Monday, July 28, 2014

Lower markets on pending home sales

Dow dropped 66, decliners over advancers better than 2-1 & NAZ fell 31.  The MLP index slid 1+ to the 521s & the REIT index was up fractionally to the 307s.  Junk bond funds slipped lower & Treasuries climbed higher.  Oil pulled back & gold was flattish.

AMJ (Alerian MLP Index tracking fund)

CLU14.NYM...Crude Oil Sep 14...101.29 Down ...0.80  (0.8%)

GCN14.CMX...Gold Jul 14.........1,304.30 Up ...1.20 (0.1%)

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Buyers Dream of Draghi as Fed-ECB Divide Bolsters Treasuries
Photo:   Bloomberg

When the ECB unleashed a stimulus barrage in Jun, it cautioned that the economy would take some time to respond.  Data due this week may test its patience.  The inflation rate is expected to remain at 0.5% for a 3rd month in Jul & the unemployment rate should remain unchanged at 11.6% in Jun.  That may fuel policy makers’ concern that annual price gains will become entrenched at a fraction of the ECB goal of just under 2%, & increase calls for further action.  The ECB unveiled a range of measures including a negative deposit rate & targeted long-term loans last month.  While the package has helped push the average yield on bonds from Europe’s most-indebted nations to a record low & bolstered manufacturing & services in a vote of confidence, it has yet to show its impact on prices, growth & lending, as geopolitical tensions threaten to undermine the recovery.  The destiny of the euro area hinges on Europe’s largest economy, Germany, which saw GDP growing 0.8% in Q1, 4X the currency bloc’s rate.  The Bundesbank has warned that political uncertainty in some of the country’s export markets may weigh on business & said that the economy may have stagnated in Q2.  Sentiment as measured by the Ifo research institute dropped more than predicted in Jul to the lowest level in 9 months. Even so, gauges of German manufacturing & services output signal a rebound in activity to levels seen at the beginning of the year, Markit Economics said last week.  Similar measures for the euro area also strengthened this month in a sign of confidence that ECB stimulus will eventually support the recovery.  The ECB predicts the area economy will grow 1% this year, 1.7% next year & 1.8% in 2016.  It expects inflation to rise gradually over the next 2 years to 1.4% in 2016.  “The combination of monetary policy measures decided last month has already led to a further easing of the monetary policy stance,” Draghi said 3 weeks ago.

ECB Patience Test: Euro-Area Inflation Seen Sticking Low

Fewer Americans than forecast signed contracts to buy previously owned homes in Jun, a sign residential real estate is struggling to strengthen.  The index of pending home sales declined 1.1% from the month before after rising 6% in May, according to the National Association of Realtors (NAR).  The forecast projected sales would rise 0.5%.  Limited availability of credit & sluggish wage growth are making it harder for prospective buyers to take the plunge, threatening to throttle the pace of the housing recovery.  Continued gains in employment & a bigger supply of available homes will be needed to help accelerate the industry’s progress, while increases in home prices may encourage more Americans to put their properties up for sale.  Purchases were down 4.5% from the prior year, on an unadjusted basis, after a 6.9% decrease in the 12 months that ended in May.  The pending home sales index was 102.7 on a seasonally-adjusted basis.  A reading of 100 corresponds with the average level of contract activity in 2001, or “historically healthy” home-buying traffic, according to the NAR.  “Supply shortages still exist in parts of the country, wages are flat, and tight credit conditions are deterring a higher number of potential buyers from fully taking advantage of lower interest rates,” the group’s chief economist Lawrence Yun said.  2 of 4 regions showed a decrease in contract signings from a month earlier, led by a 2.9% drop in the Northeast.  Pending sales are considered a leading indicator because they track purchase contracts.  Existing-home sales are tabulated when a contract closes, usually a month or 2 later.

Pending Sales of U.S. Existing Homes Unexpectedly Decrease

Dollar Stores Agree to $8.5 Billion Merger After Icahn Prodding
Photo:   Bloomberg

Dollar Tree, will buy Family Dollar Stores (FDO), a Dividend Aristocrat, for about $8.5B, creating a discount chain with $18B in sales & more locations than Wal-Mart, a Dow stock & Dividend Aristocrat.  Each share of FDO will receive $74.50 in cash & stock, 23% above the closing price at the end of last week.  The deal has a value of $9.2B.  FDO CEO Howard Levine had previously been reluctant to sell the company his father founded.  Still, the business has struggled to compete with discount chains.  Before the deal, FDO had been trying to improve operations by closing 370 underperforming stores & opening fewer new ones.  It also has been lowering prices in a bid to entice shoppers.  The companies expect the transaction to close by early 2015 & will contribute to DLTR EPS within the first year.  The deal will save about $300M annually by the end of the 3rd year.  The combined company will operate under the Dollar Tree, Deals, Dollar Tree Canada & Family Dollar brands & Levine also will remain with the company & report to Sasser.  DLTR rose 2.61 & FDO shot up 13.40 to 74.06.  If you would like to learn more about DLTR, click on this link:

Dollar Stores Agree to $8.5 Billion Merger After Icahn Prodding

Dollar Tree (DLTR)

Stocks are back to meandereding around.  Dow set a record 2 weeks ago but the bigger story is that it has been going sideways in Jul.  Macro economic data keeps coming out mixed & soggy.  Even if Q2 GDP shows growth, it will not be impressive & the H1 number will be sluggish at best.  Meanwhile the intl political front has become a disaster with no leadership for the good guys.  My feeling is that the back to school season for retailers will be lackluster, not a good sign for holiday season a few months away.

Dow Jones Industrials

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