Stocks were juiced Friday by a strong reading on business confidence out of Germany and the latest U.S. durable goods data as both came in above expectations.  Although, I’ve got to add, a closer look at the durable goods report was not all that inspiring (not the stuff that generally foments a 2% move) and the German confidence reading was completely boosted by the current conditions gauge; the measure of executives’ expectations declined, and is likely to remain under pressure in coming months as a result of latest spike in the euro; however, the market’s current mood is cheery and beating estimates is plenty right now. 

Man, such a negative tone on a great day for stocks.  I should just stop at the headline and go with the flow.  You know, like Jim Cramer, who I heard on Friday say that those with a negative view of the economic state of things are costing people a lot or money.  Of course, he’s suggesting that those striking a tone of caution are keeping people from going full steam into stocks and making a bundle.  After all, the S&P 500 has hit 1148 you know – hopefully we can hold it without slipping back as occurred the three previous occasions the index visited this level (January, March and May).  Surely, Mr. Cramerica didn’t lose anyone money by encouraging them to dive in at this level on those prior occasions, in which case his trader/fast-money audience probably sold on the summary decline.  Give me a break! 

Anyway, it was indeed a good day and industrials, financials and consumer discretionary led the rally.  Telecoms and consumer staples were the laggards, gaining just 0.87% and 1.24%, respectively. 

Volume was limp yet again, coming in 20% below the six-month average.  At this rate that six-month average is going to be 80% of normal, so no one will ever know the difference.  Let’s hope those HFT/algo trading programs don’t decide to suddenly pack in and call it a day again, pulling the bid rug out from under the market (and especially those who amazingly haven’t learned that stop-loss market orders will flatten you).  When volume is this weak, you know the machines are the bid. 

Market Activity for September 24, 2010

The Fed Factory is Humming

The Fed is pumping money like mad; you see it in M2 money supply and the weekly open market operations.  Now, the velocity of money appears to remain dead, simply because lending remains in contraction mode (actually it depends on the measure, credit either continues to contract or has flattened out after falling big time over the past two years).  But that doesn’t matter right now to the Fed, velocity that is; they know they’re helpless to spark organic sales growth, relieve business uncertainty – especially for the small business community which seems to have no desire to borrow, revive the housing market, or substantially repair the labor market (which frankly is the elixir to most of the problems that currently ails the economy). 

So, what are they doing?  They are focused on manufacturing inflation via dollar depreciation (boosting commodity prices) and engaging in a levitation act with regard to the stock market.  These are the only areas the Fed can ultimately control in an environment in which debt levels remain sky high (thus they can push rates to zero but it isn’t followed by credit expansion, which is what they usually count on). 

Bottom line:  The money supply is picking up again even prior to QE2 and that money has to go somewhere, and in fact it will go everywhere (as it has for some time now)… until it doesn’t.  Point: Asset prices are being driven not by fundamental improvement within the economy but on cheap money.  That means asset prices may continue to go higher in the short term, but creates a very dangerous scenario for when the music stops, and the music always stops when the boost comes from artificial means.

Durable Goods Orders

The Commerce Department reported that headline durable goods orders fell 1.3% (expected to fall 1.0%) in August, following a 0.7% increase in July (revised up from the 0.3% increase printed last month).   The headline figure was held back by a 40% decline in commercial aircraft orders (which jumped 69% in July) and a 4.4% decline in vehicles and parts (after a 4.6% increase in July)

Excluding transportation, which is really the figure to focus on (since transportation orders are so volatile due to the nature of commercial aircraft buying), orders rose 2.0% (expected to rise just 1.0%), following a 2.8% decline in July (revised up from the -3.8% in last month’s initial print).

On the all important nondefense capital goods ex-aircraft component (proxy for business spending), orders jumped 4.1% in August after falling 5.3% in July.  Nice bounce, but hardly impressive considering the prior month’s fall off. 

Within the individual components of this figure, the computer/electronics segment was the only area that looked good with regard to the bounce back.  These orders jumped 3.8% in August after falling 0.5% and 0.9% respectively over the previous two months.  Orders for electrical equipment rose just 0.5% after a 5.2% slide in July and machinery orders rose 3.9% after a 9.6% plunge in July.

The market applauded the report as the ex-trans and business spending figures beat expectations.  But in an overall sense, durable goods orders both headline and ex-transportation) have flattened out since April.  Business spending has also flattened over the past two months since it failed to overcome the prior month’s decline but it’s too early to tell if this one is ready to peter out just yet.  I think this segment probably has some life left for another couple of months; however, as the profit cycle turns down I’m afraid firms will be scaling spending back again. 

New Home Sales

New home sales came in flat for August after a pretty nice revision to the July figure.  Sales held at 288,000 units at a seasonally-adjusted annual rate (SAAR) last month, following a 7.7% decline in July that was revised up from the 12.4% decline initially printed last month.   The August number was expected to show 295,000 units sold.

On an unadjusted basis, just 25,000 homes sold in August (record low for August), just above the 24,000 sold in January, which was the lowest on record for any month. 

The median price of a new home fell 1.2% last month to 204,700. 

The number of new homes available for sale slipped to 206,000 from 209,000 in July. 

The inventory/sales ratio ticked down to 8.6 months worth of supply from 8.7 months worth in July.

Builders continue to struggle with big time supply issues, not really in the new home set (while supply relative to depressed sales activity is high, the absolute number of new homes for sale is super low) but with regard to previously-owned homes.  That supply is very high and when you factor in the shadow inventory (homes in the foreclosure process) inventory is probably double the official number.   Recall that banks took in a record amount of repossessions in August and that story isn’t getting better through year end and will remain elevated next year as the foreclosure process has been delayed, resulting in a fat pipeline of distressed properties just waiting to hit the market. 

ECRI Weekly Leading Indicators (WLI)

The Economic Cycle Research Institute’s WLI improved for a third-straight week, but remains very close to the dreaded -10.  The reading came in at -8.7 for the week ended September 17 from -9.3 in the previous week – this means that the index fell at an 8.7% annualized rate. 

The components of this index are proprietary but one can be sure stock prices and the steepness of the yield curve are two of them.  Considering the former rose 5.7% and the latter steepened by 28 basis points over the three weeks ended 9/17, the other components in the measure must remain pretty ugly or this index would be much better than -8.3% -- a full four points worse than the level that predicted the 1981-82 recession, which was also a double dip as it followed the recession of 1980.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900