Yesterday was a very “telling” day, as investors had to overcome adversity from a variety of fronts. The Euro backed off on concerns related to Greek debt, as well as Spain’s refusal saying that it doesn’t need any help. Germany is taking aggressive steps to cut its spending, even though it is considered to be the strongest economy in the Euro-zone. That may have had a negative impact, as Germany would have been the net consumer for goods from the other Euro nations. If they chose to conserve, that could add to the economic pressures of their neighbors. Now France is looking to make 45 billion Euros in budget restrictions. France will look to increase the retirement age to 62 and increase taxes on capital. The crisis in Europe is not over, but then again, no one expects it to be. We continue to look at the Euro as a proxy for the global opinion on what progress is being made. The Euro slipped to an intraday low of 1.2255. Holding above 1.2222 is considered a short-term positive.
There was a lot of economic news out yesterday, and it was a very mixed bag. The Producer Price Index for May slipped 0.3% on top of the 0.1% decline in April. Expectations were for a drop of 0.5%, because of the energy component. Ex-food and energy, it was up 0.2% versus expectations for an increase of 0.1%. In some respects, pricing power is probably more important than inflation concerns at this point, so the news can be seen as a very slight positive. On the negative side, no matter how you slice it, Housing starts fell 10.0% in May. April was revised to a smaller gain of 3.9%, down from 5.8%. That puts the total number of starts in April at 659,000, whereas the May decline put the annualized starts at only 593,000. Expectations were for 648,000. Permits fell 5.9% after falling 10.9% in April. The April drop in permits was because the program to enter into a purchase contract required signing by the end of April. Therefore, there was no point in pulling a permit to build after that bubble passed. Expectations were for a small 2.5% blip back up, but the decline puts the annual rate at just 574,000. This is obviously a sign that the stimulus induced bubble will be followed by a void of interested buyers. On the flip side, the numbers also suggest that builders are keeping inventories tight. They are not running out building inventory. Given that inventory is the main negative issue, seeing permits down is a negative for construction, but may be a positive for the eventual recovery.
Industrial Production rose 1.2% in May, topping expectations for a gain of 0.9%. This is a good number. Motor vehicle parts posted a solid jump, but are a modest weighting in the index. Consumer goods has the highest weighing, and that measure moved up from an April loss of 0.1% to a May gain of 1.2%. Materials have a fairly heavy weighting overall and energy made up for weakness in mining. Capacity Utilization edged up slightly to 74.7% from 74.5%. This is important in combination with what we heard from FedEx FDX (-6.0%). The company reported $1.33 on sales of $9.43 billion. Expectations were for $1.33 on $9 billion. Discount pricing and higher fuel charges hurt the bottom line. The company issued guidance for 2011 of $4.40 to $5.00. The current forecast was for $5.05, so this was definitely light. What FedEx is reporting is that they expect GDP growth to increase by 3.2% in 2011, but after a slower pace in the second half of this year. This reflects the caution that we are likely to see from many companies. However, the current pace of production is quite positive.
Crude settled the day up almost a percent to $77.67 despite weaker than anticipated economic news and higher than expected inventory data. Crude inventories were very weak last Wednesday. The DOE reported a drawdown of 1.83 million barrels. Expectations were for another 1 million barrel decline. The surprise was a build of 1.69 million barrels. However, Gasoline inventories fell 636,000 versus an unchanged estimate. Distillate Inventories rose 1.8 million barrels, higher than the estimate for 1 million. Refinery Utilization fell 1.2% after popping 1.6% the week prior.
The European stress test results on banks will be made public. They also said that they will roll out slowly over several weeks, starting with Spanish banks in a week or two. They said that they were making these results public because of public pressure. If a bank does not meet the stress test, the ECB board said that they would first look to bank mergers to resolve the capital problems, then look to the public to raise capital, and then, if all else fails, the ECB will use funds already designated to capitalize the bank. The question is, why start with Spain? Since Spain has been thrown out there as the country currently being questioned as to whether or not it will be the next shoe to drop, focusing on the Spanish banks will give insight into how the rest of the Euro-zone banks might fair in the process. This could be good news or bad news, depending on what is reported about these banks.
British Pete BP (+1.4%) reported that it will suspend its $7.5 billion dividend payment and put $20 billion into an escrow fund to compensate victims. This is a totally political move. The company contends it has capital to meet any claims. The company will reduce capital spending and divest some assets to raise money to meet these requirements. The market liked the move, giving the shares a little boost. The Financials closed flat as some details of the Financial Reform Package were due to be released. All things considered, yesterday should be viewed as a success, having held onto recent gains and having closed above its 200-day moving average at the close. Look for further consolidation today.
Yesterday was a very “telling” day, as investors had to overcome adversity from a variety of fronts. The Euro backed off on concerns related to Greek debt, as well as Spain’s refusal saying that it doesn’t need any help. Germany is taking aggressive steps to cut its spending, even though it is considered to be the strongest economy in the Euro-zone. That may have had a negative impact, as Germany would have been the net consumer for goods from the other Euro nations. If they chose to conserve, that could add to the economic pressures of their neighbors. Now France is looking to make 45 billion Euros in budget restrictions. France will look to increase the retirement age to 62 and increase taxes on capital. The crisis in Europe is not over, but then again, no one expects it to be. We continue to look at the Euro as a proxy for the global opinion on what progress is being made. The Euro slipped to an intraday low of 1.2255. Holding above 1.2222 is considered a short-term positive.
There was a lot of economic news out yesterday, and it was a very mixed bag. The Producer Price Index for May slipped 0.3% on top of the 0.1% decline in April. Expectations were for a drop of 0.5%, because of the energy component. Ex-food and energy, it was up 0.2% versus expectations for an increase of 0.1%. In some respects, pricing power is probably more important than inflation concerns at this point, so the news can be seen as a very slight positive. On the negative side, no matter how you slice it, Housing starts fell 10.0% in May. April was revised to a smaller gain of 3.9%, down from 5.8%. That puts the total number of starts in April at 659,000, whereas the May decline put the annualized starts at only 593,000. Expectations were for 648,000. Permits fell 5.9% after falling 10.9% in April. The April drop in permits was because the program to enter into a purchase contract required signing by the end of April. Therefore, there was no point in pulling a permit to build after that bubble passed. Expectations were for a small 2.5% blip back up, but the decline puts the annual rate at just 574,000. This is obviously a sign that the stimulus induced bubble will be followed by a void of interested buyers. On the flip side, the numbers also suggest that builders are keeping inventories tight. They are not running out building inventory. Given that inventory is the main negative issue, seeing permits down is a negative for construction, but may be a positive for the eventual recovery.
Industrial Production rose 1.2% in May, topping expectations for a gain of 0.9%. This is a good number. Motor vehicle parts posted a solid jump, but are a modest weighting in the index. Consumer goods has the highest weighing, and that measure moved up from an April loss of 0.1% to a May gain of 1.2%. Materials have a fairly heavy weighting overall and energy made up for weakness in mining. Capacity Utilization edged up slightly to 74.7% from 74.5%. This is important in combination with what we heard from FedEx FDX (-6.0%). The company reported $1.33 on sales of $9.43 billion. Expectations were for $1.33 on $9 billion. Discount pricing and higher fuel charges hurt the bottom line. The company issued guidance for 2011 of $4.40 to $5.00. The current forecast was for $5.05, so this was definitely light. What FedEx is reporting is that they expect GDP growth to increase by 3.2% in 2011, but after a slower pace in the second half of this year. This reflects the caution that we are likely to see from many companies. However, the current pace of production is quite positive.
Crude settled the day up almost a percent to $77.67 despite weaker than anticipated economic news and higher than expected inventory data. Crude inventories were very weak last Wednesday. The DOE reported a drawdown of 1.83 million barrels. Expectations were for another 1 million barrel decline. The surprise was a build of 1.69 million barrels. However, Gasoline inventories fell 636,000 versus an unchanged estimate. Distillate Inventories rose 1.8 million barrels, higher than the estimate for 1 million. Refinery Utilization fell 1.2% after popping 1.6% the week prior.
The European stress test results on banks will be made public. They also said that they will roll out slowly over several weeks, starting with Spanish banks in a week or two. They said that they were making these results public because of public pressure. If a bank does not meet the stress test, the ECB board said that they would first look to bank mergers to resolve the capital problems, then look to the public to raise capital, and then, if all else fails, the ECB will use funds already designated to capitalize the bank. The question is, why start with Spain? Since Spain has been thrown out there as the country currently being questioned as to whether or not it will be the next shoe to drop, focusing on the Spanish banks will give insight into how the rest of the Euro-zone banks might fair in the process. This could be good news or bad news, depending on what is reported about these banks.
British Pete BP (+1.4%) reported that it will suspend its $7.5 billion dividend payment and put $20 billion into an escrow fund to compensate victims. This is a totally political move. The company contends it has capital to meet any claims. The company will reduce capital spending and divest some assets to raise money to meet these requirements. The market liked the move, giving the shares a little boost. The Financials closed flat as some details of the Financial Reform Package were due to be released. All things considered, yesterday should be viewed as a success, having held onto recent gains and having closed above its 200-day moving average at the close. Look for further consolidation today.