Monday, August 29, 2011

Pending home sales reflect sluggish housing market

The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 1.3% to 89.7 in July from 90.9 in June.

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One again, Lawrence Yun, the NAR’s chief economist, noted that tight lending standards continue to hamper the existing home market.

Based on anecdotal evidence from realtors, he is probably correct, but his assertion that “The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy” is a bit premature in my view.

Potential buyers continue to fret over the direction of home prices, and others who would like to move are finding it difficult to sell their current home or are unable to fetch a price that would leave them with the necessary equity to invest in a new house.

Further, job insecurities and lackluster consumer confidence, along with competition from foreclosures, remain a headwind.

Spending powers ahead
A welcome surprise for an economy that has been awash in weak data. Consumer spending grew by a healthy 0.8% in July.  A rebound in purchases for durable goods, including autos, led the way but gains were broad-based.

Even accounting for a rise in headline inflation, real spending, or spending adjusted for inflation, increased by a solid 0.5%, the best reading since December 2009.

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But the overall trend remains lackluster, as the slowdown in income growth – compliments of weak employment growth – hinder spending.

Additionally, the debt ceiling debate that has sapped confidence may not manifest itself in the numbers until August. Stay tuned.

Wednesday, August 24, 2011

Bulls sniff out another round of Fed easing

Fed Chief Ben Bernanke’s talk on Friday at Jackson Hole, WY will likely be the event of the week given the recent unexpected weakness in the economy and the many debt problems that are plaguing Europe.

Clearly, this has tripped up the bulls over the last month, taking a big toll on equities and lending a helping hand to Treasuries.

But Monday and Tuesday have come as a big relief to investors, especially the strong advance yesterday.

Many traders tend to take the final week or two of August off, and a potential lack of liquidity may be accentuating the market moves.

Bargain hunting – stocks appear to be cheap if you are betting against a recession or a near-term default in Europe – is likely a contributor to the rally.

But the biggest reason, in my view, is the lack of any damaging headlines out of Europe and the expectation that Bernanke’s Fed is ready to come to the rescue with more talk of easing.

Recall that Bernanke first hinted at what would eventually be known as QE2 at last August’s meeting in Jackson Hole. That surprised markets.  And he surprised them again in early July by lowering the bar for implementing a more aggressive monetary policy.

Inflation is higher today than a year ago but this time around, the economy is unusually fragile.
Stocks have become addicted to regular Fed injections of liquidity, and another sugar high – compliments of the central bank – seems like a good short term fix.

But the last round of QE did little for the real economy since the $600 billion in new money is currently being held by banks and is on loan back to the Fed in the form of excess  reserves.

And inflation in the U.S.is higher today while emerging market economies like India and China are hiking rates in order to contain rising prices.

The Fed may try to surprise markets by calling for further unconventional action or measures that haven’t been publicly discussed, but the last round of QE was counter-productive since it exacerbated commodity inflation and contributed to higher rates overseas, which has slowed U.S. exports.

Thursday, August 18, 2011

Stocks slump, economic data weak

A sell-off that began early this morning in Europe quickly spread to U.S. markets amid lingering fears over European debt and concerns that the U.S. and European economies may be poised to enter a new recession.

The flight out of equities continued to bolster Treasuries, with the 10-year bond briefly falling below 2% for the first time ever, while gold also benefited from the fall in stocks.

In the meantime, the latest economic data did little to discourage a small but growing view that the U.S. economy is either poised to enter a new recession or may already be in a new slump.

The Philly Fed’s Business Activity Index fell an astonishing 33.9 points in August to -30.7, far below the level of zero, which marks the line between contraction and expansion.

Yes, the index can be volatile but there's little good to say about August's number.

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Losses in the sub-components were broad-based, suggesting the survey is detecting serious weakness in the mid-Atlantic region.

In the meantime, existing home sales unexpectedly fell last month, continuing a downward trend that re-established itself early in the year.

A lack of confidence in the economic recovery, worries about prices and job insecurities played a role.  Additionally, the NAR expressed growing frustration that conservative appraisals are scuttling some deals.

All-in-all, rather disconcerting.

Monday, August 8, 2011

Dow tumbles 635 points in wake of S&P downgrade

What an awful day on the Street.  In the wake of S&P’s downgrade of U.S. sovereign debt on late Friday, global markets, and the U.S. in particular, reacted violently to the country’s loss of its cherished AAA rating.

Never mind that the downgrade had been telegraphed in advance.

Never mind that Standard & Poor’s had been the U.S.’ harshest critic on deficit spending, stating a month ago that there was a 50-50 chance of a downgrade if a $4 trillion plan was not put in place.

Never mind, as Bloomberg News noted, that France, Germany and the U.K., which still hold the coveted rating, all have CDS costs – or insurance against default – that is higher than that of a U.S. Treasury note.

Still, the timing of the downgrade could not have come at a worse time, as heightened recession concerns and growing debt woes in Europe took a huge toll on the market last week.

Not surprisingly, gold prices jumped in reaction to the instability, but interestingly, investors also sought safety in Treasuries, despite the opinion by S&P that government debt no longer warrants the gold-standard AAA rating.

Without question, Bernanke’s Fed has been very closely watching the fluid situation in the financial markets, as well as the recent spate of weak economic data and the still-unfolding situation in Europe.

QE2, when it was all said and done, had little impact on the real economy, and the jump in stock prices we saw earlier in the year, which Fed officials were happy to trumpet, has all but evaporated.

Further, the extra cash the Fed injected into the system exacerbated commodity inflation, which has hurt the economy.

That doesn’t  mean equities, which are looking for their next fix from the Fed, would shun another infusion of central bank liquidity.

It only means that it’s a temporary solution to a bigger problem. We’ll know more on Tuesday at the conclusion of the Fed’s meeting.

Wednesday, August 3, 2011

Collapse in longer-term Treasury yields sends ominous signal

Stocks are falling and investors are running into the arms of Treasuries, seeking safety in the midst of economic turmoil.

Not what one might have expected last month amid fears that the growing federal budget deficit might scare away foreign buyers.

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We can discern two things:
  1. The U.S. Treasury market remains a safe-haven, even as the U.S. budget deficit explodes.
  2. The bond market is running scared, fueled by fears that another recession is imminent.
The weak economic data, starting with the downward revision to GDP, which was then followed up by a disturbing report on manufacturing, has definitely gotten the attention of Fed officials who had been anticipating a pickup in activity later in the year.

Throw in the sudden rush into Treasury bonds and you have wonder if Bernanke and Co. are starting to panic.

Jobs data on Friday may hold the key to whether the Fed will announce new plans to boost the economy.

Inflation expectations have not plummeted along with Treasury yields, but at this juncture, you have to say the odds seem to favor some type of action.

Monday, August 1, 2011

ISM suggests manufacturing growth has stalled

Following Friday’s anemic GDP number, the ISM survey suggests that manufacturing growth pretty much stalled last month.

The ISM Manufacturing Index, offered by the Institute for Supply Management, declined from 55.3 in June to 50.9 in July, well below the consensus from most analysts of around 54.

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To make things worse, new orders turned negative – 51.6 to 49.2 – for the first time since June 2009 when the recession was officially declared to have ended. That suggests further weakness in the short term.

Employment remained positive but is decelerating – 59.9 to 53.5 – and given the weakness in the manufacturing sector, prices paid continued to recede, dropping from 68.0 to 59.0.

Following the downward revisions to GDP in Q4-10, Q1-11 and the weak growth we saw last quarter,  the poor showing by a key survey of manufacturing is clearly disturbing.

This once hot sector – and one of the few bright spots in the economy – has slowed dramatically.
The earthquake in Japan and the subsequent kink in the supply chain has played a role, but other factors are also weighing on growth.

Japanese industrial production, though not fully recovered, is growing at a decent pace, and that should help U.S. manufacturing, especially auto production.

I still believe we will avoid an outright recession this year, but we are perilously close to a growth recession – one in which the economy grows but unemployment rises (that’s already happening) and nonfarm payrolls fall.