U.S. stocks advanced for a fifth session in six after a boosted profit forecast from FedEx (on the heels of UPS’s increased forecast last week) reversed pre-market weakness and the market never really looked back.  The latest new home sales report (for June) looked good prima facie, but beyond the headline was very weak.  Traders were unfazed by the worst June new-home sales on record. 

The market was also able to push aside a report from the Chicago Fed that closed in on recession territory, but this is a rather obscure index so maybe the market just doesn’t give it much attention – it should though as a string of months in the current range will signal significant economic trouble, much like ECRI is showing.

Strong profit results are certainly helping traders ignore the weaker economic data of late – these profits are behind three straight triple-digit gains for the Dow Industrial Average.  More on profits and the latest CEO tone below.

The rally over the past three weeks has recouped nearly half of the losses from the April 23 19-month high, a slide that really got rolling after the May 6 “flash crash.”  The broad market is now down just 8.5% from that April 23 near-term high – at the worst, the correction hit -16%. 

Industrials, financial and consumer discretionary shares led the rally.  Consumer staples, materials and tech (there’s those high cyclicals mixed in with a traditional area of safety again – strange behavior) were the laggards. All 10 of the major industry groups did close to the upside.

Market Activity for July 26, 2010

New Home Sales

The Commerce Department reported that new home sales came in vastly better than expected for June, rising 23.6% to 330K units at a seasonally-adjusted annual rate (SAAR) – the consensus was expecting a rise of just 3.3% to 310K.   The bounce came off of a downward revision to the May data, showing home sales plunged 36.7%; it was previously estimated at -32.7%. 

I like to show that long-term historic look, you can see the above chart goes back to 1963.  Below is a 15-year view, so you can more easily see what’s occurred of late.

So, the bounce off of the all-time low in May makes the report appear better than it was on the surface.  Sales in June were lower than any previous monthly level in the history of this data (outside of that record low hit in May).  And it was the worst June on record, both on a SAAR basis and unadjusted – just 30,000 new homes were sold, which knocks out the previous record hit in June 1982 when just 34,000 new homes were sold.  June is normally the height of the buying season, but the seasonal factor has been rendered useless as the tax credits pulled activity forward.

The median price of a new home fell 1.4% in June on a month-over-month basis to $213,400, and is about flat from the year-ago period – down 0.6%.  New home prices are down 18.74% from the 2007 peak and it’s tough seeing them moving too much lower assuming builders don’t get carried away and go adding to supply.  Then again, there’s an article out this morning stating that builders are doubling down – instead of writing off losses on land purchases, they are building on them again.

The supply of new homes relative to the pace of sales in June fell a large two points to 7.6 months worth from 9.6 in May.  A normal market generally runs at around 6 months worth of supply, but this is a big move.   Still, with the intense competition the new-home arena has to deal with from distressed properties hitting the existing-home segment of the market, I don’t think sales will be able to trend higher to get that supply figure back down to 6 months worth – it will take a year’s worth of big monthly job gains to foster that sort of sales growth. 

Chicago Fed National Activity Index (CFNAI)

A fairly obscure index from the Chicago Federal Reserve Bank came in at -0.63 for June, down from 0.31 in May.  The readings are not terribly intuitive, with regard to what they’re supposed to predict. 

A reading greater than 0.20 following a period of economic contraction signals a significant likelihood that the recession has ended.  We managed two readings above 0.20 since the recession ended (which we gauge as June 2009, but the NBER has not yet officially announced the recession’s end). 

However, a reading of -0.70 following a period of economic contraction is suppose to predict that a recession has begun.  The June reading got dangerously close to that level.

Of all of the recent signs that the economy has begun to weaken again (manufacturing activity, retail sales, consumer confidence, payrolls, the NFIB surveys, ECRI, CFNAI – not to mention initial jobless claims headed back to 480K), maybe the clearest sign that recession lurks around yet another corner is capacity the shipping industry is adding back in.  The overseas container-ship fleet has rebounded by 16% this year and is on course to receive a record amount of new vessels this month, according to maritime data provider Alphaliner. This industry is notorious for building in capacity at exactly the wrong time, and it looks like they are at it again.

Watch for Jobs

Profits by cost cutting continue to record strong results and CEO tone has become increasingly positive.  So, let’s see it in action via hiring. 

This isn’t like the 2001 downturn when unemployment peaked at 6.3%, or even the 1990-91 recession when the jobless rate peaked at 7.8%.  No, the jobless rate currently resides at 9.5% (and would be over 10% if not for the one million discouraged workers that removed themselves from the labor force in May and June alone).  It’s understandable why it took 20-24 months following the previous two economic contractions before hiring hit 200K-plus per month.  This time, at call it 10% joblessness, we should be seeing more aggressive hiring by now if the CEO were as sanguine as their words suddenly sound.

We’ll listen to hear how this tone turns as we move to the back-half of the year.  While second quarter profits continue to record strong results, the more timely data of late is showing weakening ahead.  To properly catch the message, watch the jobs; forget what they say as words are cheap.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900