MarketView for November 23

 

 

Summary 

 

It was a positive day all around on Wall Street as the major equity indexes ended a three day losing streak and sent the Dow Jones industrial average to its highest point so far this year. A key driver behind the day’s optimism was a report indicating stronger-than-expected home sales, while a weaker dollar sent commodity-linked share prices higher.

 

According to a report by the National Association of Realtors (NAR), sales of previously owned homes rose to their highest level in more than 2-1/2 years last month. That helped to ease concerns about the sector generated last week when another report showed housing starts fell sharply in October.

 

The result was a sharp increase in share prices across the board as evidenced by strong gains within all 10 S&P sectors. At the same time, the Dow hit a new 13-month high albeit with volume that was light which the chart guys would say meant “a lack of conviction.”

 

Among the key home builders, D.R. Horton rose 2.8 percent to $10.66 after the NAR said existing home sales jumped 10.1 percent in October.

 

The dollar reversed course once again on Monday, falling 0.7 percent against major currencies after St. Louis Federal Reserve President James Bullard said on Sunday that the Fed should extend its mortgage-related assets purchase program. The comments fueled expectations that interest rates would remain low for an extended period. A weaker dollar increases dollar-denominated commodity prices as local manufacturers demand more dollars for their products, and it helps boost U.S. export earnings.

 

The slide in the dollar helped lift commodity stocks as gold hit a record $1,170.55 an ounce and copper rose to levels not seen for 14 months, helped also by expectations of recovery. Newmont Mining Corp rose 2.1 percent to $53.34.

 

Home Sales Hit 2-1/2 Year High

 

Sales of previously owned homes rose sharply last month to their highest level in more than 2-1/2 years, rising by a record 10.1 percent month-over-month in October, the National Association of Realtors said on Monday, as buyers took advantage of a popular tax credit for first-time buyers that had been scheduled to end this month.

 

Sales of existing home sales surged in October to an annual rate of 6.10 million units, the NAR reported, beating market expectations for a 5.70 million-unit pace and above September's 5.54 million-unit rate. The housing market is slowly mending after a three-year decline, which helped tip the U.S. economy into its worst recession in seven decades.

 

Analysts are cautiously hoping a sustained housing market recovery will help improve the psychology of households, which has been shaken by an unemployment rate of 10.2 percent, the highest in 26-1/2 years. The NAR said its data on Monday, which showed broad-based gains in the largest segment of the housing market, was proof that the decline in purchases of existing homes had bottomed.

 

"Home prices are almost there. We are seeing less of a decline in house values," said Lawrence Yun, NAR's chief economist. He said the Realtors group expected strong sales for November, related to the federal tax credit. However, there is some caution in the air given the drop to 12-year lows in demand for home loans during the week ended November 13.

 

Distressed transactions accounted for 30 percent of sales last month and continued to weigh on home prices. First-time buyers made up a third of sales in October. A separate survey based on actual home sales showed first-time home owners accounted for 47 percent of sales last month.

 

The national median home price fell 7.1 percent from October last year, the smallest decline in over a year, to $173,100. Homes in foreclosure typically sell for 15 to 20 percent less than other homes.

 

Housing is healing and construction activity added to growth in the third quarter for the first time since 2005. Recovery is being supported by the $8,000 tax credit for first-time buyers, low mortgage rates and falling house prices. The government this month extended the home buyers' incentive into next year and added a $6,500 credit for home owners buying a new residence. It had been due to expire on November 30.

 

Purchases by the U.S. Federal Reserve of mortgage-related assets have helped to push home loans down, boosting the affordability of house and aiding the sector's recovery. On Sunday, the president of the St. Louis Federal Reserve Bank, James Bullard, said the Fed should keep its mortgage-related asset purchase program beyond a scheduled expiration in March.

 

In October, sales of single-family homes -- the biggest segment of the market -- rose 9.7 percent, while condominium and co-ops increased 13.2 percent. Sales were up in all four regions of the country. Prices rose in the Midwest, which had not seen the same boom as the rest of the country. Prices declined in the other three regions. The rise in the Midwest was the first gain in any region since November 2008.

 

The supply of existing homes for sale in October fell to 3.57 million units from the previous month, NAR said. At October's sales pace, the supply equaled seven months of sales, the lowest in 2-1/2 years and down from September's eight months.

 

The inventory of homes on the market must fall below six months' supply to strike a balance between buyers and sellers.

 

Record High for Gold

 

Gold hit a record high at $1,173.50 an ounce on Monday as a weaker dollar boosted buying in gold as a hedge against depreciation of paper currencies. Expectations of prolonged low U.S. interest rates also supported bullion's investment demand.

 

Gold has rallied to a series of record highs since news that India bought 200 tons of gold from the IMF broke in early November. In an apparent response, a number of other central banks have announced they are buying gold as well.

 

Market sentiment was highly supportive after news that star hedge fund manager John Paulson said last week he was launching a new gold fund. Paulson is among a number of hedge fund managers stocking up on the metal.

 

Spot gold was at $1,164.20 an ounce at 2:08 p.m. EST (1908 GMT), against $1,148.20 late in New York on Friday. Earlier in the session, it hit an all-time high $1,173.50. Year to date, gold is up about 33 percent.

 

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange settled up $17.90, or 1.6 percent, at $1,164.70 an ounce.

 

Investors have been buying gold not only to protect portfolios against a falling dollar but also against all fiat currencies. Gold priced in currencies other than the dollar were also reaching historic highs on Monday, with gold priced in euros rising to a nine-month peak of 782.76 euros an ounce, within 15 euros of a record high.

 

Sterling-priced gold reached a record high of 705.34 pounds an ounce, while gold denominated in Japanese yen rose to a historic peak of 104,289 yen an ounce. Options traders are betting gold will hit $1,200 an ounce or higher by early next year. Strong options interest could in turn lift underlying prices further into uncharted territory.

 

Gold's gains lifted other precious metals, with platinum hitting its highest since September 2008 at $1,473.50, and silver reaching its highest point since July 2008 at $18.91 an ounce.     Spot platinum was at $1,458 an ounce against $1,441 bid, while palladium was at $369 against $361. Spot silver was quoted at $18.56 an ounce against $18.46.

 

Fed Report is an Ill Wind

 

The Federal Reserve Bank of Chicago reported on Monday that its gauge of the national economy fell further into negative territory in October, in a report that suggested the economic recovery could be in trouble. According to the Chicago Fed, its National Activity Index came in at a negative 1.08 from a revised negative 1.01 in September. September's reading was originally reported at a negative 0.81. The index's three-month moving average, decreased to a negative 0.91 in October from negative 0.67 in September, declining for the first time in 2009, the Chicago Fed said.

 

"October's reading suggests that growth in national economic activity remained below its historical trend," the report said. The Chicago Fed said that a move below a negative 0.70 in the index's three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun.

 

The report also said the amount of economic slack reflected in the three-month moving average "indicates low inflationary pressure from economic activity over the coming year." The 85 economic indicators that comprise the Chicago Fed's index are drawn from four categories: production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories.

 

Thirty-two of the 85 individual indicators made positive contributions to the index in October, and 53 made negative contributions. Forty-three indicators improved from September to October, while 42 indicators deteriorated.

 

Values of zero in the National Activity Index indicate a national economy expanding at historical trends, negative values indicate below-trend growth and positive values signal growth above trend, the Chicago Fed said..

 

Higher Earnings at Hewlett-Packard

 

Hewlett-Packard reported after the markets closed that its quarterly earnings rose 14 percent, the result in part of a strong performance in China and improved profit margins in its services business. The fiscal fourth quarter results were in line with those the company preannounced two weeks ago, which topped Wall Street's estimates.

 

According to the company, it posted a net profit of $2.4 billion, or 99 cents per share during the fourth quarter, up from $2.1 billion, or 84 cents per share a year-ago. If you excluded one-time items, HP earned $1.14 a share. Revenue fell 8 percent to $30.8 billion.

 

The company reaffirmed its guidance for fiscal 2010, excluding items, of $4.25 to $4.35 per share on revenue of $118 to $119 billion.