July 26, 2010: Housing Inventory at a 42 Year Low?
July 26th, 2010
That’s right…good news, real-estate owners and investors….in the latest government report on New Home Sales (for June) which came out this morning at 10:00 EST, sales spiked 23.6% from May’s level.
Just to fill in some gaps….
May’s New Home Sales figure was originally reported at 300,000 (seasonally adjusted annual rate) which was the lowest rate on record, according to Bloomberg. Even that figure did not tell the whole story. In today’s report, May’s record low pace of 300,000 was revised to 267,000. Further, April New Home Sales were revised down from 504,000 to 422,000 and March New Home Sales were revised down from 411,000 to 384,000. That makes the total downward revision during those three months 142,000 or 11.69% lower than what was originally reported.
Comparing revised and original data to prior month’s revised and original data shows the following: March’s sales grew by 10.7% (originally reported at +33.4%), April’s sales grew by 9.9% (originally reported at +22.6%), and May’s sales were -36.7% (originally reported at -40.5%).
Still, June’s sales of +23.6% is a gain rather than a loss and despite June New Home Sales being the second slowest pace on record, investors are keenly focusing on good news and aggressively explaining away bad news.
According to Reuters, the sales spike in June took available inventory to a 42-year low of 7.6 months. Given that the three months prior were substantially revised lower, it’s anyone’s guess whether or not June data is “real”.
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July 21, 2010: Jobs Paradox
July 21st, 2010
Yesterday, by a whopping one vote, the Senate passed the eighth extension of Jobless Benefits since July 2008. The price tag for these extensions now stands at $120 Billion.
This new measure will extend benefits to those who have been out of work for six months or longer (labeled “chronically unemployed”) to the end of November. Politicians are already talking about a ninth extension if the job market does not improve.
This is completely oppositite of language of the past several months that talked about massive job-creation or job-savings due to prior stimulus measures. If all those jobs had been created or saved, why would benefits need to be extended?
Supporters of the benefit extension point to the fact that recipients of jobless benefits will spend those funds quickly and by doing so, help support the economic recovery. Another question….if that’s the basis of our recovery, how sustainable is that? It sounds like a very short-sighted and certainly temporary solution.
There are two key upcoming data points which will tell a lot about the real state of the Economy. June Existing Home Sales comes out tomorrow morning at 10:00. Earlier this week, we saw much weaker-than-expected results from NAHB Housing Market Index and Housing Starts. Building Permits, however, were stronger-than-expected which got market-watchers thinking that Housing Starts may be stabilizing. Advanced Q2 GDP comes out on July 30 at 8:30. This is the first of three estimates of Q2 GDP. After Final Q1 GDP (+2.7%) matched the most pessimistic estimate of any of the three readings on Q1, it is reasonable to expect a weak first reading on Q2 and possibly a downward revision to Q1.
The Major Averages are all within 3.5% of break-even for 2010. The Russell 2000 is currently down 0.89% for the year but 7.67% below its 10% correction level. The Dow 30, the narrowest market gauge, is the only one of the major averages currently above its 10% correction level (by 0.72%). Only two of the nine S&P Sectors (Consumer Staples and Utilities) are currently above their 10% correction levels. We believe the above evidence suggests that underlying market sentiment is tentative, at best. Further, the on-going consolidation at or below 10% correction levels indicate that sellers are very willing to engage at increasingly lower levels.
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July 15, 2010: A History of Julys
July 15th, 2010
As the broad markets are enjoying a very strong July thus far, we wanted to look at the history of July performance for the S&P 500. What we found is that July rallies are quite common but so are very sharp negative reversals.
We looked at performance from June closes to July closes, June closes to July highs, and July highs to July closes going back to 1990. Some of the findings were rather surprising and strongly argue for at least some measure of pull-back before the month is over.
· In every year of the sample (twenty years), July highs were equal to or higher than June’s close.
· Eleven of those twenty years saw July’s close below June’s close by an average of 2.57% with the largest negative reversal being 7.90% (2002)
· In six of the past fourteen years, there has been at least a 5% pull-back from July’s high to July’s close. The largest of which was 8.33% (2002)
· The average pull-back from July’s high to July close has been 2.85%.
· Average July performance for the past twenty years is +0.32%. Currently, the index is +6.25% for the month.
· July 2009’s performance was +7.41% which was the strongest July in the sample. Second strongest July was +6.80% (1997)
Based on July’s performance over the past twenty years, if the index was to match the strongest July (full month performance) in the sample, that would take the index to 1107. Further, if the index was to match the strongest move from June’s close to July’s high in the sample, that would take the index to 1117. We view those levels as key areas of resistance.
Conversely, if the index was to match the average performance for July over the past twenty years, (+0.32%), that translates into SPX 1033 (down -5.6% from its current level).
July 10, 2010: Here Comes Q2 Earnings
July 10th, 2010
Splashed all the media are this weekend are declarations that stocks just logged their best week in almost a year. The major averages (Dow 30, S&P 500, NASDAQ 100, and Russell 2000) posted gains over the past four trading days (last Monday was a holiday) ranging from5% to 5.42%. In actuality, the majority of those gains were made on Wednesday after the pre-market news that State Street (STT) guided earnings for Q2 higher than analyst estimates (sees Q2 earnings of $0.87; est. was $0.72). The company reports actual Q2 earnings on July 20. STT guidance prompted a snap-back in broad market sentiment and quickly fueled intense optimism for Q2 earnings in general.
It was indeed a good week….now what?
Beginning in late April (April 26 in most cases), the broad market began a corrective process that is still on-going by any technical measure. Looking just at the four major averages above, the indexes remain below 38.2% upside retracements of the declines that began in April and range from 14.6% (Dow 30) to 21.2% (Russell 2000). Also, the indexes remain below their respective 200 Day Moving Averages. Below are both levels for the averages.
Dow 30: 10,242, 10,365; S&P 500: 1091, 1112; Naz 100: 1837, 1840; Ru 2000: 648, 638.
While 5% rallies for a week are certainly welcomed news after the brutal declines of the preceding ten weeks, there are two important pieces of data to consider as we move into Q2 earnings season.
- Investors are now expecting very strong earnings and the season kicks off next week. Given how sharp of a broad market reaction followed STT’s positive earnings guidance, if earnings AND guidance don’t exceed expectations, investor sentiment could swing back to the negative in a hurry.
- July 2009 produced the largest number of bank failures of the year and the second half of the year produced 68% of the failures of the year. Last week, four more banks were seized by FDIC regulators which brings 2010’s closure tally to ninety at an insurance fund cost of $17.77 Billiion.
How the broad market responds to actual earnings news as earnings season begins and the important technical levels above will likely set the tone for at least the next few weeks.
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