Wednesday, November 26, 2008 Market Update

Wednesday: 11/26/08 10:30 AM EST :
Market Update:

There was a lot of economic news released this morning and most of it was bad. The stock indices are down but they have been moving back toward unchanged levels. Treasuries are extending yesterday's rally but prices have backed off their earlier highs.

In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 14,000 to 529,000. The decline was not unexpected following two week's of increases totaling 59,000.

In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.

The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 -- the highest reading since January of 1983. For the forty-seven weeks of the year so far, the average initial claims reading has been 406,340. For the same period last year it was 319,085.
The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million -- the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.

In other news, the Commerce Department reported that the seasonally adjusted level of new orders for durable goods fell in October by 6.2%, the largest decline in two years. Analysts had predicted a drop of 2.5%. In addition, September's previously reported increase of 0.9% was revised to a decline of 0.2%.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

All of the key sub-categories also showed large contractions last month. The large and volatile category of autos and light trucks saw a decline of 11.1% but even excluding the category, orders were down by 4.4%. Orders outside the defense sector are often seen as a clearer picture of underlying demand because those within the defense sector are not governed by standard market forces. Defense orders declined by 25.2% in October following a 25.4% increase in September. But even excluding the defense sector, orders were down by 4.6%.

Another closely watched category is non-defense capital goods minus aircraft -- seen as a gauge of core business demand. The order level there was down by 4.0%. This follows a 3.3% decline in September and a 2.3% decline in August.

In a separate report, the Commerce Department reported that the seasonally adjusted, annualized pace of new home sales fell in October by 5.3% to 433,000. September's originally reported rate of 464,000 was revised down by 457,000. The latest reading was below analyst's predictions of 450,000 and was the lowest since January of 1991.

The decline was not consistent around the country. The pace rose in the Northeast by 22.0% and in the Midwest by 6.0%. But in the two largest contributing regions, the rates declined. The largest contributor, the South, saw a decline of 6.0% and the second largest contributor, the West, saw a drop of 18.0%.

With declining sales, builders have cut back on new construction. The level of inventory on the market at the end of the month (adjusted, annualized) was 381,000, the lowest level since March of 2004. At the prevailing sales pace, this represented 11.1 months of supply, up from 10.9 months in September.

The average new home price fell by $11,400 in October to $272,300, the lowest since August of 2004. The median price fell by $3,700 to $218,000, the lowest since September of 2004. The average price was down by 12.2% from a year earlier and the median price was down by 7.0%.
Another release this morning was the report on personal income and spending for last month. The Labor Department said that personal income, the fuel for consumer spending, rose by 0.3%. This was a little stronger than the 0.1% that forecasters had predicted though September's originally reported rise of 0.2% was trimmed to an increase of 0.1%. Of greater interest to observers was a 1.0% decline reported in personal consumption expenditures (consumer spending). This was a fourth consecutive monthly decline and it was the largest since September of 2001.

A key manufacturing indicator was also released this morning. This was the Chicago Purchasing Managers Index (PMI), a gauge of manufacturing activity in the heavily-industrialized region. It came in at 33.8 for November. Any reading below 50.0 indicates a contraction relative to the preceding month and the latest index is the lowest since 1980. The other principal regional indices -- New York and Philadelphia -- also showed deep contractions this month and the accumulated data suggest that Monday's national index will reflect another deep decline.

The last major release of the day was the final read on consumer sentiment from the twice-monthly surveys sponsored by the University of Michigan. The overall sentiment index for November came in at 55.3, down from the preliminary reading of 57.9 and October's final reading of 57.6. Forecasters had predicted little change from the preliminary figure.

The latest reading was the lowest in twenty-eight years, reflecting deep pessimism. The expectations index came in at 53.9, down from the preliminary 55.7 and October's final 57.0. The index of current conditions came in at 57.5, down from the preliminary 61.4 and up slightly from October's final 57.4.

In industry news, the Mortgage Bankers Association of America reported that its mortgage application index rose last week by 1.5%. The improvement was not too unexpected given a decline in average fixed mortgage rates. But the reading was still the third lowest since December of 2000. The report said that the refinance index declined by 2.1% after rising by 2.6% the week before. The purchase index rose by 5.1% following a 12.6% decline a week before.
Refinances accounted for 49.3% of application activity last week, down slightly from 49.9% a week earlier. Registrations for adjustable rate mortgages represented 3.0% of application activity, up from the previous week's 2.6%.

Tuesday, 11/25/08 : The stock indices gyrated yesterday on mixed economic data and technical pressure following two days of gains. But they found support and ultimately finished narrowly mixed on news that the government was acting to spur mortgage lending and to make more credit available for consumers and small businesses.

The government backing for the mortgage industry sent investors exposed to mortgage prepayment risk into Treasuries to hedge against an expected increase in refinancing activity. The backing also bolstered investor demand for Freddie and Fannie debt.

In late trading, the 10-Year Treasury Note was up by 1-28/32, lowering its yield by 21 basis points to 3.11%; the Dow was up by 36.08 points to 8,479.47; and the Nasdaq was down by 7.29 points to 1,464.73.

Tuesday's major economic release was the preliminary report on GDP for last quarter. As expected, it showed a slightly larger contraction than the one in last month's advance report. Though not a surprise, it did spotlight the slump in the economy -- one that is expected to get worse.

The other major release was the Consumer Confidence Index. It came in stronger than expected this month but from a record low last month.

Another report released yesterday indicated the ongoing decline in home prices. Once again, the news was not entirely unexpected but it underscored the weakness in this critical economic component.

Both stocks and bonds reacted favorably to the Fed announcements to free up credit flows. But since stocks had already made strong gains in the previous two sessions, further progress there was more difficult.

Nevertheless, the Dow managed to make a 0.43% gain on the day, bringing the three-day total to 927.18 points or 12.28%. The S&P 500 gained 0.66% for the day and 13.95% for the last three sessions. The Nasdaq fell by 0.50% but it was still ahead by 11.29% for the three-day period.
The GDP news helped reduce demand projections for oil and futures fell. The price of a barrel of light, sweet crude for January delivery was down by $3.73 on the New York Mercantile Exchange to settle at $50.77. With the exceptions of last Thursday and Friday, yesterday's close was the lowest for a front-month contract since May of last year.

While stocks were rallying on Friday and Monday, Treasuries were falling. This made yesterday's advance easier. The momentum even trumped the pressure of new supply. Yesterday's 5-Year Note auction results were mixed. Bids exceeded the $26 billion offer amount by 2.44 to 1, the highest bid-to-cover ratio in the last four such auctions and above the average of 2.15 for the twelve auctions preceding yesterday's.

Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from last month's $82 million and above the twelve-auction average of $90 million.

But foreign demand was disappointing. Indirect competitive bids, which include those from foreign central banks, received 20.6% of the issue, the lowest award portion in the last six auctions and below the twelve-auction average of 25.8%. . . . .