The market is fixated on the less than desirable housing-related reports out Tuesday morning. Such below-consensus readings on starts and permits are a shot across the bow for regulators to cut the smooth talk and extend the housing tax credit. Whether the tax credit has had a huge impact on overall housing demand in recent months is not very supported in the statistics (low mortgage rates arguably a bigger component). But, much could be said about bolstering market psychology, in this case that of homebuilders. Maybe it is time to expand the program to not just first time buyers making less than $75,000.
The recent rally in the price of crude oil is faltering Tuesday. The dollar actually started to rally in value versus a basket of other international currencies, and this is causing a shift out of the commodity asset class of which crude oil is included. Also causing some of the selling pressure Tuesday was the fact that it closed in on the $80 per barrel level. Oil and other commodities have an inverse relationship with the value of the dollar. As it stands, oil traders and investors have been taking their cue from the rally in the broader equities market and allocating more capital to the oil trade. The fact that the Dow Jones Industrial Average recently hit, and surpassed, the psychologically important 10,000 mark served as a source of encouragement to investors that the economy is on the mend. As such, the logic goes that this portends an eventual increase in activity which will ultimately lead to a ramp in the demand for energy.
However, the caveat to this outlook is that there is currently a surplus of crude oil, much of which is sitting in tankers offshore. Once the market improves, the bet is that these stocks will be released onto the market, and this can be problematic for future pricing gains.
Furthermore, despite its secular downtrend, a technical rally in the value of the dollar will pose an impediment for additional pricing gains for oil. A counter rally in the dollar is always a possibility given the overwhelmingly negative outlook that most investors have of the greenback. In the final analysis, oil will move higher in the long-run. However, that path up with be punctuated with many starts and stops.
Afternoon Notes from WSS Research Desk
Knowing the reasoning of Mr. Market is just one of the arrows in an analyst's quiver. I have received a host of calls from contacts seeking color on the earnings results from Coach (COH) released Tuesday morning. Let's run down the list of what the luxury goods purveyor had to offer for early morning goers (such as myself) today:
* Beat earnings estimates by $0.05 per share
* Same-store sales improved noticeably on a sequential basis
* Global sales trends have continued to be favorable into October
* Inventory tightly controlled
* Gross margin heading higher relative to existing consensus forecasts for remaining three quarters of current fiscal year
* Close to $1.0 billion in cash
* No debt
Despite the positives, the market is hammering the stock. The reaction may stem from the unfavorable housing data (poor household wealth correlates to poor demand for luxury goods), but also as a result of Coach's increased investment in China and to a lesser extent, the U.S.
The company said it will build a distribution facility in China to support its expanding operations. There are naturally costs associated with a move, but opportunities in delivering products to market quicker to capture sales/margin opportunities. Free cash flow lovers did not like the overall tone on planned investments, which happened to coincide with comments on possible supply chain inflation by the end of calendar 2010. So, in spite of the generally positive news, the market fixed its gaze on the negative. In my humble opinion, an opportunity to own a piece of a solid company has been created.
President Obama is expected to announce on Tuesday more relief for small businesses. The Small Business Administration (or SBA) will soon offer loans with raised caps. It's good to see that some more attention is finally going to the small businesses out there, but it's still unnerving that our best efforts to fix our debt-driven economic crash is through loose lending practices.
We heard from both General Motors and Magna Corporation (NYSE:MGA) that a deal for Opel and Vauxhall should have been completed by the end of last week. Well, here we are and more hurdles and speed bumps continue to pop up. The most recent hurdle was the announcement from the European Union that the proposed deal might breach state aid rules. General Motors' CEO Fritz Henderson said that keeping Opel is definitely a fall back plan, but it does hope to sell a 55.0% stake to the Canadian auto parts giant. We said back in August that it looked like General Motors was dragging its feet in the hopes of keeping the Opel brand and getting a similar handout from the German government that the U.S. and Canadian governments gave the struggling auto giant. The slip up this time around was in response to wording in the agreement that Germany's $6.7 billion aid was only available should Magna and Sberbank be the winners. RHJ International, the other bidder for the Opel and Vauxhall brands, indicated it would not renew its bid should the negotiations between Magna and General Motors fall apart. The best outcome for both companies would be the sale of Opel to Magna, which would allow General Motors to restructure itself quicker under the "Core 4" brands (Chevrolet, GMC, Cadillac, and Buick).
After reaching its one-year high last week at 334.51 (October 14 closing price), the chip sector, as measured by the Philadelphia Semiconductor Index, has been rather ambivalent, not knowing which way to move and trading relatively flat with much volatility. Most recently, the SOX is trading slightly in the red, down less than 1.0% from Monday's closing price.
In spite of the strong financial results from tech companies such as Apple (NASDAQ:AAPL) and Texas Instruments (NYSE:TXN) last night, investors appear to be taking a cautious stance. It appears that most of the uncertainty stems from the poor housing data that was announced before the open of the market. Investors have been digesting the results, and appear to be taking a step back as the concerning housing data adds risk to consumer spending, which represents over two thirds of gross domestic product. Continuing high levels of unemployment and initial claims, together with still unfavorable housing conditions is the reality that the consumer is facing going into this holiday shopping season, and this may limit growth in the short-term for this sector.
Wednesday, two very important semiconductor capital equipment companies are scheduled to report earnings after the close of trading: Novellus Systems, Inc. (NASDAQ:NVLS-OLD) and Lam Research Corporation (NASDAQ:LRCX). We expect both of these companies to deliver better than expected results on both the top and bottom lines as it has become apparent that a number of foundry companies such as Taiwan Semi (NYSE:TSM) and Samsung has ramped up their capital spending. Also, positive signs from ASML Holding NV (NASDAQ:ASML) last week are providing support for our belief that capital equipment companies should deliver strong results this earnings season.