Investor sentiment, evident by the decline in pre-market futures, was pretty negative early yesterday morning but reversed course to send stock prices higher.  The gain extends the winning streak to three sessions and trims this mini correction to 6.3%.

The leading sectors were a blend of safety and high cyclicals as health care, consumer discretionary and basic material shares outperformed.  Health care has been on a roll as it’s the best performing sector YTD (consumer staples, energy and utilities are next in line).  The only sector to close lower for the session was financials.   The group is this year’s worst-performing sector (followed by basic materials and tech).

The CRB Index ticked higher, currently 9.3% below the recent peak hit in April 29, as 12 of its 19 components edged up – the energy complex was mixed with crude up slightly and wholesale gasoline down a bit.

The EU bailout talks that occurred this weekend failed to deliver consensus and that’s what drove futures lower – more or less agreeing to disperse just half of the funds, which would cover Greek financing (and push back another EU banking crisis) through July.  But then about an hour into trading EU official Jean-Claude Juncker arrested that concern as he stated a “solution” will be found.  Well, we always knew the EU would eventually find a way to kick this can further down the road and delay the inevitable event of Greek default, but it’s just how long it would take and the degree of market volatility that ensues.  But to call this a solution is both ridiculous and a farce.  The only solution is default and restructuring.  For now the only thing the market needs to hear is that the inevitable default isn’t occurring now.

Market Activity for June 20, 2011

Sector Activity for June 20, 2011

This Week

We didn’t have an economic release yesterday, but this morning we get existing home sales results for May.  Economists expect sales of previously-owned homes to fall 5%, which would mark the third decline over the past four report months – and this is the peak of the buying season.  Odds are sales will decline and the hit may mark yet another worse-than-expected result as pending home sales (a gauge of contract signings) slid 11% in April.  Existing homes sales are officially counted when the contract closes.

Later in the week the big releases will be the latest FOMC meeting, jobless claims, durable goods and the latest revision to Q1 GDP.

That FOMC meeting -- which during normal times means people watch it for the rate decision that follows, but these are hardly normal times -- will be watched for any tacit comment that may point to QE3; and it won’t be the text that follows the meeting but the press conference that the Chairman now holds.  No such signal will arrive though as it will take a stock-market slide (and everyone screaming for more Fed help) before they roll out the next round of bond-buying.  And as we’ve talked about for a little while now, expect the next QE round to be focused around a specific interest-rate target on the 10-year bond (ala, the 1940s when the Fed bought all the bonds necessary to hold what was then the 25-year bond at 2.50%).

Initial jobless claims have been stuck back above the 400K mark for 10-straight weeks now and that’s what we’re watching for: initial claims to finally go sub-400K again.  Until they do, there just isn’t the evidence that monthly job growth will outpace population growth (roughly 150K/month), which outside of a mass exodus from the labor force is a necessary condition for a lower jobless rate.

Durable goods orders may be the most important number of the month as business spending on capital equipment is needed more than ever with personal consumption slumping and the government and trade figures tugging on GDP.  Excluding transportation equipment durable goods orders (important to remove transportation as the commercial aircraft component is hugely volatile) have declined at a 5.75% annualized rate so far this year.  The business spending component is down 6.25% at an annual rate for 2011.  A lot of people expect business spending to pick up again though as firms will want to take advantage of the higher depreciation allowance that expires at the end of year – and that pick up is likely unless an adverse event causes purchasing managers to get chary with their cash again, no matter the incentives.

Finally, there is the latest revision to Q1 GDP.  That’s an outdated number at this point, but will be revised upward to 2.0%-2.2% from the previously reported 1.8%.   What I’ll be watching for is how much inventory rebuilding drives the higher revision.  You don’t always want this component accounting for so much, or all, of the upward revision as it mean the real final sales figure (GDP minus inventories) is falling – which shows underlying demand remains weak.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900

St. Louis, MO

Acropolis Investment Management