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  • The Ascent Off Session Lows - By Jennifer Coombs

    After starting the trading session deep in the red, the major equity indices have all made impressive reversals from session lows, although they are still in negative territory. Crude oil prices surged earlier in the session on news that Saudi Arabia is bombing Yemeni militias, backed by Iran. Prices surged to over $52 per barrel in the premarket, but currently are hovering around the $50-level. The tech-heavy NASDAQ is underperforming its peers thanks to SanDisk (NASDAQ:SNDK) projecting revenues for the current quarter to be around $1.3 billion, down from its previous guidance of $1.45 billion, primarily because weak demand is leading to lower prices. In the premarket, the NASDAQ was close to giving up most of its year-to-date gains in 2015, but for now the index is staying alive.

    Market volatility continues to be centered on the tech space and international headlines, however there were a few positive points that should have moved the market higher today. First, initial jobless claims fell sharply in the week ended March 21st, but unfortunately these numbers aren't likely to raise the bar for the March employment report. Initial jobless claims fell by 9,000 to 282,000 which in turn drove down the 4-week average by 7,750 to 297,000. This is great news except for the fact that this time a month ago, the number was slightly better. It is worth noting that last week was the sample week for the March employment report, and the sample-to-sample comparison for March and February was not favorable. Continuing claims for the week ended March 14th moved slightly lower by 6,000 to 2.416 million and were slightly lower compared to the February sample week. However, the 4-week average at 2.422 million is still 22,000 claims higher than the sample week from February. There aren't really any special factors that would skew the numbers in this week's report, but the report points to stronger labor market conditions, but weaker improving conditions.

    Following Markit's flash release on the manufacturing sector, the firm provided data to gauge economic health across the services space. For the month of March, Markit's preliminary reading shows that although the manufacturing sector is sputtering the services sector remains quite strong in the United States. The March flash reading of the services sector purchasing managers index (PMI) is up for the second month in a row, and is now at a 6-month high of 58.6, up from the 57.1 final reading in February and the 54.2 final reading in January. The report cites particular improvement in economic conditions, strengthening consumer confidence, new product launches, and higher employment. New orders are at a 6-month high and backlogs are now at a 5-month high. One big tick in the negative column, however, is the downgrade in expectations: the percentage of managers that believe their business will rise over the next 12 months came in at the lowest level since June 2012. We note that the downgrade in expectations was likely due to the rough start in 2015, although as other reports have shown, the weakness was clearly centered on lower exports and a slowdown in manufacturing. The services sector is very lightly exposed to the export market, which makes it much healthier than manufacturing and could also help to offset currency-related weakness in next quarter's earnings.

    Mar 26 1:48 PM | Link | Comment!
  • Manufacturing Grinding To A Halt - By Jennifer Coombs

    Investors are showing great risk aversion as the biggest losers of the session are predominately in the high-flying biotechnology and semiconductor sectors. Growing concerns over another bubble has sent the NASDAQ and Russell 2000 lower from their 52-week highs. The US dollar remains strong and debt issues continue to plague Greece and the European Union, while oil inventories certainly aren't helping either. For the week ended March 20th, crude oil inventories increased by another 8.2 million barrels for the 11th straight weekly build and yet another 80-year high. Refineries cut back production in the week, which resulted in a draw of 2.0 million barrels of gasoline inventories and no change for distillate inventories.

    Though the market remains distressed, there continue to be some rays of positivity. Playing off of the pop in new home sales yesterday, there looks to be a turnaround in the volume of mortgage applications on a weekly basis. Low mortgage rates are finally leading to a rise in applications in the week ended March 20th for both home purchasers (up 5.0% over last week) and home refinancers (up 12.0% over last week). Purchase applications are actually up 3.0% year-over-year and this is especially optimistic for gains in home sales. Mortgage rates moved lower in the week with the average 30-year loan for conforming balances (less than or equal to $417,000) sharply lower by 9 basis points to a rate of 3.9%.

    On the flip side, it's apparent that the manufacturing sector is still quite weak. For the month of February, durables orders declined by 1.4% in the month after rebounding by 2.0% in January, and fell short of market expectations for a 0.7% gain. However the core reading (excluding transportation orders) declined by 0.4% in the month following a 0.7% drop in January, but it still fell short of the consensus estimate for a 0.3% gain. In February, orders in transportation declined by 3.5% in the prior month; this after rebounding by 8.8% in January. Motor vehicle orders also slipped in February by 0.5%, while, nondefense aircraft orders dropped by 8.9%, and defense aircraft fell by a hefty 33.1%. Outside of the core, overall orders were mixed. Areas that showed improvement were primary metals and electric equipment, while declines were observed in fabricated metals, machinery, and computers & electronics. Nondefense capital goods orders excluding aircraft, which is about as core of a reading as one can get, dropped by 2.6% in February after an 8.8% increase in January. The number of total new orders in this reading (in the chart below) has been steadily on the decline since August 2014. Ultimately, the latest orders numbers points to more weakness in manufacturing and serves as one more data point for the Federal Reserve to keep rates low.

    Mar 25 2:06 PM | Link | Comment!
  • New Home Sales = Powerful - By Jennifer Coombs

    A pretty big mixed bag of economic data has the market feeling rather indifferent today. While the NASDAQ has resumed its attempt at a rally, the S&P 500 and Dow Jones Industrial Average are roughly 0.2% in the red. On the international front, more concerns about Greece and a plane crash in Southern France have kept investors on their toes, as well as the Chinese manufacturing PMI slipping below the breakeven 50-level to a new 11-month low of 49.2. Domestically, the biggest news of the morning was the February reading on the U.S. consumer price index (NYSEARCA:CPI), which came in roughly in-line with economist expectations. Overall, CPI inflation has marginally firmed with energy starting to move out of what the Fed has been calling a "transition phase." Still, inflation remains extremely low and should clearly point to no change in Fed policy come April.

    Aside from the CPI, there were two more notable readings. Although we prefer to use the Institute for Supply Management (ISM) data on the purchasing managers index (PMI), Markit provides a decent direction as to how the month should pan out for the manufacturing sector. So far, the year has gotten off to a slow start, but that is apparently changing in March as the flash manufacturing PMI reading came in at 55.3 versus the 55.1 final reading in February. Most notably, new orders are at a 5-month high since rising domestic sales are offsetting declining export sales and weak sales in the oil sector due to the stronger US dollar. Output is at a 6-month high, while employment is at a 4-month high, while input costs have declined for the third month in a row and output costs are at their slowest in 3.5 years. Last week, the Federal Reserve Open Market Committee (FOMC) pointed to weak exports as a major factor holding down growth. We note though that in general, this report has been marginally better than the hard data from the government (which has been roughly flat). As a result, we see the manufacturing sector as really being closer to the 50-level.

    Lastly, and most impressive of all, was the massively better-than-expected jolt from the housing sector. New homes sales for the month of February lifted the annual pace to 539,000 units, and adding to this news was a big upward revision from January to 500,000 from 481,000. We note that these are the first two readings above 500,000 since April and May of 2008. As a result, the gain in new homes drew down the already thin supply on the market to 4.7 months' worth of inventory at the current rate compared to 5.1 and 5.3 months in the prior two reports. This inventory level is the lowest since June 2013 and should no doubt result in builders expanding construction in the near-term to make up the difference. However, the lack of supply failed to lift prices where the median home price fell by a sharp 4.8% to $275,500. It seems that home sellers are giving price concessions as the year-over-year price is only up 2.6%.

    On a regional basis, the sales in the South are astonishing at multi-year highs. The South makes up a whopping 59% of all new home sales and the selling levels are now back to where they were in February 2008. There was also a big surge in sales in the Northeast where sales are comparatively low to the rest of the country. However, sales in the Midwest, which is also a small region for new home sales, declined sharply in the month as they did in the West, which accounts for nearly 23% of all new home sales.

    The winter months are usually pretty bumpy for housing data, due to weather adjustments across much of the nation. However, today's report is very encouraging since it stands in contrast to what has recently been dreary data for the housing sector. More than anything, it confirms the recent outlooks of homebuilders Lennar (NYSE:LEN) and KB Home (NYSE:KBH) - the critical spring selling season is off to a great start in 2015.

    Mar 24 2:00 PM | Link | Comment!
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