Monday, October 29, 2012

Market Week: October 29, 2012

The Markets

Despite good economic news, particularly from the housing market, disappointing corporate earnings continued to contribute to strong downdrafts last week as any halting attempts at a rally generally gave way to renewed selling. The large caps of the Dow and S&P 500 were hit hardest among the domestic indices, while the Global Dow fared even worse.

Last Week's Headlines

Sales of new homes rose more in September than in any month since April 2010. The 5.7% increase over August put new home sales a whopping 27.1% ahead of the previous September. If sales were to continue at that pace, the Department of Commerce said, it would take 4.5 months to deplete the inventory of new homes for sale--the shortest amount of time since October 2005.
U.S. economic growth accelerated in the third quarter, rising to 2% from 1.3%, according to the Bureau of Labor Statistics' initial estimate. The increase was driven in part by a 14.4% increase in construction spending, consumer spending that rose 2%, and a 3.7% increase in federal spending, primarily on the military, while capital spending by businesses fell 1.3%.
More than 80 CEOs of some of the largest and most well-known U.S. corporations issued an open letter urging Washington to attack the national debt. The letter didn't endorse either presidential candidate's economic proposals. However, it did call the approach developed by the bipartisan Simpson-Bowles Commission--a combination of spending cuts, increased tax revenues, and measures to limit health-care costs and strengthen Social Security--an "effective framework" for attacking the debt problem.
Significant orders for commercial aircraft helped durable goods orders soar almost 10% in September--their biggest increase in more than two years. However, even setting aside the nearly 32% increase in the transportation category, orders for goods intended to last at least three years were up 2%.
As expected, the Fed will continue to buy $40 billion of mortgage-backed securities each month. The Federal Open Market Committee said that without such support, the current moderate economic growth might not be enough to produce improvement in the labor market.
After reaffirming Spain's bond rating the previous week, Moody's downgraded 5 of Spain's 17 regions.
The U.S. Justice Department filed a $1 billion suit against Bank of America, charging that the bank fraudulently sold Fannie Mae and Freddie Mac defective mortgages that were processed without proper quality checks.

Eye on the Week Ahead

More earnings reports, fewer days until November 6: In addition to corporate earnings, Friday's unemployment data will be of interest, as will any potential economic impact of Hurricane Sandy.
Key dates and data releases: personal income/spending (10/29); home prices (10/30); business productivity/costs, U.S. manufacturing (11/1); unemployment/payrolls, factory orders (11/2).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, October 22, 2012

Market Week: October 22, 2012

The Markets

Despite a relatively strong start to the week, weak earnings reports took the wind out of the sails of domestic equities. The Dow lost 205 points on Friday--coincidentally, the 25th anniversary of the stock market's single biggest percentage loss ever--while disappointing results from several key tech companies hit the Nasdaq hard.

Last Week's Headlines

There was good news from the residential construction industry. Housing starts shot up 15% in September; that's the biggest increase since July 2008. The third straight month of increases put housing starts almost 35% ahead of last September. Even better, new single-family starts were up 11% for the month. Building permits, an indicator of future activity, also were strong, according to the Commerce Department; September's 11.6% increase meant that permits were more than 45% higher than a year earlier.
The National Association of Realtors® said home resales fell 1.7% in September. However, the year-over-year picture is better, with an 11% increase from a year ago.
A 1.1% jump in retail sales in September represented the third straight month of increased sales, according to the Commerce Department. That meant spending was 5.4% higher than the previous September. The largest increases were seen in electronics and appliance stores, which were up 4.5% during the month of the iPhone 5 launch; gas stations and nonstore retailers also saw solid gains.
Gas prices also contributed to a jump in consumer inflation; the Bureau of Labor Statistics said September's 0.6% increase in consumer prices was primarily caused by gas costs that were up 7% for the month. Aside from volatile food and energy costs, prices rose 0.1% for the third straight month. That put the annual inflation rate at 2% over the past year, slightly higher than August's 1.7% annual figure.
Moody's reaffirmed Spain's investment-grade bond rating, though it coupled the Baa3 ranking with a negative outlook. Meanwhile, representatives of European Union countries debated how quickly to set up a common banking supervisor. The new entity's legal framework is scheduled to be drafted by the end of the year, but the supervisory agency would not become functional until later in 2013.
The Philadelphia Fed's manufacturing survey saw a sizeable increase in September; after five months of contraction, the survey rose to 5.7 from -1.9 in August. However, the -6.2 reading on the Fed's Empire State survey--the third consecutive negative figure--was less encouraging. Meanwhile, the Federal Reserve said oil and gas wells that had been sidelined by Hurricane Isaac resumed production, helping send industrial production up 0.4% in September; it's now up 2.8% since last year.
For the seventh quarter in a row, China continued to see slower economic growth. The National Bureau of Statistics said Q3 gross domestic product there fell from 7.6% to 7.4%, its weakest level since early 2009.
The Conference Board's index of leading economic indicators rose 0.6% in September after an August decline of 0.4%.

Eye on the Week Ahead

In light of last week, fresh earnings reports are likely to generate even more interest than usual, while the first estimate of third-quarter economic growth will doubtless fuel more political rhetoric on both sides about the state of the economy. Also, the Federal Open Market Committee will hold its last meeting before the election.
Key dates and data releases: new home sales, FOMC announcement (10/24); durable goods orders (10/25); initial estimate of Q4 gross domestic product (10/26).

Monday, October 15, 2012

Market Week: October 15, 2012

The Markets

Equities took a 2%-plus hit last week. Whether it was caused by profit-taking, a gloomy forecast from the International Monetary Fund, reaction to initial third-quarter earnings reports, or some combination, the decline cost equities their attempt at a new post-2007 high. Meanwhile, oil prices bounced back above $90 a barrel, while the stock market's troubles also meant a bit more appetite for U.S. Treasuries.

Last Week's Headlines

The International Monetary Fund cut its forecast of global growth to 3.3% for this year (from 2011's 3.8%) and 3.6% next year (although its 2.2% forecast for the United States is slightly higher than previously estimated). However, the IMF's annual report warned that its growth estimates depend on the eurozone addressing members' debt problems and the United States avoiding the so-called "fiscal cliff." Otherwise, the IMF called the risk of a serious global slowdown "alarmingly high."
There continued to be relatively encouraging news out of the housing market. Mortgage foreclosures nationally fell to a five-year low in September, according to RealtyTrac®. The 180,427 foreclosure filings were 7% lower than the previous month and down 16% from a year ago. The biggest declines were seen in California, Georgia, Texas, Arizona, and Michigan, while states where foreclosures must go through the judicial system, such as Florida, Illinois, Ohio, New Jersey, and New York, continued to have substantial year-over-year increases.
Standard & Poor's downgraded Spain's sovereign debt to BBB- (one notch above junk status) and gave it a negative outlook for the future, indicating the likelihood of future downgrades. However, the yield on the Spanish benchmark 10-year bond remained under 6%.
Once again, higher gas prices helped push inflation at the wholesale level up 1.1% in September. However, producer prices overall remained relatively stable, as the year-over-year inflation rate was a moderate 2.1%.

Eye on the Week Ahead

The bailout watch on Spain could intensify in advance of the European Union summit on Thursday and Friday. Domestically, a flood of earnings reports as well as housing and manufacturing data will suggest the state of the economy.
Key dates and data releases: retail sales, business inventories, Empire State manufacturing survey (10/15); consumer inflation, industrial production, international capital flows (10/16); housing starts (10/17); Philadelphia Fed manufacturing survey (10/18); home resales, options expiration (10/19).

Monday, October 8, 2012

Market Week: October 8, 2012

The Markets

Encouraging manufacturing and employment data helped the Dow hit a level less than 4% below its pre-2008 high, while the S&P 500 was roughly 6.5% away from achieving the same target. Meanwhile, oil slipped below the $90-a-barrel mark, offering some hope for a little relief on gas prices down the road.

Last Week's Headlines

The unemployment rate fell in September to 7.8%, its lowest level since January 2009. The Bureau of Labor Statistics said the addition of 114,000 jobs to the nation's payrolls cut the unemployment rate by 0.3%, the biggest monthly decline since January of last year. The greatest job gains were seen in health care, transportation/warehousing, finance-related companies, and business and professional services.
After a three-month summer slump, U.S. manufacturing showed growth in September. The Institute for Supply Management's index of manufacturing activity hit 51.5% (any figure above 50% indicates growth), while a more than 5% monthly gain put new orders at 52.3%. The ISM's measure of the services sector also was up; the 55.1% reading represented the fastest pace of growth in six months.
A nearly 35% decline in demand for transportation-related equipment--primarily aircraft--helped cut U.S. factory orders by 5.2% in August. However, the Commerce Department said that excluding the volatile transportation sector, orders were up 0.7%.
Construction spending fell 0.6% in August, according to the Commerce Department, but was still 6.5% higher than a year earlier. A 1.7% drop in private nonresidential construction was responsible for the monthly decline; residential construction rose 0.9%.
Members of the Federal Open Market Committee have discussed using numerical thresholds for unemployment and inflation to determine when to begin raising the Fed's target interest rate. The FOMC has said it anticipates keeping interest rates low through mid-2015. Minutes of the committee's most recent meeting also indicated the Fed expects moderate economic growth for the next few quarters that will accelerate sometime in 2013.

Eye on the Week Ahead

Tuesday's announcement by Alcoa--the unofficial start to the Q3 earnings season--will give investors something to mull over other than politics and economic data. Wholesale inflation numbers could show the impact of energy prices.
Key dates and data releases: balance of trade (10/11); wholesale inflation (10/12).

Monday, October 1, 2012

Market Week: October 1, 2012

The Markets

As investors reviewed mixed U.S. economic data and waited for news on Spain's financial stability, equities fell for the second straight week. The anxiety helped boost U.S. Treasury prices once again.

Last Week's Headlines

The rate of U.S. economic growth continued to slow in the second quarter. The Commerce Department's final estimate of Q2 GDP was 1.3%; that's less than the 1.7% previously estimated and lower than Q1's 2% rate. The Commerce Department said lower crop yields caused by the severe summer drought in the Midwest were a major factor in the downward revision. Corporate profits after tax were down 0.4% after a 6.7% increase in Q1, but were up 14.5% from a year earlier.
Home prices were up 1.6% in July and were 1.2% higher than in July 2011, putting them at their highest level in nearly two years. It was the third straight month in which all cities measured by the S&P/Case-Shiller 20-city index saw increases, and 16 of those cities also were up from last year.
Meanwhile, August sales of new single-family homes fell 0.3% during the month, the Commerce Department said, though they were still almost 28% higher than a year ago. The median home price--$256,900--was the highest it's been since March 2007 and 17% higher than last August.
Half of the 14 Spanish banks that underwent stress tests to determine their stability could need as much as €59 billion in fresh capital, while the other half (which represent roughly 62% of all 14 banks' total credit obligations) are okay. The Spanish government also unveiled a budget that includes new tax increases and austerity measures, which set off a fresh round of protests.
Americans spent more in August, but they cut back on savings to do so. According to the Commerce Department, personal spending was up 0.5% during the month, but because incomes were up only 0.1% (and down 0.3% after taxes), the savings rate fell to 3.7% from 4.1%. Meanwhile, the Bureau of Labor Statistics' yearly snapshot of consumer expenditures showed consumer spending up 3.3% last year. It was the first yearly increase in three years (though the 3.2% increase in consumer prices might account for much of it), and the average income before taxes was up 1.9% to $63,685.
Plummeting sales of commercial aircraft helped cut orders for durable goods--those intended to last at least three years--by 13.2% in August, according to the Commerce Department. That was the largest decline since January 2009. However, excluding the nearly 35% drop in transportation-related equipment, new orders were down only 1.6%.

Eye on the Week Ahead

As the final quarter of 2012 kicks off and the days to the November election tick down, unemployment data will be even more closely watched than usual. Minutes of the discussion that led up to the Federal Reserve's QE3 decision also will be of interest. Finally, global investors will wait to hear whether Spain's new budget and banking report will affect its credit rating or the likelihood of a request for financial assistance.
Key dates and data releases: U.S. manufacturing, construction spending (10/1); auto sales (10/2); U.S. services sector (10/3); U.S. factory orders, FOMC minutes (10/4); unemployment/payrolls (10/5).