Who didn’t know that China was making a concerted effort to slow its rapid and unsustainable growth? Second quarter GDP rose 10.3%, a rate envied by the rest of the world, but down from 11.9% in Q1. Expectations were for 10.5%, so growth was slower than expected, but China has been taking steps to curb growth, so no surprise. European markets started out mixed, although they weakened following the US open. The early stability was due to a successful Spanish auction of debt. That gave the Euro a solid boost, which pushed the currency more convincingly through that 6-month downtrend line and to two-month highs. The Euro has been steadily rising in recent weeks, as the austerity measures are nailed down, the IMF and ECB emphasize their conviction to saving the Euro Zone, and also due in large part to the revised expectations for US growth.
Headlines were key to yesterday’s market weakness. The reality of slower economic growth in Q2 and Q3 hit home. It’s not that it is all that unexpected, but investors were worried that all the numbers pointed to slower growth than anticipated. Housing has produced significantly weaker data since the stimulus package expired. We’ve seen it in the data based on contract signings and housing starts. We will see it in the upcoming existing home sales data, because those figures are based on closings, which had to happen prior to June 30th. As we roll into July, mortgage applications are falling precipitously, hitting a 14-year low, down 3.1% for the week ending July 9th. This is the sink hole that follows the home stimulus expiration. While not too much of a surprise, it still makes for ugly headlines.
The June report on the Producer Price Index fell 0.5%, worse than the 0.3% decline anticipated. Take out Food and Energy and the core PPI was up 0.1%, as anticipated. The volatile components were simply down more than anticipated. Weekly Jobless Claims fell 29,000 to 429,000 from a slightly revised 458,000. The drop garnered no excitement, as investors viewed the number as suspect. GM normally shuts down its plants for two weeks, sending its workers to the claims office so American taxpayers can pick up the tab for two weeks of unemployment while the plant is retooled. GM didn’t do that this year, and that seasonal adjustment tweaks the numbers artificially lower. Investors will have to wait a couple weeks before getting more solid data, and those numbers are likely to be higher.
Industrial Production rose 0.1% in June, topping forecasts for a 0.1% decline. It’s not a big miss, but a small positive nonetheless. We want to see production trending higher. However, Capacity Utilization was unchanged at 74.1%. May was revised down from 74.7% to 74.1%, a slight negative due to the revised data. The big numbers that hurt the market came from two regional Fed surveys. The first was the Empire Manufacturing Index for July, down to 5.09 from 19.57. Expectations were for 18.0. Normally, one would not get too bent out of shape over the NY Fed survey, but the more important Philly Fed Survey was out shortly thereafter. That index also showed a sharp drop to 5.1 from 8.0. An increase to 10.0 was anticipated. The one important component was that New Orders fell to -4.3 from +9.0. Prices Paid rose to 13.1 from 10.0 even as prices received fell further into the red, -8.4 from -6.5. Inventories were steady at 4.5. The only positive was that the Employment component rose to 4.0 from -1.5. What these data told us what we already knew. Q2 was off the pace of Q1, and Q3 will slow even further.
Financials were in the spotlight, and that, too, was a mixed bag. JP Morgan & Chase JPM (+0.3%) reported quarter earnings that were deemed decent, but not great. The firm set aside $1.5 billion in loan-loss reserves. The lack of M & A, IPOs, and low volume resulted in revenues falling 13%. The company earned 87c after one-time exclusions, topping estimates for 74c. Revenues were $25.6 billion versus estimates for $25.8 billion. CEO Dimon said that credit losses were down 65%, but from high levels. The worry for the big financial/brokerage firms was that trading revenues fell to $4.6 billion, down 33% or $2.3 billion less than the prior quarter. The “risk aversion” factor among the broader client base is what weighed on the stock. Add the fact that FinReg passed through the cloture vote, and we saw profit taking in the broader Financial sector and increased pressure on brokerage firms heavily reliant upon trading activities. The top banks, Bank of America BAC (-1.8%), Citigroup C (-1.2%), Goldman Sachs GS (+4.4%), and Morgan Stanley MS (+0.2%) were mostly lower early. Late in the day, the SEC said it would have a major announcement, which traders expected would be a settlement with Goldman. Financials rallied. Also, BP (+7.6%) looks like it sealed the well, although it will take days to test the pressure. Still, oil stocks rallied as the spill slowed to a trickle. The rally erased the session’s losses on the reversal of these two groups.
I will be completely out of touch for the next week. I can’t help but log in and make sure the world isn’t falling apart without me when I’m on vacation. However, this time I will be hiking out of the Sequoia National Park to Mt. Whitney Summit. The 75 mile hike over 7 days will peak at 14,505 feet, the tallest point in the continental United States. No place to plug in. As many loyal followers know, the market often struggles when I’m away. It comes under the same category as Super Bowl or octopus predictions (World Cup), but be forewarned. The market is a bit extended and ran into resistance with the S & P at 1100. I wouldn’t be surprised to see a little “back and fill” action, as investors struggle through the good, bad, and cautious earnings reports next week. Another negative coincidence is that next week’s economic data mainly focus on a lot of housing data. I think that could be problematic, as the data are going to be quite negative. I’m hoping for a mild pullback/consolidation. The support is at 1050 and resistance is initially at 1111. If we were able to break out close to 1130, then I see 1150 as more substantial resistance and I would advise selling into that strength. This is going to be a very volatile timeframe. Timing-wise, we are getting closer to fall and I expect to be moving to a more cautious stance as July comes to a close. It will be earnings versus economic data, and we feel confident that the latter will be relatively negative. If you need a “stop” point, it would be S & P 1075.
Who didn’t know that China was making a concerted effort to slow its rapid and unsustainable growth? Second quarter GDP rose 10.3%, a rate envied by the rest of the world, but down from 11.9% in Q1. Expectations were for 10.5%, so growth was slower than expected, but China has been taking steps to curb growth, so no surprise. European markets started out mixed, although they weakened following the US open. The early stability was due to a successful Spanish auction of debt. That gave the Euro a solid boost, which pushed the currency more convincingly through that 6-month downtrend line and to two-month highs. The Euro has been steadily rising in recent weeks, as the austerity measures are nailed down, the IMF and ECB emphasize their conviction to saving the Euro Zone, and also due in large part to the revised expectations for US growth.
Headlines were key to yesterday’s market weakness. The reality of slower economic growth in Q2 and Q3 hit home. It’s not that it is all that unexpected, but investors were worried that all the numbers pointed to slower growth than anticipated. Housing has produced significantly weaker data since the stimulus package expired. We’ve seen it in the data based on contract signings and housing starts. We will see it in the upcoming existing home sales data, because those figures are based on closings, which had to happen prior to June 30th. As we roll into July, mortgage applications are falling precipitously, hitting a 14-year low, down 3.1% for the week ending July 9th. This is the sink hole that follows the home stimulus expiration. While not too much of a surprise, it still makes for ugly headlines.
The June report on the Producer Price Index fell 0.5%, worse than the 0.3% decline anticipated. Take out Food and Energy and the core PPI was up 0.1%, as anticipated. The volatile components were simply down more than anticipated. Weekly Jobless Claims fell 29,000 to 429,000 from a slightly revised 458,000. The drop garnered no excitement, as investors viewed the number as suspect. GM normally shuts down its plants for two weeks, sending its workers to the claims office so American taxpayers can pick up the tab for two weeks of unemployment while the plant is retooled. GM didn’t do that this year, and that seasonal adjustment tweaks the numbers artificially lower. Investors will have to wait a couple weeks before getting more solid data, and those numbers are likely to be higher.
Industrial Production rose 0.1% in June, topping forecasts for a 0.1% decline. It’s not a big miss, but a small positive nonetheless. We want to see production trending higher. However, Capacity Utilization was unchanged at 74.1%. May was revised down from 74.7% to 74.1%, a slight negative due to the revised data. The big numbers that hurt the market came from two regional Fed surveys. The first was the Empire Manufacturing Index for July, down to 5.09 from 19.57. Expectations were for 18.0. Normally, one would not get too bent out of shape over the NY Fed survey, but the more important Philly Fed Survey was out shortly thereafter. That index also showed a sharp drop to 5.1 from 8.0. An increase to 10.0 was anticipated. The one important component was that New Orders fell to -4.3 from +9.0. Prices Paid rose to 13.1 from 10.0 even as prices received fell further into the red, -8.4 from -6.5. Inventories were steady at 4.5. The only positive was that the Employment component rose to 4.0 from -1.5. What these data told us what we already knew. Q2 was off the pace of Q1, and Q3 will slow even further.
Financials were in the spotlight, and that, too, was a mixed bag. JP Morgan & Chase JPM (+0.3%) reported quarter earnings that were deemed decent, but not great. The firm set aside $1.5 billion in loan-loss reserves. The lack of M & A, IPOs, and low volume resulted in revenues falling 13%. The company earned 87c after one-time exclusions, topping estimates for 74c. Revenues were $25.6 billion versus estimates for $25.8 billion. CEO Dimon said that credit losses were down 65%, but from high levels. The worry for the big financial/brokerage firms was that trading revenues fell to $4.6 billion, down 33% or $2.3 billion less than the prior quarter. The “risk aversion” factor among the broader client base is what weighed on the stock. Add the fact that FinReg passed through the cloture vote, and we saw profit taking in the broader Financial sector and increased pressure on brokerage firms heavily reliant upon trading activities. The top banks, Bank of America BAC (-1.8%), Citigroup C (-1.2%), Goldman Sachs GS (+4.4%), and Morgan Stanley MS (+0.2%) were mostly lower early. Late in the day, the SEC said it would have a major announcement, which traders expected would be a settlement with Goldman. Financials rallied. Also, BP (+7.6%) looks like it sealed the well, although it will take days to test the pressure. Still, oil stocks rallied as the spill slowed to a trickle. The rally erased the session’s losses on the reversal of these two groups.
I will be completely out of touch for the next week. I can’t help but log in and make sure the world isn’t falling apart without me when I’m on vacation. However, this time I will be hiking out of the Sequoia National Park to Mt. Whitney Summit. The 75 mile hike over 7 days will peak at 14,505 feet, the tallest point in the continental United States. No place to plug in. As many loyal followers know, the market often struggles when I’m away. It comes under the same category as Super Bowl or octopus predictions (World Cup), but be forewarned. The market is a bit extended and ran into resistance with the S & P at 1100. I wouldn’t be surprised to see a little “back and fill” action, as investors struggle through the good, bad, and cautious earnings reports next week. Another negative coincidence is that next week’s economic data mainly focus on a lot of housing data. I think that could be problematic, as the data are going to be quite negative. I’m hoping for a mild pullback/consolidation. The support is at 1050 and resistance is initially at 1111. If we were able to break out close to 1130, then I see 1150 as more substantial resistance and I would advise selling into that strength. This is going to be a very volatile timeframe. Timing-wise, we are getting closer to fall and I expect to be moving to a more cautious stance as July comes to a close. It will be earnings versus economic data, and we feel confident that the latter will be relatively negative. If you need a “stop” point, it would be S & P 1075.