Saturday, August 29, 2009

Weekly Market Wrap-up

Equity trading was directionless this week, and US indices ended the week more or less where they began. The Administration confirmed that President Obama would nominate Fed Chairman Ben Bernanke for a second four-year term, a move that was praised from most quarters. Meanwhile, the White House's mid-year budget review trimmed estimates for the FY10 deficit to $1.58 trillion (mostly since money earmarked for bailing out banks is no longer required) but increased the deficit the ten-year deficit projection by $2T. The month-long "cash-for-clunkers" program ended, with 690K vehicles traded in at a cost of $2.9B in Federal funding. Housing data showed further improvement and the Conference Board's Consumer Confidence index rose to 54.1, blowing away estimates. For the week, the DJIA, S&P500, and Nasdaq were each up less than 0.5%.

Economic data out this week offered the strongest evidence yet that housing has turned a corner. The June S&P/CaseShiller Home Price Index rose on a sequential basis for the first time in three years, prompting some to say that housing has bottomed. The S&P/CS composite index showed home prices declined less than expected and improved a bit over May levels (a second consecutive gain) in the 20 leading metropolitan areas in the US; however, prices remain 16% lower than last year. The economists that developed the index, Karl Case and Robert Shiller, gave contrasting interpretations of the data. Case said "the boat has turned" for US housing while Schiller warned that less positive data should reverse this trend soon. The Commerce Department said July New Homes Sales rose nearly 10% sequentially, for their biggest month over month gain since early 2005. Some analysts cited a surge of first-time homebuyers cutting deals as the Federal tax credits for such first-time buyers are scheduled to expire in November. In another sign of housing normalization, the supply of new homes fell to 7.5 months from 8.5 months in June (about 6 months of supply is considered normal and healthy).

Quarterly numbers from homebuilder Toll Brothers also suggest that improvements are being seen in housing. While Toll Brothers lost far more than expected in Q3, the company saw another uptick in new contracts and, for the first time in three years, the number of homes in its backlog grew compared to the prior quarter (reversing a twelve-quarter trend). A wide selection of consumer names offered quarterly reports, although there was no clear trend in the data. Staples was in line with expectations and once again refrained from offering any forward-looking guidance. Burger King Holdings crushed EPS estimates and offered strong guidance for its FY10. High-end retailer Tiffany & Co. exceeded beaten-down expectations by wide margins. Dell gave some more hope to the consumer tech sector with a solid Q2 earnings report that garnered price target increases from several analysts.

The tech sector also got some good news out of Intel this week. The semiconductor maker raised guidance for revenue and gross margins on Friday, sending the stock up 4%. Another Dow component, Boeing, took flight on Thursday after issuing a new delivery schedule for its troubled new 787 Dreamliner jet, with first flight now expected by end of 2009 and first deliveries by Q4 2010. Management's apparent confidence that this would be the final revision of the flight schedule lifted the stock to an 11% gain on the week.

The FDIC reminded investors that the financial sector is a long, long way from normality in two separate moves this week. On Thursday FDIC released its Q2 quarterly report on the banking sector, increasing the number of "troubled" institutions on the list by about 25%, to 416 in Q2 from 305 in Q1. The FDIC fund for insuring deposits has dwindled to about $10B, its lowest level since the S&L crisis in the early 1990s. FDIC Chief Sheila Bair said she expects the number of problem banks and bank failures to remain elevated even as economy begins to recover. Rochdale analyst Dick Bove believes another 150-200 banks are set to fail in the US in the coming months, on top of the 106 banks that have collapsed over the last two years. The day before releasing the Q2 report, the board of the FDIC voted to lower capital ratio standards for investments made by private equity firms in failed banks to 10% from the 15% prior recommendation. The agency hopes to lessen the demands on its resources by allowing a wider pool of private investors to buy up failed banks more quickly.

Treasuries largely rallied in tandem with equities again this week, an anomaly only partially explained away by vacation-induced thin volumes. A larger-than-expected NY Fed coupon pass on Monday set the tone for the week, driving yields lower, a move reinforced by another round of successful 2-, 5- and 7-yr note auctions. The 10-yr note did move back above the psychological 3.50% level following personal income and spending data on Friday, but as equities continue to test their best levels of the year the US benchmark is still some distance below its August and 2009 highs.

Bernanke's reappointment was widely welcomed by a market longing for stability, with the notable exception of Morgan Stanley's Steven Roach, who criticized the Fed chairman for his well documented position on asset price bubbles. In any event, Bernanke is highly unlikely to depart from his existing blend of optimism and caution, nor is the "commitment to keeping rates low for an extended period" mantra likely to be adjusted any time soon. But with the appointment out of the way (pending Senate confirmation), the issue of exit strategies is likely to intensify. Note that within two weeks of a policy statement affirming the Fed "has decided to gradually slow the pace" of treasury purchases, the NY Fed's permanent coupon pass was almost double market expectations. Furthermore, the Fed Governor Lacker raised eyebrows on Thursday with hints that the Fed's $1.25T in agency MBS purchases would be reevaluated, in direct contrast to the official line.

In currencies, another round of improving economic data kept the greenback's price action within the prior week's range but did not managed to alter the dollar's inverse correlation to equity price movements. Official commentary about the sustainability of the recovery remained cautious, with the spotlight on Asia. Chinese PM Wen reiterated his cautious views and stressed that China would keep up its proactive fiscal policy and moderately loose monetary policy, cautioning markets not to be blindly optimistic. In Europe, the IFO data suggested that the German economy is on the mend, but European officials remained cautious regarding the sustainability of any recovery. Overall, EUR/USD held a 1.42 to 1.44 range with chatter indicating an Asian sovereign account had been bidding for euros for month-end commercial purposes at 1.4200. France's Sarkozy warned the euro should not suffer alone in FX adjustments. Meanwhile, Germany could face a wave of corporate restructurings and mass job cuts following next month's elections. Press reports speculated that German executives have deferred job cuts to ensure re-election of a business-friendly government, with an implicit "pact" ahead of the Sept 22nd ballot. Sterling maintained a heavy tone against the major pairs in continued selling associated with dovish BoE policy stance and high level of government and consumer indebtedness. Overall dealers speculating that the UK recovery will lag the Euro and US regions. GBP/USD dipped below the 1.63 handle while GBP/JPY tested below 100-day moving average at 153.33 area.

The dollar apparently decoupled from risk appetite sentiment this week, maintaining a steady tone in the early part of the week. Heaviness in the yen crosses had a negative influence on European-related pairs and indirectly aided the USD. The Yen seemed to be reacting to risk aversion growing out of comments from government officials, especially the comments from China cited above. Dealers also talked about a Japanese press report that an increasing number of firms plan to take advantage of tax exemptions on dividends from overseas units to repatriate funds ahead of the Japanese half-year point in September. The upcoming elections in Japan were also a focus, with numerous issues involved that could impact the yen, including currency reserves and bond strategy. DPJ leader Hatoyama commented that if his party wins the upcoming general election this Sunday (as is expected) it would not raise government bond issuance in the next fiscal year.

Gyrations on the Shanghai Composite have remained the focal point in Asia this week. Although the index is still above its multi-week lows from the prior week, extreme volatility coupled with a final session sell-off on Friday are making investors leery that the bounce from 2,750 low may not last. PBoC adviser Fan Gang attempted to infuse the uncertainty with a tone of optimism, suggesting that the recovery is progressing faster than expected and may build sufficient momentum to keep the economy growing above 8% in 2010. He also suggested that a firmer recovery in exports and corporate investment can replace the impact of the 4 trillion yuan stimulus going forward even as accommodative monetary conditions are removed. Conflicting forecasts from former PBoC member Yu Yongding painted a more dire scenario: Yu emphasized the threat of overcapacity leading to deflation as the direct result of over-stimulated investment in fixed asset infrastructure. Note that the Chinese Cabinet articulated plans later in the week to cap excessive investment in China's industrial sectors, especially in steel, cement and coal.

Markets in the Far East were also weighed down by ongoing tensions with Australia's miners. Early in the week, Rio Tinto noted that it may be looking into a bauxite and alumina cooperation with Chinalco, suggesting that the conflict from failed partnership with the state company may be in the past. However, that speculation was then refuted by Chinalco management, who said that although it remained open to cooperation with miners, no specific agreement was reached with Rio Tinto, and any subsequent offer would be under less favorable conditions than before.

Trade The News Staff Trade The News, Inc.

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