U.S. stock indices ended mixed on Thursday as the Dow Industrials and S&P 500 closed lower, while the NASDAQ Composite gained ground following two sessions of decline.  The NASDAQ didn’t spend much time in negative territory during the session but the Dow and SPX did, so recovered quite a bit by the close.  A reversal in crude prices, a 6.3% swing to close the session lower after being up as much as 5.4% in early trading, fostered the late-day rally in equity indices.

The Dow Jones Transportation Average is lagging the performance of the Industrial Average.  Of course, the transports will take a hit when oil prices jump 18% in three days, but it goes beyond the past three sessions for those interested in contemporary Dow Theory*.   The Transportation Average had taken a 6% hit this week (before rallying to close positive yesterday), but it had also lagged that of the Dow Jones Industrial Average by 287 basis points for all of 2011 prior to this latest surge in crude prices.  For the year, the Dow Transports are down 1.92% vs. the 4.24% gain for the Dow Industrials – a 616 basis point differential; the break down between the two averages began on January 18. 

The CRB Index understandably hit a new post-crisis high mark yesterday, totally fueled by the energy complex, before pulling back after OPEC stated they’re willing and able to replace any lost Libyan production.  (Or maybe it was the rumor that Gadaffi was shot, the financial press seemed to cite this as the reason for the reversal in crude.  Even so, I’m not sure why this would ease concerns in the crude market as Libya will only be left to dozens of maniacal tribal leaders mixed in within various offshoots of Islamic fascists.  In the best case scenario another military figure will emerge, but he’ll have his hands full now that virtual civil war has broken out.)

Crude hit $103/barrel before closing at $97.28 and wholesale gasoline rallied to $2.77/gallon before ending at $2.72 (up 25 cents in six sessions and 75 cents since the end of Q3).  For every 25-cent increase at the pump, $670 million per week and $35 billion per year is sucked from consumer activity.   

An interesting development appears to be taking place:  The U.S. dollar/safety trade relationship appears to have broken down.  The greenback hasn’t strengthened on this latest round of de-risking, remaining below 80 on the Dollar Index (DXY) – closing down to 77.06 from the already low 77.66 last Friday.  If the greenback can’t gain a little ground on de-risking, which had been the trend since the financial crisis hit, then maybe nothing can keep it from the danger zone of 75 on DXY…until the Fed ceases its QE junket. 

Market Activity for February 24, 2011

Sector Activity for February 24, 2011

Jobless Claims

Initial jobless claims fell 22,000 to 391,000 last week, following the 28k increase in the prior week that brought first-time claims back above the 400K level.  Over the past two weeks initials are up 6,000.  The current level of initial claims is commensurate with roughly 125-150K in monthly payroll growth – an improvement from the 105K/month average over the past few months but half the number needed to absorb population growth, re-entries and college grads. 

The four-week average settled at 402,000, the lowest level since July 2008. 

Continuing claims continued to decline as both the standard issue and emergency extensions fell.  Standard continuing claims (cover the first 26 weeks of joblessness) fell 145,000 to 3.790 million.  Emergency claims dropped 55,300 to 4.446 million.  It appears that some of this decline was a function of payrolls bouncing in February (after January’s disappointingly weak results), but also due to benefits expiring as the long-term unemployment situation persists. 

Durable Goods Orders

The Commerce Department reported that January durable goods orders just about matched expectations on the headline number, missed slightly when excluding transportation, and missed pretty big on the business spending reading as orders for electronics and electrical equipment remained weak.

Headline durable goods orders rose 2.7% in January (a 2.8% increase was expected) after an upwardly revised 0.4% decline in December.  When excluding transportation equipment, which is key because aircraft orders are intensely volatile, orders fell 3.6% (expected to fall just 0.5%) but followed a big upward revision to the December reading (orders rose 3.0%, instead of the 0.5% previously reported).  So combine the two months and the data pretty much matched expectations.

The segment of the report I like to focus on is the non-defense capital goods order ex-aircraft, which is the proxy for business spending.  These orders slid 6.9% after an upwardly revised 4.3% increase in December.  Yet, even which the higher revision to the previous month, the number missed expectations big. 

New Home Sales

New home sales slid 12.6% in January as builders continue to contend with distressed sales (which go for much lower prices) within the existing-home segment.  This decline follows a 15.7% bounce in December, so the Jan. decline didn’t completely offset the previous month’s bounce but the chart below tells the story. 

New homes sales came in at 284,000 at a seasonally-adjusted annual rate (SAAR), following December’s 325,000 units sold.  The January results came in only 10,000 units higher than the all-time low hit in August. 

On an unadjusted basis just 19,000 new homes sold across the country last month, marking a new low. 

The median price of a new home fell 1.9% in January to $230,600, but is still up 5.7% over the past 12 months.  Prices will have to decline, just as we’re seeing within the existing-home market (which hit a new cycle low in January) to compete with distressed sales. 

The supply of new homes rose to 7.9 months worth (at the current sales pace) from 7.0 in December.

The chart below illustrates the comment made above regarding the competition the new home segment is feeling from the distressed-property sales within the existing-home market. 

*The traditional version of the Dow Theory says that all three Dow indices (industrials, transports and utilities), among other tenets of the theory, must move together to confirm a new directional trend.  Outside of the purists who cling to the original theory, it has morphed into simply watching for the break down in the relationship between the industrials and transports.  That is, if transports shift direction then the industrials will shortly follow. 

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900