Wednesday, November 17, 2010

Markets are sputtering, trying to rebound from yesterday's losses

Stocks have been near break even today.  Dow is only up 1 (barely above 11K support), advancers ahead of decliners about 2-1 & NAZ is up a stronger 13.  Bank stocks began the day giving a lift to the Financial Index, but that has slipped into the red.


Value 197.40 One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change   -0.62  (-0.3%)

The MLP index rebounded 1 to the 355s & the REIT index as up 2½ to the 211s.  Junk bond funds are strong, bouncing back 1-2% after yesterday's big losses.  There is buying in Treasuries.  The yield on the 10 year Treasury bond fell 4 basis points to 2.80% & sharply below the intra-day highs over 2.90% yesterday.

Treasury yields:

U.S. 3-month
U.S. 2-year
U.S. 10-year

Alerian MLP Index   ---   2 weeks

Dow Jones REIT Index   ---   2 weeks

10-Year Treasury Yield Index   ---   2 weeks

Oil pared losses after a US gov report showed a decline in inventories.  But overall, commodities are quiet.

CLZ10.NYM...Crude Oil Dec 10...81.70 ...Down 0.64  (0.8%)

GCX10.CMX...Gold Nov 10....1,338.70 ....Up 0.40  (0.0%)

Gold Super Cycle Link!  

U.S. Home Starts Drop More Than Forecast

Photo:  Bloomberg

Starts on new homes in the US slumped in Oct to the lowest in 1-1/2 years mainly due to sharply reduced building of multi-unit homes.  The Commerce Dept reported overall construction starts plummeted 11.7% to a 519K annual rate from a downwardly revised 588K in Sep, the weakest starts rate since 477K in Apr 2009 (when the economy was still coping with the severe impact of the 2007-8 financial crisis).  Forecasts had anticipated a starts rate in Oct of 600K!  But permit applications for new building edged up to a 550K rate last month from an upwardly revised 547K in Sept.  The drop in Oct starts was concentrated in multi-unit buildings. Single-family home starts were down 1.1% from Sep to 436K but multi-unit construction starts plunged 43.5% to 83K.  One hopeful sign in the starts numbers was that inventories of completed but unsold homes fell to a record low 79K, suggesting the drag from an overhang of unsold homes might be lightening.  Dreary conditions in the important housing market (shown below) will not end soon.

U.S. Home Starts Drop More Than Forecast on Multifamily Slump

Housing starts - 1 year

One-Year Chart for Total starts (NHSPSTOT:IND)

Single family starts - 1 year

One-Year Chart for 1 unit starts (NHSPS1:IND)

Building permits -1 year

One-Year Chart for Total authorized (NHSPATOT:IND)

The Federal Reserve (FED) plan to expand purchases of Treasuries has triggered criticism from Reps & some economists who wrote an open letter protesting the move.  In addition, Germany, China & Brazil are unhappy about the plan.  But Dems support the move.  Even though the program is continuing, the criticism may fan dissent within the FED over the quantitative-easing policy which could limit its ability to take further measures if the economy remains weak. 2 weeks ago, the FED said it intended to buy the securities by the end of Jun, yet would “adjust” the program if circumstances change. This storm over quantitative easing, so named because it focuses on changes in the quantity of money the FED creates through bond purchases rather than changes in interest rates, could cause the FED to stop short of the $600B target. This confusion is partially responsible for the recent run up of interest rates on Treasuries (i.e. selling in Treasury debt).

Fed May Hesitate on More Easing After Critics Question Mandate

The IPO for General Motors, scheduled for today, may raise $15.8B after the Treasury & United Auto Workers’ retiree health-care trust increased the shares they are selling. The IPO was expanded by 31% to 478M shares, after boosting the offer price to as much as $33 a share (from the mid $20s). An overallotment & an offering of preferred shares may increase the total amount raised to about $22.7B which would make it the biggest IPO in history.  The Treasury needs to sell GM stock for an average of about $45 a share to break even on its entire investment.

GM Increases IPO Size as Treasury, UAW Sell More Shares

Stocks are looking for direction.  European countries are scrambling to work out a bailout plan for Ireland.  Even if they do, the haunting question is when will the next weak country need help?  There is a modest sense of relief as the € is up half a penny to $1.35+.  Widespread unhappiness with QE2 is making all markets nervous.  Dismal housing numbers did not help.  Dow went over 11K, after failing to do so for many weeks, one month ago.  Now it's up to the bulls to show if they are serious about sustaining this market rally.

Dow Jones Industrials   ---   2 weeks

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