U.S. stocks held their ground yesterday, bouncing between gain and loss on several occasions but closing virtually unchanged following Tuesday’s 2.35% move that pushed the S&P 500 above the 200-day moving average -- a level the index dove below on May 20.  Certainly, a strong industrial production report helped buoy stocks but watching the way the market hang in there felt surreal considering all that’s going on around us. 

For instance, a Bloomberg survey that attempts to measure confidence in the global economy tanked yesterday morning, Tuesday night’s ABC consumer confidence reading fell and remains at deep recessionary levels, BP canceled its dividend for the next three quarters and will set up a $20 billion escrow account to fund Gulf Coast claims – and that escrow is in no way capped at that amount, oil continues to gush into the Gulf of Mexico at more than 10 times the rate originally estimated, housing starts fell more than twice the level expected and building permits signaled residential construction will remain floored, the land of the inactive consumer (Japan) decides to double their sales tax and Spanish banks clamor to borrow from the ECB as funding markets evaporate for the “Cajas.” 

So with these events in mind, it was strange to watch stocks hold ground.   Then again, high frequency trading is oblivious to news, it only knows levels.

Utilities and health care shares led the four industry groups that gained ground for the session, while consumer-related shares and industrials led the six that declined.

Market Activity for June 16, 2010

We received a panoply of data yesterday, so I’ll try to keep the comments brief.

Mortgage Applications

The Mortgage Bankers Association reported that its applications index jumped 17.7% for the week ended June 11 after the 12.2% decline in the previous week.  The reading was largely boosted by a 21.1% rise in refinancing activity, which makes up 74% of the overall index right now.

Purchases did rise, the first increase since the tax credit expired in the week ended April 30. However, the 7.3% bounce in purchases for the latest week hardly makes up for the 42% plunge during the five weeks following the tax credit expiry. 

Producer Prices

The Labor Department reported that the producer price index (PPI) fell 0.3% in May (a decline of 0.5% was expected) – just like the import price data from Tuesday the decline was almost completely due to the energy component.  Excluding energy PPI ticked higher by 0.1%. 

So for the month, residential gas fell 0.1% (up 2% y/o/y), gasoline slid 7.0% (up 31% y/o/y) and the food category fell 0.6% (up 5.7% y/o/y).  Outside of food and energy, computers was the only segment to decline, down 0.3% for the month (down 11% y/o/y). 

Housing Starts

The Commerce Department reported that housing starts slid 10.0% in May to 593,000 units at a seasonally-adjusted annual rate (SAAR), following 659,000 units SAAR in April – a number that was revised down from the initially estimated 672,000 units. 

The May results would have been lower if not for a 33% jump in multi-family starts.  This segment accounts for only 21% of total starts, but a 33% move will have an effect – if multi starts had been flat, total starts would have declined 28% in May.  Single-family starts declined 17.2%.

In the months to come, I don’t think we’ll be able to count on multi-family housing construction buoying overall starts.  The permits data, which is also released with this report and suggests the direction of residential construction for the next couple of months, fell 5.9% in May (an increase of 2.5% was expected but I have no idea why), which follows April’s plunge of 10.9%. 

So, here we sit at one-third the 50-year average and there is no material fundamental reason home building should restart anytime soon.  The coming supply of distressed properties will make for an increasingly rough environment for builders.  The simple fact is we don’t need more supply, especially until the jobless rate declines in a substantial manner.  Even the low level of building is too much for now, which I believe we’ll see via prices over the next 6-12 months. 

Industrial Production

Industrial production (IP) continues to look good, although the figure was boosted by a big month of auto production and the shift to much warmer weather. 

IP rose a strong 1.2% in May, following a downwardly revised 0.7% increase for April (originally printed as a 0.8% increase).  From the year-ago period, IP is up 7.9%, but comparisons will get tougher two reports out – June 2009 was the cycle low on the IP index, in fact a 12-year low so that makes it a two-cycle nadir.  Production is looking good, I’m not trying to take away from that, but the year-over-year readings result in a bit of over-stating due to the collapse in production last year. 

There are three components to IP: Manufacturing, Utility and Mining

Manufacturing production rose 0.9%, boosted by a large 5.5% increase in auto production.  I do worry that vehicle inventories will look a bit bloated 5-6 months out, the auto sales will not be there to absorb this supply if employers remain reluctant to hire workers in an aggressive manner.  The manufacturing segment accounts for 80% of total IP and activity within this sector is already going to ease as the fabulous $780 billion U.S. stimulus program and China’s gargantuan stimulus (officially $600 billion, but much more than that as they directed banks to lend like mad) are now in the waning period.

Utility production rose a large 4.8% in May, no doubt weather related.  The figure is seasonally adjusted but May 2010 was warmer than usual.  This segment accounts for roughly 12% of total IP.

Mining production fell 0.2% in May after four months of pretty strong gains.  The segment accounts for about 8% of total IP.

Capacity utilization (CU) continues to make progress, but remains well below average.  Total CU rose to 74.7% in May from 73.7% in the prior month – the 40-year average is 80.9%.

For the manufacturing sector, CU rose to 71.5% from 70.8% -- the long-term average is 79.6%.  Utility CU jumped to 81.0% from 77.3% -- the long-term average is 87.5%.  Mining CU slipped to 90.6% from 90.7% -- the long-term average is 87.4%. 

Have a great day!

Brent Vondera, Senior Analyst