U.S. stocks halted a three-session rebound to put us back below where the broad market began the previous week.  Consumer staples outperformed as the group was the only sector to gain ground for the session.  Health care, telecoms and utilities also performed nicely on a relative basis – utilities, consumer staples and heath care are the best performing sectors for the year.  Financials, energy and industrials led the market lower. 

The CRB Index traded lower with stocks – the two are close to inseparable so long as the Fed remains wildly aggressive – as the energy complex weighed on the measure.  Crude slipped 1.4% to $86.71/bbl, natural gas down 2.25% to $3.94/millionBTU and wholesale gasoline off slightly to $2.85/gal.   The national average at the pump is down to $3.59. 

Treasurys were back to rally mode as the 10-year yield slid eight basis points to 2.22% and the 30-year off 10 basis points to 3.67%. 

As stocks rebounded over the previous few sessions, yesterday was yet another day.  The market was unable to ignore more weak global economic reports, unlike Monday as traders brushed off a rather ominous Empire Manufacturing report, as GDP for the 17-country Eurozone slowed to 0.2% in the second quarter (after 0.8% in Q1) and the zone’s growth driver (Germany) ground to a halt as it printed 0.1% (after the 1.3% in Q1). 

Also occurring yesterday was the so-called “emergency meeting” between Merkel and Sarkozy  in which they dismissed the euro bond plan (something Spain and Italy have been begging for) as their electorates have zero desire to further backstop the reckless financial activities of the PIIGS – and the euro bond plan would have Germany and France essentially fully backing that profligacy.  By listening to commentary over the weekend, traders had been hoping for another quick “fix.”  And MerKozy didn’t only fail to deliver what the market wanted, but fired an RPG at their troubled banking system by proposing a financial transactions tax.  You can only laugh at the stupidity. 

Market Activity for August 16, 2011

Sector Activity for August 16, 2011

 Import Price Index

The Labor Department reported that import prices unexpectedly rose in July, coming in at +0.3% when a 0.1% decline was estimated.  This followed a 0.6% decline in June, which was the first monthly decline in a year.  On a year-over-year basis, the import price index accelerated to 14.0%, up from 13.7% in June. 

Commodity prices bounced a bit in July and the U.S. dollar continued to lose ground against other currencies, and that’s really all it takes to send import prices higher. 

The figure will surely decline when the August reading comes out as commodity prices have slid 6% thus far and the Dollar Index is a bit higher.  But the current level of import prices illustrates the perils of further Fed action.  When they roll out the next round of QE, it may very provide a boost for stocks.  The question is how quickly the market turns back down as additional money-pumping activities push money into the commodity trade and crush an already beaten down economy. 

Housing Starts

Home builders broke ground on more homes than expected in July, but housing starts still fell even as the June results were revised lower. 

Starts came in 604,000 at a seasonally-adjusted annual rate (SAAR) for July, down 1.5% from 613,000 in June – which was revised down from the 629,000 that was initially reported.  The figures would have been worse if not for a 30.5% bounce in multi-family units over the past couple of months.  Single-family housing starts are up just 2.2% over the past two months and fell 5% in July (and that’s from already deeply depressed levels). 

Home builders continue to struggle with distressed properties hitting the market, a situation with which the new-home market cannot compete. 

Industrial Production

The Federal Reserve reported that industrial production (IP) rose a much better-than-expected 0.9% in July (expected to come at +0.5%) as auto production fueled manufacturing activity and hot weather spurred utility production – the utility component, which accounts for just 12% of IP right now, accounted for 38% of the IP increase for the month. 

Manufacturing production, the largest component of IP as it accounts for 75% of the index, registered a nice 0.6% increase for the month as it was led by a 5.2% bounce in auto production – factory production had been flat over the previous three reporting months as auto assemblies were down.  So let’s finally put this thought that the Japan supply-chain disruption is the reason for our economic woes behind us finally. 

Mining activity, which accounts for the final 13% of the IP, rose 1.1% in July as commodity prices, particularly energy prices, continue to make it very profitable to engage in these endeavors. 

Despite the growth in industrial production over the past two years, the index that tracks this activity remains 10% below the prior cycle’s peak.  It’s been 32 months now, which is the longest period of time in the postwar era in which IP has remained this far below the prior peak. 

Capacity utilization (the percentage of plant and equipment that is being put to use) rose to 77.5% from 76.9% in June.  This puts the figure at the highest level since the recession began in 2008, but it remains a full two-percentage points below average. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900