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Special Market Commentary

Updated 6/30/09
 
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A Flat Market
 
Posted: 6/30/09 1:15 PM ET

Rally Stalls as Confidence Falls

The market is slumping as the quarter comes to a close. The main culprit is an unexpected drop in consumer confidence, ending a two-month winning streak in that index. Other economic data today was positive but has failed to offset the negative consumer reading as home prices fell at an 18% annualized rate in April – which was better than had been expected – and manufacturing activity in the Midwest improved in June. Treasuries are lower after the release of this data. Meanwhile in equity news, Ford raised its quarterly production forecast, H&R Block and Apollo Group both beat earnings expectations, General Mills lifted its quarterly dividend, Abbot Laboratories will have to pay a hefty patent infringement fine, Broadcom sweetened its offer to acquire Emulex Corp, and Adobe Systems announced plant closings. Overseas, stocks in Europe were lower.

At 12:52 p.m. ET, the Dow Jones Industrial Average is down 1.3%, the S&P 500 Index is off 1.2%, and the Nasdaq Composite is down 0.7%. Crude oil is $1.85 lower at $69.64 per barrel, wholesale gasoline is down $0.04 at $1.89 per gallon, and gold is $8.35 lower at $929.60 per ounce.

 

 

I
Calm Before The Storm?
 
The effect from the Russell Index rebalancing spilled over to today's market as stocks were a little jumpy in the first hour of trading. After that, the water became placid. Stocks were mostly higher and traded in a very tight range for the rest of the day. Volume was holiday light while VIX dropped to a nine month low at 25.35. When the closing bell rang, the DJIA was up 90.99 points (+1.08%) at 8529.38. The S&P 500 was up 8.33 points (+0.91%) at 927.23 while the NASDAQ underperformed slightly, finishing the day with a 5.84 point gain (+0.32%) at 1844.06.
  
The internals were mostly positive. Advancers led decliners by an 18 to 11 ratio on the NYSE but lagged by an 11 to 14 ratio on the NASDAQ. About two thirds of the volume was on the upside on the NYSE while over 60% of the volume was up on the NASDAQ. All ten major sectors gained for the day.
  
Light volume coupled with a holiday-shortened week makes it difficult to gauge this week's market movements. The general mood of the market is bullish as fund managers try to close the month/quarter and first half of the year on an up note. But there are signs that sentiment may have become a little too bullish. The CBOE index put/call ratio is now under 1.00 two days in a row. In addition, while a declining VIX is positive for prices, the VIX is at a nine month low and a bounce is likely to be in store. Increasing volatility is a negative for stock prices.
  
Both the S&P 500 and NASDAQ are now in a short term overbought condition. The DJIA is back above its 200 day moving average and another day of gains will put it in short term overbought condition, also. All these factors point to some kind of pullback in early July.

 

  
by Yin Lin, CFA
 

June 30, 2009

Consumer Confidence Slips As Home Price Decline Moderates

And Regionals Rise

The Consumer Confidence Index slipped 5.5 points to 49.3 in June, partial payback after two strong months of gains. Economists expected a rise of 1.1 points to 56.0. Both the present situation and expectations components fell similarly. Additionally, the expectations component for May was revised down by 0.8 points, while the present situation was revised up by that amount. Confidence dropped in all demographic categories. Seven of the nine regions suffered declines.

Despite this month’s setback, the economy is expected to grow over the next three quarters.

Buying plans retreated. Plans to buy a vehicle in the next six months fell more than a point (more than is typical) to a low 4.6%. Plans to buy a home ticked down to 2.7%, in line with historical tendencies for June. Plans to buy a major appliance shed 2.7 points, a little more than normal. Vacation plans, however, rebounded 2.4 points to 37.0%. For the first time since September 2007, more than half of respondents expect interest rates to rise.

Home Price Declines Moderate

According to S&P/Case-Shiller, existing single-family home prices fell about 1% in April, the smallest decline since at least last June, with eight metro areas registering monthly price increases. On a y/y basis, the 10-City and 20-City Composite Indexes each fell 18%, both better than the record lows seen in January. Thirteen of the 20 metro areas recorded improvement in their annual price returns in April. The Composite Indexes are off more than 30% from their May 2006 peaks, having fallen to their lowest levels since mid-2003. Foreclosure moratoriums may have helped stabilize prices some in April, but that could reverse in the second half of the year.

Regionals Improve

Regional reports out this morning, as well as others over the past couple of weeks, indicate business activity deteriorated at a slower pace across the country in June. Economists expect the national ISM Index to rise 2.1 points to 44.9, although we think it could exceed 46. Chicago area activity rebounded. The Chicago Business Barometer rose 5.0 points to 39.9, recouping nearly all of May’s loss and eclipsing expectations for a reading of 39.0. The improvement was broad-based, suggesting a slower rate of decline in activity. Notably, the production and order backlogs indexes rose to their highest level since last fall. Buying policy, however, was mixed, with lead times for MRO supplies and capital equipment lengthening, while production materials dropped to its shortest duration since December 2007, at the start of the recession. Prices fell at a slower rate.

Cincinnati area activity also declined at a slower pace. The PMI rose 3.6 points to 42.1, its highest level since October. Other indexes were mixed. The composite price index rose 22.7 points to 8.0, indicating a broad-based increase in average prices for the first time in seven months.

In Milwaukee, manufacturing activity was flat, as the PMI rose seven points to a neutral 50 reading, the best since February 2008. Individual indexes were mixed. Notably, production jumped 15 points, the most since August 1987, to 53, indicating a modest pickup in output. Price pressures turned positive for the first time since September.

But New York City business activity contracted once again. The current business conditions index, which largely tracks the service industry, dropped 16.5 points to 44.8, giving up over half of the gain seen in May. Working capital shortages remained a concern. Despite the drop in activity, expectations improved modestly. Price pressures have begun to move off their lows.

Worker Confidence Continues to Improve

The Rasmussen Employment Index rose 2.5% to 68.4 in June. This was the fourth consecutive monthly increase to its highest level since October. From a year ago, the index is off 13.0%, the least since September.

Weekly Chain-Store Sales Mixed

Chain-store sales were mixed in the latest week, helped by seasonally hot weather and 4th of July sales promotions. The ICSC/Goldman Sachs Retail Chain Store Sales Index climbed 1.6%, the most in five months, and is up 0.6% on a y/y basis. Despite the weekly improvement, the ICSC expects a weak month. Redbook indicated its sales index has fallen 4.4% in the first four weeks of June, compared to a targeted -4.1%. From a year ago, sales are also down 4.4%, compared to a target of -4.2%.

 

Joseph F. Kalish, Senior Macro Strategist

Kathy Hartley, Senior Macro Equity Analyst

Alejandra Grindal, International Economist

Ned Davis Research, Inc.

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Fred Endris

This information is intended for clients of Endris Financial Services only and is valid only where Advisor is currently licensed.  This information is NOT a recommendation to buy or sell securities.  Any quoted returns are for past performance only and are not an indication of future performance.  References to returns of the market indexes is presumed to be accurate from an outside source, but is not guaranteed to be accurate. Opinions expressed by the author are dated  and may no longer reflect the author's current position.