy of analysts' expectations.
It was a surge in aircraft bookings and a jump in July auto orders -- undoubtedly nudged up by the elegantly-named Cash for Clunkers program that generated a reported 700,000 new-car sales -- that drove the increase. But even excluding the nudge from transportation, the 0.8% rise was the largest increase in two years. Excluding defense, orders were up 4.3%.
Capital goods orders were very good, up 9.5% following a 5.7% drop in June. The big gainers? Primary metals, fabricated metals, computers & electronics, communication equipment, and even electrical equipment in a hint of improving construction demand. Machinery orders did fall substantially but couldn't make a dent into the capital goods reading.
Not only orders, but shipments rose, up $3.5 billion or 2% to $173.1 billion, after a 0.7-percent June increase. Inventories of manufactured durable goods, which we always like to see fall, were down for the seventh consecutive month, off $2.7 billion or 0.8% to $314.1 billion, following a decline in June of 1.5%. Like the fall in months of housing inventory, this tells us that manufacturers are getting their formerly-crowded shelves back in line with demand, which should boost economic growth in the second half of the year.
The strong report suggested that business spending on equipment may actually post an increase in the third quarter after plunging at a record 36% rate in the first quarter and dropping 9% in the second quarter.
So with all this you'd think the market would jump, but investors evidently want a little more proof of growth There was a little excitement after the home sales reports but after that, not much. Of course, late August is notorious for low volume, one reason, in addition to no more white shoes, to look forward to September.
Retailers moved a little after good earnings from Dollar Tree (DLTR) and Williams-Sonoma (WSM). Dollar Tree reported a higher-than-expected jump in quarterly profit and boosted its full-year sales and earnings forecast on a substantial increase in customer traffic in its stores. Long-time customers are shopping there more frequently and new customers, who in better times might have spurned a store that sells most of its merchandise for a buck, are walking right in. In a telling detail, customers are not only buying basic merchandise like food there, but also discretionary goods like books and party supplies. The stock is not selling for a buck:
Home improvement retailers like Home Depot (HD) and Loew's (LOW) gained, not surprisingly, on the new home sales report.
On the other end of the retail spectrum, Williams-Sonoma, a very high-end home goods retailer into which I have been walking for years without ever buying anything for myself, reported second quarter earnings of five cents a share excluding one-time items, better than analyst estimates of a 9-cent loss. The careful reader will note this sentence: "Revenues were primarily driven by stronger than anticipated merchandise margins and ongoing cost containment initiatives." Revenue fell 18% year-over-year to $672.1 million, above consensus. The company says it expects a third quarter and year above analyst expectations. (They'll have to do it without me, alas.) The stock jumped $1.68 or 10.6% today, to $17.15.
And in our never-ending but probably loony search for infallible "buy" signals (I know there aren't any): A number of quite intelligent people like the "trinity" of the New York Stock Exchange Advance-Decline Line, the McClellan Summation Index, and the Nasdaq New Highs-New Lows (one or two other similar indicators can be substituted). When all three are lined up and doing what they should, it's okay to jump off the deep end, so they say, and maybe they're right. What the Nasdaq New Highs-News Lows Index should show is new highs exceeding new lows and trending above the 10-day average price. As this graph shows, we're not quite there yet.
NASDAQ NEW HIGHS-NEW LOWS INDEX:
Still, other signals, like the bottom head-and-shoulders formation we looked at last week tell us it's probably okay to dip a few toes back into the pool lest we lose all the upside.
And as regards this week's Silly Graph, I guess I'm as much to blame as anybody. I refer, of course, to the price of cookies, cakes and cupcakes -- kept high, obviously, by unrelenting demand.
U.S. CITY AVERAGE PRICE of CAKES, CUPCAKEs AND COOKIES:
Tomorrow brings earnings for a number of companies including some late-reporting foreign firms like Accor, Avis Europe, China Sunergy, China Telecom, Royal Bank of Canada, The Nine, Ltd. and Vimpel Communications. In economic reports, stand by for Gross Domestic Product and Jobless Claims. They could be market movers.