Well, really, how long could we expect that pre-Christmas rally to last? News on Wednesday of an unexpected and heavy drop in November new home sales put a not-surprising wet blanket over the three-day rally. Still, stocks managed to rise.
INDEX WRAPUP, WEDNESDAY, Dec. 23:
Advancing issues outpaced decliners (as did advancing share volume).
Stocks started out mildly higher early after a report showing growth in consumer spending last month, then fell quickly in midmorning after the Commerce Department said sales of new homes plunged 11.3% to their lowest level since April. The EIA reported that draw in crude inventories was larger than expected, leading to gains in energy and other commodities and a concomitant fall in the dollar, which broke a 4-day streak. Stocks moved up on the dollar's fall, but drifted down into the close.
DOW JONES INDUSTRIAL AVERAGE:
All three major indexes managed gains after trading in very narrow ranges all day. The Dow was up 1.51 points or 0.01% to close at 10,466, a bit below its 52-week high last Monday of 10,501.
The S&P was up 2.57 points or 0.23% at a new 52-week high, making relentlessly higher lows and level highs for two months. It's like an immovable object meeting an irresistible force.
The fall in new-home sales was especially disappointing since economists had forecast an increase and another report showed a better than expected gain in sales of existing homes. On the bright side, it didn't spur a huge selloff, which in itself may be a harbinger of much better times. Also, volume has been light all this holiday week, which can often exaggerate moves either way.
The slump from October's new-home-sale rate indicates that consumers are taking their sweet time to avail themselves of the deadline extension for the first-time buyers' tax credit. That was set to expire at the end of November, but Congress extended it to April 30 and expanded the program to include current homeowners who relocate. If Congress were just a wee bit smarter, it would be advertising that extension loudly all over the place, instead of hoping that citizens will pick it up by process of osmosis. As investors, we sometimes tend to think that everybody gobbles up the business and economics pages the way we do. But if you ask most normal people, they'll tell you they don't. Congress, take the hint.
New home sales data, incidentally, which monitor sales agreements signed the previous month, are a better indicator of future real estate activity than sales of previously occupied homes. So even though home resales rose 7% last month, most economists expect completed sales to decline during the winter months and keep buyer traffic flat until spring. In concert with that, the Mortgage Bankers' Association's purchase application index fell 11.6%; even the refinance index fell 10.1%, despite 30-year loans averaging 4.92%.
Builders clearly saw the storm coming: last week the National Association of Home Builders said its index of industry confidence fell to the lowest level since June. The group blamed high unemployment with its deleterious effect on high-ticket-item buying, and a slow economic recovery, which about covers it. Pulte (PHM) and KB Homes (KBH) were the only major builders to squeak out a gain Wednesday.
You candlestick folks will probably be thinking, "Looks like an evening star setup to me," especially since Pulte has a whole mess of debt. Thursday will tell us more.
Today's shining star was the small-cap-tracking Russell 2000, up 7.38 points or 1.18% to 630.98, well above its resistance near 624. One breakout doesn't make a trend, but if the Russell even just manages to stay there, this show of small-cap strength would give us a genuine confirmation that this upward trend has legs.
Personal income increased a respectable $49.7 billion or 0.4% at the fastest rate in four months, and disposable personal income (DPI) increased $54.1 billion or 0.5% in November, according to our statistics-mad friends at the Bureau of Economic Analysis. In tune with that, personal consumption expenditures (PCE, or you can just call it "shopping") increased $47.9 billion or 0.5%. That followed a 0.3% rise in DPI and a chunky 0.6% rise in PCE the previous month. Real disposable income, or what you have left after taxes, moved up 0.2% in both months. All in all, not bad, although it would have been reassuring to see expenditures keep pace with October. Both figures fell slightly short of analysts' expectations.
Private wages and salaries increased $16.1 billion in November, well up from the increase
of $3.2 billion in October. Manufacturing payrolls increased $1.6 billion, up from a
decrease of $2.4 billion; services industries' payrolls increased $15.7 billion, compared
with an increase of $5.2 billion. The rise reflects the drop in unemployment last month to 10%. Just FYI, Treasury Secretary Timothy Geithner said that "it is reasonable to expect employers will start adding jobs by the spring." However, economists concur that growth remains too weak to sustain a strong economic recovery. To which one might reply, "Hey -- half a loaf is better than no loaf at all, yo."
PERSONAL INCOME and OUTLAYS:
Crude oil imports down, distillate demand up, and last week 4.9 million barrels of crude oil disappeared from inventory, leaving us with 327.5 million barrels (which is still near the upper limit of average), while distillate inventories vanished to the tune of 3.1 million barrels despite an increase in distillate production. That drop reflected demand for home fuel (with winter coming in like gangbusters and all).
Crude imports averaged 7.7 million barrels per day last week, down 65,000 bpd from the previous week. Domestic refineries produced less gasoline in the week at the same time that gasoline imports were down, making for a 0.9 million-barrel draw in gasoline stocks despite little change in driving demand. Refineries with their cellophane margins are still operating at 80% of capacity; refinery inputs averaged 13.8 million barrels per day last week, about 27,000 bpd below the previous week's average. In the last month, gasoline demand rose 0.8% year over year. February crude prices spiked up over $2 or 2.7% to around $76.50 on the news, taking oil stocks and oil funds with them. Oil looks like it could hit $80 a barrel without conscious deliberation.
USO OIL FUND:
Purely FYI, the final reading for the December University of Michigan Consumer Confidence report was revised down to 72.5 from 73.4; estimates on average called for a slight pickup to 73.8. The indexes for both current conditions and the economic outlook were adjusted lower, the former moving from 79.1 to 78.0, the latter going from 69.7 to 68.9. A minor jolt, but remember that this time last year the overall reading stood at 60.1. As your cranky Aunt Muriel might say, "Confidence, shmonfidence. Spending activity is much more closely tied to income than to confidence, so just take this stuff with a grain of salt. Now go make me a gin and tonic." (Wait. That was my Aunt Muriel.)
Come we now to retail. Store managers are saying that this year's brick-and-mortar sales are so-so, if that. Add the recent snowstorm that hit the Atlantic states and the Northeast, and the one sweeping the entire northern and central plains as we speak, and it could turn out to be a blue-ish Christmas. In addition to making a perfect mess out of travel plans, the weather is forcing last-minute shoppers, of which there are more than a few, to stay home. So far from preliminary reports, sales in the Northeast were down 17.3%.
Online sales, however, are on the rise; they were up 13% on Saturday, rising some 6% to $4.8 billion for the week, and they outstripped last year's online sales almost every day during Thanksgiving week. As witness Amazon, up $5.50 or 4% today and up 172% year to date. It's one of the rare stocks that started coming out of the doldrums long before March 2009.
In earnings, Linux-operating-system leader Red Hat (RHT) announced third-quarter earnings late Tuesday and saw a nice jump into a new range Wednesday, where it stayed. Yes, its net income fell by 32% percent as the company grappled a legal settlement and higher operating expenses, among other troubles. But results still exceeded Wall Street's forecasts and the stock traded on heavy volume. With items, the company earned $16.4 million or 8 cents per share, down from $24.3 million or 12 cents last year. Revenue was up 18% to $194.3 million.
American Greetings Corp. (AM) saw very heavy volume Wednesday after announcing a swing to Q3 profit of $29.7 million or 75 cents a share, from a loss of $193.3 million or $4.25 a share a year ago, better results than expected after last year was slammed by write-downs and restructuring. Revenue fell to $440.2 million from $454.1 million in the absence of retail operations the company sold last year. The company raised its fiscal-year cash flow estimate, by $35 million to at least $195 million.
And in the Life is Real and Life is Earnest Department, shares of uniform-maker Cintas Corp. (CTAS) fell Wednesday after the company announced a lower quarterly profit amid high unemployment. Late Tuesday the company announced that it earned $57 million or 37 cents per share in the Nov. 30 quarter, down from $71 million or 47 cents per share a year ago. Revenue dropped 10% percent to $884 million. Both results missed estimates. Cintas is directly affected by the staffing levels of its customers; with the unemployment rate last month at 10% and the Fed saying it will stay above 8% for the next two years (!), what can one expect.
For Cintas' 2010 fiscal year ending in May, analysts on average predict income of $1.75 per share on revenue of $3.58 billion. Cintas's CEO warned them that their 2010 expectations were "too optimistic." Oh, the analysts loved that: The stock plummeted $3.33 or 11.2% on huge volume. The company is likely to post revenue declines in uniform rentals for the next several quarters.
Jumping on an upgrade was healthcare facility operator Tenet (THC), one of Wednesday's top gainers in the S&P500. Apparently at least one analyst thinks the company will continue to improve its margins and increase its inpatient admissions but more important, Tenet is expected to benefit if healthcare reform passes and expands insurance coverage. That wouldn't happen until 2014, but the prospect should support hospital-related stocks over the next few years.
Ethernet pioneer 3Com Corp.'s (COMS) second-quarter earnings rose 55% thanks to a tax benefit, fewer write-downs than the year before, and to sales that didn't fall too badly. 3Com posted a profit of $20 million or five cents a share, well up from $12.9 million or three cents last year. Exclude the one-off items and earnings fell to nine cents from 12 cents, which still beat expectations, on revenue of $322 million.
The tech sector will almost always struggle in a recession as corporations and consumers hold on to their wallets, with 3Com no exception. That leads to a wave of M&A activity, like last month's announcement that 3Com would be taken over for $2.7 billion by Hewlett-Packard (HP) in its attempt to become a one-stop technology shop for big companies. Eventually the recession fades . . . leaving tech well-positioned for the inevitable strong rise in spending. HP's stock didn't even blip down on the announcement and is up 5% since then. As if on cue, the Nasdaq-tracking Powershares QQQ (QQQQ) edged into new territory; it's up 75% since March.
Predicting short-term market moves is the original mug's game (although we all try to do it). Still, even with an annoying housing situation and painful unemployment, the stock market seems to have truly turned the corner. At this point, technology and small caps look like leaders. Stay tuned.
Thursday gives us a busy morning. Don't miss November's durable goods orders, as it could be a market mover: Total orders in October fell 0.6% but an uptick is expected given the ISM's improvement in October. Also look for jobless claims and the natural gas report. The market will close at 1:00 for the holiday but late-stayers will note the late-afternoon report of the Fed's balance sheet and money supply.
Best wishes to all for a delightful Christmas and a happy, healthy and prosperous new year.
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