Monday, November 18, 2013

Markets edge lower on nervousness about Federal Reserve intentions

Dow inched up 14 but was unable to hold above 16K, decliners over advancers 3-2 & NAZ lost a big 36.  The MLP index was off 1+ to the 452s & the REIT index pulled back 1+ to 271.  Junk bond funds slid back & Treasuries had modest gains.  Oil fell after Federal Reserve Bank of New York President William Dudley said he’s “getting more hopeful” about the US economy, signaling that the central bank may reduce stimulus.  Gold fell the most in a week as a global equity rally cut demand for precious metals as alternative investments.

Dow Jones Industrials

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Treasury yields:

U.S. 3-month


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U.S. 10-year


CLZ13.NYM....Crude Oil Dec 13....92.92 Down ...0.92  (1.0%)

Live 24 hours gold chart [Kitco Inc.]

NY Fed President William C. Dudley

Photo:   Bloomberg

Bill Dudley said he’s “getting more hopeful” the US economy is gaining strength as the drag from fiscal policy wanes.  “While growth in 2013 has been disappointing, I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015,” Dudley said today.  “As growth picks up, I expect to see more substantial improvement in labor market conditions.”  Economic growth isn’t yet sufficient to ensure the substantial labor market gains that the Fed has said are a prerequisite to any reduction in its $85B in monthly bond purchases, Dudley said.  Policy makers, aiming to bring down unemployment now at 7.3%, have pumped up the Fed’s balance sheet to a record $3.9T.  “We’ve seen quite a bit of improvement” as unemployment has dropped, “but I don’t think we’ve really seen enough growth momentum to give us confidence we’re going to continue to see” gains in the outlook for jobs.  “There are some nascent signs that the economy may be doing better,” said Dudley, vice chairman of the FOMC.  The US economy expanded at a 2.8% annualized rate in Q3, a faster pace than forecast & a pickup from the 2.5% gain in Q2.  “The private sector of the economy should continue to heal, while the amount of fiscal drag should subside,” he added.  The NY Fed chief also pointed to payrolls growth as a positive sign.  Employment climbed 204K in Oct, exceeding the forecast.  Job growth so far this year has averaged 186K a month, compared with 183K last year.  “I hope that this marks a turning point for the economy,” Dudley said.  “Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving.”  The goal of these speeches is to keep everybody guessing about the next move by the Fed.

Modular Home Construction

Photo:   Bloomberg

Confidence among US homebuilders held in Nov at a 4 month low as buyer traffic & sales outlooks retreated.  The National Association of Home Builders/Wells Fargo builder sentiment gauge was unchanged at 54 from a revised Octo reading that was weaker than initially estimated.  The median forecast projected 55.  Readings above 50 mean more respondents reported good market conditions.  The gov shutdown & political wrangling over the nation’s budget have taken a toll on consumer sentiment, causing some would-be buyers to delay spending decisions.  Higher mortgage rates also are holding back gains in real estate, which has been a source of strength for the economic expansion.  “Policy and economic uncertainty is undermining consumer confidence,” David Crowe, chief economist at the builders association, said.  “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt & federal budget issues cause builders & consumers to remain on the sideline.”   2 of 3 components of the builder survey deteriorated this month.  The group’s measure of the sales outlook for the next 6 months declined to 60 from 61 & prospective buyer traffic fell to 42 from 43.  That put both measures at 5 month lows. The gauge of current single-family home sales was unchanged at 58.  Borrowing costs for homebuyers have climbed since May, with the average rate for a 30-year, fixed-rate mortgage at 4.35%, up from 3.34% a year ago, according to Freddie Mac.

Homebuilder Sentiment in U.S. Holds at a Four-Month Low on Sales Outlook

Dow stock Home Depot puts up Q3 numbers before the market opens tomorrow, & investors will be looking for any hint that rising mortgage rates & a more subdued housing market will affect sales.  CoreLogic this month said that a measure of home prices rose only slightly in Sep from Aug, a sign that prices are leveling off after big gains earlier this year.  Record-low interest rates & rising prices have fueled big sales at HD, pushing its shares to an all-time high in May.  Analysts expect higher net income & revenue.  Analysts will be looking for signs that spending on homes remains elevated.  Strong sales would suggest that rising home prices & mortgage rates have not chilled the mood of consumers.  Analysts are projecting EPS of 89¢ on revenue of $19.17B.  Last year EPS was 74¢, excluding one-time items, on revenue of $18.13B.  The stock remains near its record peak but slipped 36¢ today.

Earnings Preview: Home Depot 3Q

Home Depot (HD)

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Stocks are back to meandering.  But they're entitled after the Dow gained more than 2.8K YTD.  Dow topped the magical 16K level making the bulls happy.  However nothing has changed in the stock market as the big decline at NAZ shows.  No dramatic news is expected in Nov until Black Fri data is reported at the end of the month.  In the meantime stocks should continue to meander.

Dow Jones Industrials

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