EU Fund for Financial Institutions Helpful
A combination of a positive revision to the OECD's economic forecast and an EU effort to put together a fund for the orderly unwinding of troubled financial institutions helped stocks start the day okay on Wednesday.
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EU Fund for Financial Institutions Helpful
The EU has the right idea, as it directly mitigates global market concerns. The Europeans are putting together a fund to mitigate EU financial institutional troubles in an orderly manner. I view this concern about European financials as the most important catalyst of recent market decline. Thus, we were pleased to see the EU taking steps to thwart potential future problems at its banks. We are also looking towards the OECD report as a starter today, or rather the keeper, after yesterday's late day surge in US shares. Asia kept pace today, with the NIKKEI 225 moving up 0.66%. European markets enjoyed the news too, as the ESTX 50 moved up 1.68%. As we approached the close in New York though, the major indices all dropped into the red.EU Fund for Financials
Basically, an EU official proposed levying a bank tax to help fund a pool to protect against failing financial institutions that may be too big to fail. The biggest banks are of course found in Germany, France and the usual elite places, so the majority of nations should push the new regulation through. At first glance, it seems even European banks are for it! Gee, I wonder why...
Remember how US banks suddenly liked government intervention when the walls started caving in? I fear EU bank support might offer signal into what is to come soon, the failure of major European institutions. We were talking run on banks last night, with my friend the trader from the West Side mentioned below, but our discussion was focused on Greece.
OECD Makes Nice
The Organization for Economic Co-operation and Development (OECD) published its economic outlook this morning. The OECD revised its 2010 GDP forecast for OECD countries to +2.7%, from +1.9%, and published new expectations for 2011 at +2.8%, up from 2.5%. This supported stocks that were looking for a ledge to push higher from today, after yesterday's effort at rise.
However, the OECD hedged a bit, and warned that overheating emerging markets and sovereign debt concerns presented risks to economic stability. The OECD, World Bank etc. all seem to repeat the obvious and adjust forecasts that are off to begin with. Their reports make for better catch-up reads than they work for aiding prescient investment bids.
Based on the OECD report, European markets are most fragile, with GDP projected to rise 1.2% this year and 1.8% in 2011. Be careful though, because when some of Europe's divergent markets fall back into recession, the OECD will adjust this lower and it will do users of the data little good. The group's projection for the US is for 3.2% growth in both 2010 and 2011. I think the odds of growth sticking at a steady pace in 2011 is low, and the forecast is the least risky that one might make. So be careful...
The OECD restated some of the things we've written here, though not recently; for instance, it looks to China and India and other emerging markets to help the broader global economy out of trouble. While that's the case, the vital and robust growth out of emerging Asia also raises the volatility of GDP globally. Boom and bust cycles thus become more likely and more dramatic...
New Home Sales
New Home Sales benefited from the deadline for first time homebuyers to lock in their relative tax deductions. Sales jumped 14.8% to an annual pace of 504K, well above the revised March pace of 439K (which was also up sharply from February). More importantly, sales well-exceeded the economists' consensus view for 425K. Even though it was well understood that the April pace of sales was powerfully moved by a rush to get the $8K+ tax benefit, the importance of the actual change itself still helped markets higher this morning.
I suspect the fact that new home inventory dropped to 5 months, the lowest level in decades, played a big role in supporting the stock market surge this morning (though it's not represented in the Dow's chart). However, remember that inventory is measured by the current sales pace, which may be inflated due to the tax incentive.
No surprise: the median price of a new home was 9.5% lower than last year's level. Sales activity was hottest in the Midwest (+31.6%) and West (+21.7%), with some growth seen in the South (+10.8%) and none in the Northeast (0.0%). That information differed with what we've seen in the existing home market in the Northeast (a lot less open land here).
Mortgage Activity
Dampening most of the enthusiasm from New Home Sales was the fact that while they were hot in April, they are not now. The Mortgage Bankers Association's Weekly Applications Survey for the period ending May 21 showed Purchase Activity dropped 3.3%, to the lowest level since April 1997. The prior week's data, covering the period ended May 14, produced a Purchase Index collapse of 27.1%. This is where you can see the impact of the concluding tax incentive. The MBA theorized that the incentive pulled activity from May into April. The big question is, what will happen after a few weeks pass, and the tax incentive plays no role whatsoever?
As long rates stuck low, refinance activity continued to prove robust. Contracted rates on 30-year and 15-year fixed rate mortgages were 4.8% (from 4.83%) and 4.25% (from 4.19%), respectively. That led the Refinance Index 17% higher. Refinance activity moved to 72.2% of all mortgage activity, up from 68.1% in the prior week. Of course, as we explained last week and again in our weekly copy, low rates are the result of increased demand for treasuries; that is thanks to European troubles and capital finding its way to "safety."
Durable Goods Orders
Durable Goods Orders are often volatile due to the high price tags of these items, and thus the data can easily stray far from consensus estimates. April's Durable Goods Orders were reported up 2.9%, well ahead of the economists' consensus forecast for 1.5%. This was off of a prior month revised level that marked no change, versus the initially reported decline of 1.3% in March (so the bar was raised).
The bad news was found in New Capital Goods Orders excluding aircraft and defense, which fell 2.4%. This is the best measure for the real longer term economic outlook, since these items have long production times and are ordered well in advance of final delivery. Without a positive feeling from businesses for the outlook, these orders will not occur. April's change marked a significant turn in trend, therefore, in my view.
Transportation skewed the numbers significantly in April, so that when excluding the segment, new orders actually fell by 1.0%. Transportation orders increased by 16.1%, because of the serious cost of aircraft and after a 13.7% drop in March. When excluding defense but including transportation, new orders jumped 3.4%. Shipments of goods were up 1.4%, and inventories increased 0.7%. Still, the general impression garnered from the Durables Report does not seem the reason for early market rise this morning. Rather, it likely contributed to its reconsideration.
Oil Inventory
For the week ending May 21, oil inventory increased by 2.4 million barrels while gasoline decreased by 0.2 million. Both oil and gasoline remained above the upper limit of the average range for this time of year. The summer driving season officially begins this weekend, and so gasoline demand should be on the rise. Recent dips in gasoline prices may thus offer some opportunity on the long end. Oil prices recovered ground today, rising 3.9% on the nearest WTI Crude contract to about $71.43.
I have to give credit to seasoned trader Steve Koufakis, who I accepted a few beers from last night as we watched the Phils get destroyed by the Mets (to which I rebut, there's always September...). Steve was all over the long oil trade, and was emphatic about the impact the Gulf spill would have on deep water offshore drilling over the next six months or more. He said, "we still need oil," as he made sure I understood how cheap it was now. BTW: Steve also thinks euro weakness will have a negative impact on New York City real estate. I agree that New York tourism has got to take a hit this summer, and so the commercial market seems to find no support through summer.
Treasury Secretary Timothy Geithner stopped over in London before his return from Asia. He will be doing his best to restore European market confidence. Meanwhile, the SEC proposed a new rule today to better light the audit trail of all securities. The SEC hopes this will make it easier to understand strange market happenings like the "flash crash" of May 6.
At 4:15 PM, Richmond Federal Reserve Bank President Jeffrey Lacker will speak on the topic of financial regulation at a conference at the Institute for International Economic Policy in Washington.
In corporate news, analysts meetings occurred or are underway for Newell Rubbermaid (NYSE: NWL), Arrow Electronics (NYSE: ARW), Thermo Fisher Scientific (NYSE: TMO), Northern Trust (Nasdaq: NTRS), and Yahoo! (Nasdaq: YHOO). The National Bank of Greece (NYSE: NBG) reports earnings results today. The Ira Sohn investment conference kicked off in New York, while Finra starts its annual conference. Trade lockup curbs expire on ArvinMeritor (NYSE: ARM), while Tessco (Nasdaq: TESS) splits 3:2.
The day's earnings schedule includes 99 Cents Only (NYSE: NDN), AFC Enterprises (Nasdaq: AFCE), American Eagle Outfitters (NYSE: AEO), Apollo Investment Corp. (Nasdaq: AINV), Avago Tech (Nasdaq: AVGO), Bank of Montreal (NYSE: BMO), BluePhoenix Solutions (Nasdaq: BPHX), Brown Shoe Co. (NYSE: BWS), Charm Communications (Nasdaq: CHRM), Codexis (Nasdaq: CDXS), Diana Shipping (NYSE: DSX), Dress Barn (Nasdaq: DBRN), Fred's (Nasdaq: FRED), Hoku Scientific (Nasdaq: HOKU), Jamba Juice (Nasdaq: JMBA), Jo-Ann Stores (NYSE: JAS), LTX-Credence (Nasdaq: LTXC), NetApp (Nasdaq: NTAP), Rosetta Genomics (Nasdaq: ROSG), Rue21 (Nasdaq: RUE), Semtech (Nasdaq: SMTC), Sigma Designs (Nasdaq: SIGM), Solarfun Power (Nasdaq: SOLF), Sycamore Networks (Nasdaq: SCMR), Synovis Life Tech (Nasdaq: SYNO), Telvent (Nasdaq: TLVT), Toll Brothers (NYSE: TOL), Trintech (Nasdaq: TTPA), VeriFone Holdings (NYSE: PAY), Vimpel-Communications (NYSE: VIP) and Zale Corp. (NYSE: ZLC).
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