U.S. stocks rebounded from Wednesday’s slump on Thursday after strong earnings results and June existing home sales that fell less than expected – although the full-brunt of the payback from the tax credit pulling sales forward won’t occur until the July data is released next month; existing home sales are counted when a contract closes, and June’s closing were helped by late-April signings.  Mid and small cap stocks bucked a recent trend of under-performing the large caps to best the broad market yesterday.

Stocks got a boost from second-quarter results at 3M and UPS.  Operating profit at 3M surged 28% and revenue jumped 18%.  The results were fueled by 3M’s move to dominate emerging markets, and iPad sales – their optical film is a key component in that device.

Traders were even more encouraged to buy stocks after UPS posted good results and offered upbeat comments on the economic outlook.  The figures were driven by Asian growth (domestic package volume was up just 1.2% from the very weak year-ago period); I’d be careful in expecting back-half of the year growth in Asia matching first-half results, but UPS appears to think so  The world’s largest package-delivery firm increased forecast for the full year and stated that the recovery will remain slow and inconsistent but will not double dip into recession. 

I guess most people have heard by now that GM will be purchasing sub-prime lender AmeriCredit, one of those double-take news stories.  It’s not worth additional comment since the acquisition is ridiculous on so many fronts; it’s obvious how this is going to turn out.  And it happens a day after FinReg was signed – that’s choice!

Market Activity for July 22, 2010

Jobless Claims

The Labor Department reported that initial jobless claims rose 37,000 last week to 464,000 – more than erasing the 31K decline in the previous week and returning these claims back above the 450K level (it was expected to remain below 450K).  The four-week average rose 1,250 to 456,000.

Continuing claims slid as the standard issue of claims (those benefits that last the first 26 weeks) fell a large 223,000 (nearly erasing the 276K jump in the previous week) and emergency claims (those benefits that extended out to as long as 99 weeks) fell another 370,000.  These claims have plunged 1.6 million over the past two months, but of course this is due to this emergency level of benefits expiring a couple of months back.

Congress has now passed another round of extensions – beyond the traditional 26 weeks of benefits.  So, over the next month the data will prove that the plunge in continuing claims has been due to expirations rather than meaningful levels of job creation for those among the long-term unemployed. 

Existing Home Sales

The National Association of Realtors (NAR) reported that June existing home sales fell 5.1% to 5.37 million at a seasonally-adjusted annual rate (SAAR) from 5.66 million in May. This was about half the decline expected as the consensus estimate was for a 9.9% decline.  (I think the expected decline for June will show up, and then some, in the July figure as early-June sales were closings from late-April signings – April 30 was the tax credit deadline, with regard to the signing of a contract.) 

Single-family unit sales fell 5.6% in June to 4.70 million.  Multi-family unit (condos, townhouses and co-ops) sales fell 1.5% to 670,000.  I like to concentrate on the single-family side of the market -- they make up 88% of the existing-home market and the results are less volatile than that of multi-family. 

Oddly, for the second month in a row even as sales declined, the median price of an existing home rose – jumping 5.2% in June to $183,700 from $174,600 in May.  The price of a single-family existing home rose 5.5% to $184,200 from $174,500 in May…Hmmm.  Prices must fall over the coming months, as the supply figures suggest. 

The supply of existing homes relative to the pace of sales rose to 8.9 months worth from 8.3 in May. For single-family homes, the months worth of supply rose to 8.7 from 7.8 in May.  This figure is likely to spike via the July report as those sales will be completely removed from the tax credit. 

The number of existing homes available for sale (not adjusted for sales, but just the straight figure) is back up to 3.39 million for single-family units from 3.25 million.  The figure is back on the rise, and that’s the distressing properties coming onto the market – and there’s more to come as lenders and the government have delayed the inevitable.

And this increase in existing homes available for sale, driven by distressed properties, continues to widen the “distressing gap” (a term coined by Bill McBride of Calculated Risk) – a particularly bad scene for new-home sales.

EU’s Stress Tests

We’ll get the PR campaign that is the European-bank stress test results around noon here in the U.S. – when the markets close in Europe.  They’ll go pretty swimmingly I imagine.  Yeah, they’ll throw a few banks to the dogs just to make it a little more believable – you know, a couple from Greece and a couple of the Spanish cajas – but the vast majority of the 91 banks tested will pass. 

I’m sorry to be so cynical about it, but come on what are they supposed to do, run these test with a reality-based rigidity that guarantees a banking crisis?   The banking system is all about confidence.  The real tests will come over the next 4-6 quarters, and the same is true for banks here in the U.S.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900