MarketView for September 1

 

 

Summary   

 

Wall Street hit the skids again on Tuesday, only it was not because of disappointing economic information. Instead it was investors worrying about what might happen because of what did happen although there is nothing to say it will happen. However, to hear the pundit tell it,  stocks have risen too far too fast without any underlying support.

 

In other words, September started out the month living up its reputation as being the worst month for stocks as elevated anxiety pushed the three major indexes down 2 percent for the day and drove the S&P 500 below the psychologically important threshold of 1,000. Skepticism that stocks can add to a nearly 50 percent rally over the last six months prevailed in the market.

 

Among the worst performers of the day were shares of JPMorgan Chase, down 4.1 percent at $41.67, and Citigroup down 9.2 percent at $4.54.

 

After a brief period of optimism in early trading, the Street pretty much ignored the first sign of growth in manufacturing in a year and a half, and the highest level of pending home sales since June 2007.

 

Fears of a revival of balance-sheet troubles in the financial sector led to a sharp rise in the CBOE Volatility. Known as Wall Street's favorite barometer of investor fear, the VIX rose 12.1 percent to 29.15 as investors used options to take out protection against further declines in stocks.

 

Solid evidence that the economy was pulling out of the worst recession in 70 years came from the Institute for Supply Management's August manufacturing index, which grew for the first time in 19 months, partially driven by the government's cash-for-clunkers program.

 

Auto sales did well in August, but again the Street ignored the sales data, sending Ford Motor down 4.7 percent to $7.24 despite a 17 percent rise in its monthly sales. Shares of eBay fell 2.1 percent to $21.68 after the company announced its plan to sell a majority stake in its online phone unit Skype for $1.9 billion to private investors.

 

Economic Data Points to Recession’s End

 

The manufacturing sector grew in August for the first time in over 18 months, while pending home sales hit a two-year high in July, adding to mounting evidence the longest economic slowdown since the Great Depression is ending.

 

The Institute for Supply Management said its index of national factory activity rose to 52.9 in August from 48.9 in July. The median forecast of 78 economists surveyed by Reuters was for a reading of 50.5.

 

A reading above 50 indicates expansion in the manufacturing sector. The last time the index showed growth in the sector was in January 2008 with a reading of 50.8. August was the highest since a reading of 52.9 in June 2007.

 

The manufacturing and housing data pushed U.S. stocks higher and the Nasdaq rose more than 1.0 percent while Treasury debt prices added to losses with the 30-year bond falling more than a full point. The U.S. dollar fell against the euro and rose against the yen.

 

Regional surveys have shown business picking up steam in August, though employment remained weak, consistent with fears the United States could be in for a "jobless recovery." Increased hiring is seen as critical to getting a consumer-led recovery under way. The U.S. unemployment rate was 9.4 percent in July. However, the employment component of ISM showed some small sign of hope, rising to 46.4 in August to its highest since August 2008 from 45.6 in July.

 

It appears at this point that the economy will return to growth sometime in the third quarter helped by the government's fiscal stimulus spending and the Federal Reserve's massive injections of liquidity into the banking system in the past year.

 

The National Association of Realtors said its pending home sales index, based on contracts signed in July, rose 3.2 percent to 97.6, the highest level since June 2007, from 94.6 in June. Pending home sales contracts have risen for a record six straight months.

 

A nationwide slump in housing prices for the first time since the Great Depression of the 1930s contributed to the credit crunch and contraction in economic activity in the past year, but recent housing data suggested home prices may have stopped falling. Some stabilization in the three-year old housing downturn is seen as essential to any economic recovery.

 

Last week Standard & Poor's said prices of single-family homes rose for the second consecutive month in June, while the government said sales of newly-build single-family homes rose for a fourth straight month in July and the inventory of unsold new homes fell to the lowest in 16 years. Earlier this month, the government said existing homes sales rose in July to mark the fastest pace in nearly two years.

 

Despite some optimism on manufacturing and the housing market on Tuesday, data also showed total construction spending fell 0.2 percent in July to the lowest rate since February 2004. June's rise was revised down to 0.1 percent from the originally reported 0.3 percent.

 

Pending Home Sale Rise

 

Pending sales of previously owned homes reached a two-year high in July, the National Association of Realtors reported on Tuesday, giving more evidence that a recovery in the housing market was under way.

 

According to the NAR its Pending Home Sales Index, based on contracts signed in July, rose 3.2 percent to 97.6, the highest level since June 2007, from 94.6 in June. Pending home sales contracts have risen for a record six straight months. Pending sales were 12 percent higher in July compared to the same period last year.

 

"The recovery is broad-based across many parts of the country. Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit," said Lawrence Yun, NAR chief economist.

 

NAR estimates between 1.8 million to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year and that roughly 350,000 additional sales would not have taken place without the credit. The tax credit expires in November.

 

Recent data have suggested the housing market is starting to dig out of a three-year slump. The collapse of the housing market was the main trigger of the worst recession in 70 years.

 

A recovery in the housing market would help combat losses at financial institutions, which have been battered by defaults on mortgages. It would also improve the psychology of households, whose net worth has been decimated by the plunge in home values and encourage consumers to spend rather than save.

 

The pending home sales index in the Northeast fell 3.0 percent to 78.8 in July but was 4.7 percent higher than the same period last year, the NAR said. In the Midwest the index slipped 2.0 percent to 88.1 but was 8.1 percent above a year ago. Pending home sales activity in the South rose 3.1 percent to an index of 103.8, while contract activity in the West jumped 12.1 percent to 112.5.

 

Crude Down Again

 

The price of crude oil fell sharply on Tuesday as economic concerns sent investors into safer havens, outweighing positive manufacturing and home sales data. Sweet domestic crude futures for October delivery settled down 2.73 percent or $1.91 per barrel at $68.05, while in London, Brent futures settled down $1.92 per barrel at $67.73.

 

The declines came after inventories fell as renewed worries over the health of the financial sector shook investor confidence. The dollar rose as the slide in the U.S. stocks boosted the currency's safe-haven appeal.

 

Oil futures were up in early trading as the market focused on a report showing a jump in U.S. manufacturing and pending home sales. Oil traders will look for fresh direction from weekly U.S. crude stockpiles data. The U.S. Energy Information Administration (EIA) will release its data on Wednesday at 10:30 a.m. EDT.

 

Adding to already high inventories, the Organization of the Petroleum Exporting Countries has reduced its compliance with agreed production curbs. OPEC supply in August rose for a fourth consecutive month as Saudi Arabia, Nigeria and Venezuela increased their production, taking overall output discipline to 68 percent of the target from a revised 70 percent in July. OPEC meets on September 9 in Vienna to reconsider its output policy.

 

CIT Postpones Interest Payment

 

Adding to the woes of the financial sector, CIT announced that it is deferring an interest payment on some notes, thereby sending its shares down as much as 17 percent. The lender to small and medium-sized companies has been battling to avoid bankruptcy as the two-year-old financial crisis triggered a sharp rise in its loan losses and credit costs.

 

The cash-strapped company said in a filing with the SEC that it cannot pay an interest payment due September 15 to holders of its March 15, 2067 junior subordinated notes. CIT shares fell to $1.44 from $1.74. The shares had almost doubled in August from 87 cents at the start of the month, amid a broad rally in financial stocks.

 

Last month, the 101-year-old lender completed a tender offer for $1 billion in debt, buying time to restructure its finances and stave off bankruptcy. CIT received an order from the Federal Reserve on August 12 to submit a plan for raising capital and meeting debt obligations.