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Shifting into Low Gear

|Includes:Philadelphia Semiconductor Index (SOX)
Market Overview
By: Conley Turner

After exhibiting initial strength in the first part of the session, follow through into the afternoon session was not forthcoming and stock indexes fell into the red. The impetus for the rise in the morning was the result of a decline in new claims for unemployment benefits in the US. This provided some relief, albeit temporary, to market participants who have been subject to a series of economic data pointing to a faltering domestic economy.

The U.S. Department of Labor reported that first-time claims for unemployment benefits fell to 473,000 in the past week. This comes after a spike above 500,000 the week prior. The consensus expectation was for a decline to 490,000. The report interrupted consecutive weeks of gains and sparked a little optimism that the economy may not fall back into recession.

Nonetheless, the avalanche of other negative data is still sufficient to stifle that enthusiasm by late morning. The fact of the matter is that this is but one data point against a backdrop of a particularly difficult economic environment. The pace of growth is slowing with no near term turnaround that is evident. Forthcoming economic data is anticipated to convey even further weakness. This is clearly the case for tomorrow's report on Q2 GDP growth which is expected to be revised down from 2.4% to 1.4%.

The elevated rate of unemployment is the primary impediment to a credible and sustainable recovery. Until that situation is resolved it is unlikely any progress made will be accomplished without a great amount of difficulty. Up to a few months ago the concept of a jobless recovery was being bandied about. However, fast forward to present day and that argument has given way to fears of a double dip recession and the current rate of unemployment being an enduring fixture on the economic landscape.

This scenario underscores the precarious place that the economy is in and the enormous challenges that lay ahead. The fact of the matter is that the situation is not unique to the U.S. but an affliction that is impacting almost all developed nations. Yet even they do not have the perfect solution to this seemingly incorrigible mess. It took a long time for things to get to where we currently are and equally so, it will take time to get out of it. The world has undergone a structural shift of sorts. Outside of the solution of something tantamount to a cure for cancer, the medicine to fix this problem will be bitter and the process with be arduous. Human nature has not changed in millions of years and the masses will blame whoever is doing the administering.

Turing to the oil market, the commodity is trending upward as the U.S. dollar index is lower against a basket of other international currencies thereby creating buoyancy. Much of the strength in the dollar can be attributed to the uncertainty attributed to European economies. Although it faded from the headlines, the situation in Europe still significant and is once again coming to the forefront as the austerity measures in Greece are believed to be severely impacting that country's economy. Furthermore, there are fears that it may have negative implications on the broader European economy.

There is no certainty, however, as to whether this rise in oil is sustainable. The reason for the move down in the first place was due to evidence of a slowing U.S. economy and this fact has not changed. At this juncture, after falling over 10 percent from the $82 achieved about a month ago, oil is currently trading at the low end of the current trading range. The decline has been so dramatic that some investors are currently looking at the current level as a trading opportunity. That said, a lot of price volatility in the commodity can be expected until clarity in the broader economic picture is attained.

Tax Credit Bait and Switch
By: David Urani

Taking a second look at yesterday's new home sales data, it's interesting to see the downward shift in the level of wealth in America. As a percentage of total new home sales, the weight in the market is clearly being shifted to the lower end while overall sales hit new record lows. Looking at the distribution of new home prices going back to 2002, the $150,000 to $200,000 price range is now at a new high, representing 30% of sales. Bargain priced foreclosure inventory is certainly contributing to that trend. Meanwhile, anything above $400,000 is at their lows. In the past two months, zero new homes more than $750,000 were sold. In a time when it's easy to say that the wealthy are sitting pretty while the rest of us perish, these home sales trends show that the rich are as flustered as the rest of us.

Then again, what are the incentives for the wealthier folks to buy homes when they can be almost certain that their income and estate taxes are going up next year. A new $750,000 home takes several builders to make as well as skilled craftsmen to produce the parts; that's as good a stimulus project as any. Don't get me wrong, I love to see affordable homes fall into the hands of those looking to fulfill their American dream, but one thing that scares me about this low-end weighted home sales market is that these are the folks that can least afford another dip in home prices. I fear the homebuyers' tax credit lured buyers into this market and now that it's gone and demand has plunged, I do in fact see declining prices as imminent. I would hate to see these new, lower end homeowners immediately go underwater after being hit by an unintentional bait and switch by the white house.

Tech Stocks Lose Momentum?
By: Carlos Guillen

So far into today's trading session, the tech sector as measured by the Philadelphia Semiconductor Index (SOX) appears to be ramping lower. After peaking at the end of yesterday's trading session, the index has continued to slide down. On a technical basis, the SOX looks vulnerable at 312; a fall below this level may indicated that the index will like make more moves to the downside.

Certainly, investors continue to be worried about the state of the economy; consumer spending, which is 70% of total GDP, is more vulnerable now as unemployment rates continue at elevated levels and as government stimuli are running out of steam. Earlier today, according to the Labor Department, initial claims during the week ended August 21 totaled 473,000, which decreased from the 504,000 revised figure reported for the prior week and landed below the Street's estimate of 490,000. While the initial claims result was better than expected, it is still stubbornly high. We believe an initial claims level of less than 400 thousand would need to be reached in order to help bring the unemployment rate to a more tolerable level. However, this is just not going to occur any time soon.

Tomorrow also promises to be a rather down day, particularly if the second estimate to GDP comes in below the consensus estimate. While the first reading for second quarter GDP came in at 2.4%, now the consensus estimate is indicating that the revised figure will be lower at 1.4%. This is a significant reduction to the first estimate, and a miss to this more pessimistic number will likely cause the market to trend lower once again.

The University of Michigan's consumer sentiment index will also be reported tomorrow. This index is considered a leading indicator, and it will shed some light as to how the public is seeing the economy unfold during the next six months. A miss in this figure can also bring the market lower tomorrow, so there is certainly tension building up for tomorrow's trading session.

Unless there are more convincing data that point to stronger economic growth, long term investors will remain scared. At the moment, it is clear that the most significant driver of stocks is the economy and jobs. Great companies are getting hit not because of poor product or ineffective management, but because of resurging fear of a double dip recession. With continuing high unemployment levels, investors are finding it difficult to see strong consumption growth in the near future, and now investment spending may also be at risk.

Disclosure: none
Stocks: SOX