CAPITAL MARKET COMMENTARY
STOCKS ARE “HIGHER” AROUND THE WORLD: And we would have expected them to be so given yesterday’s sharp rally in the US. Asian shares have led the rally, and given their recent underperformance…this isn’t surprising. Europe is higher, but only marginally so. In the US, the trading bias will remain to the upside through Monday given the end of the quarter as well as fiscal year end of the mutual fund industry. Thereafter however, the recent relative weakness displayed by the NASDAQ 100, Russell 2000 small caps and the Retail Index suggests this Dow and S&P 500 “flight to quality” rally isn’t really all that healthy. This, combined with significant resistance levels and overbought indicators continue to prompt us to consider selling short rallies rather than becoming aggressive buyers.
THE ECONOMIC CALENDAR IS FULL TODAY: First, we have Durable Goods orders and New Homes Sales for August. Durable goods are expected to have risen by +0.5%, while the ex-transportation figure is also expected to show a gain of +0.5%. We won’t argue, but the report is inherently volatile given an aircraft order here or pulled aircraft order there can and will swing the report from positive to negative very quickly. We will further be looking at the non-defense capital goods number for insight into business capital spending. With the recent weak Philly Fed, coupled with the tame Dallas and Richmond Fed manufacturing surveys…this number will be widely watched for signs of deterioration. For New Homes Sales – the consensus expects a decline from 1.072 million annualized units to 1.040 million.
We expect the homebuilders have rationalized prices and provided incentives that would prove to keep this number rather “strong” in comparison to existing home sales where incentives other than prices are nonexistent. A weaker than expected report would certainly be cause for concern, for then incentives will have not been sufficient to entice buyers to buy.
And finally, we have two Fed speakers today. Fed Governor Krozner speaks on Productivity at 1pm EST, and Kansas City Fed President Koenig speaks on Monetary Policy and the Economic Outlook at 8:45pm tonight. These will be important.
MBA MORTGAGE APPLICATIONS SURVEY: This report released this morning showed that for the first time in four weeks – mortgage applications on balance “dropped”; this even as interest rates hit a 6-month low. For the week ended September 22nd, activity dropped -4.9% from the previous week, which was also its highest level since April. But more importantly in the report – the purchase component fell -5.5%. Perhaps home buyers are reading the headlines and sitting on the sidelines a bit longer and negotiating lower prices; certainly if we were in the market to buy a house we would be doing so. But also – if we were selling a house – we may be taking it off the market at this time until the springtime when natural buying demand picks up. We know of one friend who has done just this; we suspect there are more.
We are reminded of the old saying that may very will apply to this modern day conundrum: “You can lead a horse to water…but you can’t make him drink”. LOOKING AT THE “WHAT”…BUT NOT THE “WHY”: We find the market can at times trade “irrationally” such as we consider it be doing now, and it can do so for far longer
than we can stay solvent. We respect the current move in the markets, and they could very well trade higher. However, we are not of the business school opinion that markets are efficient, for they are far from it in our opinion. This is why “opportunities” are created given the masses for some reason or another don’t’ like, or do like particular stocks or countries or anything for that matter. We believe that just such an “opportunity” is unfolding before us.
We all know that WTI crude has traded down $18 off its $78/ barrel high; we all know that 10-year note yields have fallen rather precipitously from 5.25% to 4.53% - and we know that this in effect will provide the consumer with more disposable income. However, this is the “what”; but why are WTI crude and not yields “falling”? Not because of any exogenous event; but because the economy is slowing – not just in the US – but around the world. Demand for most goods is slowing; and as such revenue and profit expectations are a bit too high. The culprit – a plunging US housing market; we put more weight upon the housing market than many – and herein lies the rub…we suspect many are underestimating the impact of the housing market upon the US and world economy…and that isn’t yet reflected in the major indices.
So…we are bearish, with a material slowdown and perhaps a short recessionary period lying directly ahead. Our friends a UBS noted yesterday that when median home prices decline…then GDP has printed 4 of 5 times between -3.0% and +0.7%; there are two negative and two positive occurrences out of those 4 times. But with housing being more “impactful” to the US economy at the present time, and with 3Q GDP estimates at 2.0%...the risk therefore remains that traders and investors are positioned for a soft landing rather than a hard landing. We vote the latter; we respect the former – hence we are sellers of stock on rallies in lieu of a normal -10% correction in the S&P 500 back towards the 1150 level.
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