August
25th 2008 Edition
Weekly review of the
markets
Last week
Last
week, once again, we thought we were going to continue higher; the graphs were
all positives. We also hoped the worst was behind us regarding the financial
crisis , but, the price of oil needed to pursue its correction.
Monday
morning, started off with a rally of the the oil price instead and we also had
to absorb the an article from the Barron’s saying the Treasury would likely
need to inject more fresh cash into Fannie May and Freddie Mac. The exact two
things that could derail the recent reversal showed their ugly faces
again early on. Without any news to help, the three indexes closed in the red
Tuesday
Oil continued its climb while other bad news came out of the financial
sector plus the PPI came out much stronger than expected. An article from the
Wall Street Journal stated that the next results from Lehman Brothers would be
nothing short of disastrous. The PPI which was expected to come in around 0.7%
came out at 1.2% and the “underlying” result was 0.7% instead of the consensus
of 0.2%. So it’s no surprise that the second day of the week closed in the red too…
Wednesday
no major news was expected but we still had a very volatile day with oil
closing slightly higher but the markets closed in positive territory which was
quite surprising given the last two days. It seems the lack of bad news was
interpreted like good news!
Thursday
oil and resources started up again, oil at its highest, showed a 5.6% increase
with a 7$ increase. Nothing else could influence the markets that day but yet
again the markets ignore the oil price volatility and finished higher… We need
to remember though that the oil price is still 20% lower than its recent highs…
Friday,
oil prices returned under 120$, while Mr Bernanke stated that the recent
strength the US dollar exhibited and the oil price correction significantly
reduced the inflation pressure. We concluded they wouldn’t increase the
interest rate which is obviously good news for the markets. Markets started up
and even after a correction we still finished higher for a third consecutive
day.
This Week
Considering
these last three consecutive positive days we are tempted to expect a bullish
week but we have to be careful and realize we are not of the woods just yet…
The economic data suggests we oscillate between levels of recession and slow
growth; it’s still anybody’s guess…
Recently
the lowering ressources and oil prices reduced the inflation pressure, delaying
inflation rate hikes. Right now the main black cloud surrounds Freddie Mac and
Fannie May solvability issue. It basically rises the aversion to risk of banks
who are asking for higher returns on their loans which cancels out the Central
bank’s efforts… ON the economic news sode, there will be plenty of them but few
really should impact the market significantly. The main event will occur Tuesday
at 2PM with the FOMC minutes release. Thursday, with the realease of the GDP
prelimiary results should also be worth keeping an eye out for.
As
usual see the economic calendar in details below ( for Investor rules members
only)
Technically
now let’s look at the S&P500. Right now the picture is very unclear since
at this time we have many contradictory figures for example at this time we are
not sure if we have a bearish flag or a
bullish channel. The coming week should add some clarity to this picture…
Same
thing for the Dow Jones :
The
NASDAQ on the other hand seems to be showing its true color a little more willingly:
The flag can’t be supported since it is already to long but we can expect a
double top around 2450.
Now
let’s take a closer look at the upcoming weeks in terms of economic news and
how each one can inpact the market:
( Soon
to be for Investor Rules members only )
Not
a member yet? Just go to http://www.trading-and-investing-for-beginners.com/gold-membership.html
Economic calendar
(Reports I consider will impact the market the most with definitions and
expectations)
Monday
Existing Home Sales
Consensus 4.94M
Definition
Existing home sales tally the number of previously constructed homes,
condominium and co-ops in which a sale closed during the month. Existing homes
(also known as home resales) account for a larger
share of the market than new homes and indicate housing market trends.
(National Association of Realtors)
Why Do Investors Care?
This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as home resales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.
Even though home resales don't always create new output, once the home is sold, it generates revenues for the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.
Since the economic backdrop is the most pervasive influence on financial markets, home resales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
Tuesday
Redbook
8:55 ET
Definition
A weekly measure of sales
at chain stores, discounters, and department stores. It is a less
consistent indicator of retail sales than the weekly ICSC index. It is also
calculated differently than other indicators. For instance, figures for the
first week of the month are compared with the average for the entire previous
month. When two weeks are available, then these are compared with the average
for the previous month, and so on. It might be more useful to compare
year-over-year figures since these are indeed compared to the comparable week a
year ago. This index is correlated with the general merchandise portion of
retail sales covering only about 10 percent of total retail sales.
Why Do Investors Care?
Consumer spending accounts
for two-thirds of the economy, so if you know what consumers are up to, you'll
have a pretty good handle on where the economy is headed. Needless to say,
that's a big advantage for investors.
The pattern in consumer spending is often the foremost influence on stock and
bond markets. For stocks, strong economic growth translates to healthy
corporate profits and higher stock prices. For bonds, the focus is whether
economic growth goes overboard and leads to inflation. Ideally, the economy
walks that fine line between strong growth and excessive (inflationary) growth.
This balance was achieved through much of the nineties. For this reason alone,
investors in the stock and bond markets enjoyed huge gains during the bull
market of the 1990s. Retail sales growth did slow down in tandem with the
equity market in 2000 and 2001, but then rebounded at a healthy pace between
2003 and 2005.
The Redbook is one of the more timely indicators of consumer spending, since it
is reported every week. It gets extra attention around the holiday season when
retailers make most of their profits. It is also a useful indicator when
special factors can cause economic activity to momentarily slide. For instance,
it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit
Consumer Confidence
10:00
ET
Consensus 53.0
Definition
The Conference Board compiles a survey of consumer attitudes on present economic conditions and expectations of future conditions. Five thousand consumers across the country are surveyed each month. While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month.
Why Do Investors Care?
The pattern in consumer attitudes and
spending is often the foremost influence on stock and bond markets. For stocks,
strong economic growth translates to healthy corporate profits and higher stock
prices. For bonds, the focus is whether economic growth goes overboard and
leads to inflation. Ideally, the economy walks that fine line between strong
growth and excessive (inflationary) growth. This balance was achieved through
much of the nineties. For this reason alone, investors in the stock and bond
markets enjoyed huge gains during the bull market of the 1990s. Consumer
confidence did shift down in tandem with the equity market between 2000 and
2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in
2005 when gasoline prices surged.
Consumer spending accounts for more than two-thirds of the economy, so the
markets are always dying to know what consumers are up to and how they might
behave in the near future. The more confident consumers are about the economy
and their own personal finances, the more likely they are to spend. With this
in mind, it's easy to see how this index of consumer attitudes gives insight to
the direction of the economy. Just note that changes in consumer confidence and
retail sales don't move in tandem month by month.
New Home Sales
10:00 ET
Consensus 525,000
Definition
New home sales measure the number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances.
Why Do Investors Care?
This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.
Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.
Since the economic backdrop is the most pervasive influence on financial markets, new home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
FOMC minutes
Definition
On
Why Do Investors Care?
The FOMC has changed dramatically in the transparency of its operations. It now
discloses policy changes at the end of each meeting. Historically, the Fed used
to keep investors guessing about policy changes. Historically, Fed officials
did not appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is more pronounced, reading the minutes of the previous month's meeting is not always as enlightening as it used to be. However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement. Fed officials make numerous speeches, which freely give their views to the public at large.
The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes. Historically, Fed officials did not appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is more pronounced, reading the minutes of the previous month's meeting is not always as enlightening as it used to be. However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement. Fed officials make numerous speeches, which freely give their views to the public at large.
Wednesday
MBA Purchase
Applications
07:00ET
Definition
The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
Why Do Investors Care?
This provides a gauge of not only the demand for housing, but economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the Mortgage Bankers Association purchase applications, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.
Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.
Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the MBA purchase applications index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
Durable Goods
Orders
08 :30 ET
Consensus 0.1%
Definition
Durable goods orders reflect the new orders
placed with domestic manufacturers for immediate and future delivery of factory
hard goods. The first release, the advance, provides an early estimate of
durable goods orders. About two weeks later, more complete and revised data are
available in the factory orders report. The data for the previous month are
usually revised a second time upon the release of the new month's data. (Bureau
of the Census,
Why Do Investors Care?
Investors want to keep their
finger on the pulse of the economy because it usually dictates how various
types of investments will perform. Rising equity prices thrive on growing
corporate profits - which in turn stem from healthy economic growth. Healthy
economic growth is not necessarily a negative for the bond market, but bond
investors are highly sensitive to inflationary pressures. When the economy is
growing too quickly and can't meet demand, it can pave the road for inflation.
By tracking economic data such durable goods orders, investors will know what
the economic backdrop is for these markets and their portfolios.
Orders for durable goods show how busy factories will be in the months to come,
as manufacturers work to fill those orders. The data not only provide insight
to demand for items such as refrigerators and cars, but also business
investment such as industrial machinery, electrical machinery and computers. If
companies commit to spending more on equipment and other capital, they are
obviously experiencing sustainable growth in their business. Increased
expenditures on investment goods set the stage for greater productive capacity
in the country and reduces the prospects for
inflation.
Durable goods orders tell investors what to expect from the manufacturing
sector, a major component of the economy, and therefore a major influence on
their investments.
EIA Petroleum Status Report
10:35 ET
Definition
The
Energy Information Administration (EIA) provides weekly information on
petroleum inventories in the
Why Do Investors Care?
Petroleum
product prices are determined by supply and demand - just like any other good
and service. During periods of strong economic growth, one would expect demand
to be robust. If inventories are low, this will lead to increases in crude oil
prices - or price increases for a wide variety of petroleum products such as
gasoline or heating oil. If inventories are high and rising in a period of
strong demand, prices may not need to increase at all, or as much. During a
period of sluggish economic activity, demand for crude oil may not be as
strong. If inventories are rising, this may push down oil prices.
Crude oil is an important commodity in the global market. Prices fluctuate
depending on supply and demand conditions in the world. Since oil is such an
important part of the economy, it can also help determine the direction of
inflation. In the
Thursday
Corporate Profits
08:30 ET
Consensus 56.9
Definition
Corporate profits, as reported by the Bureau of Economic Analysis (BEA), are summarized briefly as the income of organizations treated as corporations in the national income and product accounts. The BEA reports several measures of profits. Profits from current production (corporate profits with inventory valuation and capital consumption adjustment), are also known as operating or "economic" profits. Capital consumption adjustment deals with the differences in depreciation allowances used for accounting and income tax purposes. Inventory valuation adjustment (IVA) deals with the difference in measuring the cost of inventory replacement. Book profits amount to operating profits subtracting out inventory valuation and capital consumption adjustments. After tax profits are book profits after taxes are subtracted. The Econoday reports will focus on after tax profits reported by the BEA, since these are the most relevant.
The corporate profit figures that are derived from the national income and product accounts (NIPA) depend on GDP growth. They don't always move in the same direction or the same magnitude as the profit data reported directly by individual companies or even the S&P 500.
Why Do Investors Care?
Corporate profits are the lifeblood of investment spending. Profits are the income of a corporation. When profits are strong, then companies will be able to increase their capital spending. This could allow better growth prospects for a company and is likely to increase its underlying value. When corporate profits decline, then capital spending tends to decline. Without the potential for growth, a company could be at a disadvantage, particularly in our global economic environment.
Corporate profits also reveal the health of an organization. When a company's profits are anemic during economic expansion, it suggests that the company is not performing efficiently. The value of an inefficient company is determined by its stock price. Thus weak profits signal lower stock prices. When a company's profits are relatively strong, even during an economic downturn, it usually means that the organization is well-managed. The higher value for this type of company is reflected in a higher stock price.
Gross Domestic Product (preliminary)
Real GDP-Q/Q change-
GDP price index -Q/Q change-
Definition
Gross Domestic Product (GDP) is the broadest measure of aggregate economic
activity and encompasses every sector of the economy.
Why Do Investors Care?
GDP is the all-inclusive measure of economic activity. Investors need to
closely track the economy because it usually dictates how investments will
perform. Investors in the stock market like to see healthy economic growth
because robust business activity translates to higher corporate profits. Bond
investors are more highly sensitive to inflation and robust economic activity
could potentially pave the road to inflation. By tracking economic data such as
GDP, investors will know what the economic backdrop is for these markets and
their portfolios.
The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.
Jobless Claims
08:30ET
Consensus 427K
Definition
New
unemployment claims are compiled weekly to show the number of individuals who
filed for unemployment insurance for the first time. An increasing (decreasing)
trend suggests a deteriorating (improving) labor market. The four-week moving
average of new claims smoothes out weekly volatility.
Why Do Investors Care?
Jobless
claims are an easy way to gauge the strength of the job market. The fewer
people filing for unemployment benefits, the more have jobs, and that tells
investors a great deal about the economy. Nearly every job comes with an income
that gives a household spending power. Spending greases the wheels of the
economy and keeps it growing, so a stronger job market generates a healthier
economy.
There's
a downside to it, though. Unemployment claims, and therefore the number of job
seekers, can fall to such a low level that businesses have a tough time finding
new workers. They might have to pay overtime wages to current staff, use higher
wages to lure people from other jobs, and in general spend more on labor costs
because of a shortage of workers. This leads to wage inflation, which is bad
news for the stock and bond markets. Federal Reserve officials are always on
the look out for inflationary pressures.
By
tracking the number of jobless claims, investors can gain a sense of how tight,
or how loose, the job market is. If wage inflation threatens, it's a good bet
that interest rates will rise, bond and stock prices will fall, and the only
investors in a good mood will be the ones who tracked jobless claims and
adjusted their portfolios to anticipate these events.
Just
remember, the lower the number of unemployment claims, the stronger the job
market, and vice versa.
Friday
Personal Income and Outlays
08:30 ET
Consumer
Spending – M/M change
Personal Income –M/M change
Definition
Personal income is the dollar value of income received from all sources
by individuals. Personal outlays include consumer purchases of durable and
nondurable goods, and services.
Why Do Investors Care?
The income and outlays data are another handy
way to gauge the strength of the consumer sector in this economy and where it
is headed. Income gives households the power to spend and/or save. Spending
greases the wheels of the economy and keeps it growing. Savings are often
invested in the financial markets and can drive up the prices of stocks and
bonds. Even if savings simply go into a bank account, part of
those funds are typically used by the bank for lending and therefore
contribute to economic activity. In the past twenty years, personal savings
have diminished rapidly as consumers have spent a greater and greater share of
their income.
The consumption (outlays) part of this report is even more directly tied to the
economy, which we know usually dictates how the markets perform. Consumer
spending accounts for more than two-thirds of the economy, so if you know what
consumers are up to, you'll have a pretty good handle on where the economy is
headed. Investors can see how consumers are directing their spending, whether
they are buying durable goods, nondurable goods or services. Needless to say,
that's a big advantage for investors who determine which companies' shares they
will buy.
NAPM-Chicago
09:45 ET
Consensus 49.8
Definition
The National Association of Purchasing
Management -
Why Do Investors Care?
Investors should track economic data like the NAPM - Chicago to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures.
The NAPM -
Consumer Sentiment
10:00 ET
Consensus 62.0
Definition
The
University of Michigan consumer surveyquestions 500 households each month on
their financial conditions and attitudes about the economy. Consumer sentiment
is directly related to the strength of consumer spending. Consumer confidence
and consumer sentiment are two ways of talking about consumer attitudes. Among
economic reports, consumer sentiment refers to the
Why Do Investors Care?
The
pattern in consumer attitudes and spending is often the foremost influence on
stock and bond markets. For stocks, strong economic growth translates to
healthy corporate profits and higher stock prices. For bonds, the focus is
whether economic growth goes overboard and leads to inflation. Ideally, the
economy walks that fine line between strong growth and excessive (inflationary)
growth. This balance was achieved through much of the nineties. For this reason
alone, investors in the stock and bond markets enjoyed huge gains during the
bull market of the 1990s. Consumer confidence did shift down in tandem with the
equity market between 2000 and 2002 and then recovered in 2003 and 2004.
Consumers became more pessimistic in 2005 when gasoline prices surged.
Consumer spending accounts for more than two-thirds of the economy, so the
markets are always dying to know what consumers are up to and how they might
behave in the near future. The more confident consumers are about the economy
and their own personal finances, the more likely they are to spend. With this
in mind, it's easy to see how this index of consumer attitudes gives insight to
the direction of the economy. Just note that changes in consumer confidence and
retail sales don't move in tandem month by month.
That’s it for the economic
calendar this week and for this outlook on what we can expect in the markets this
week so use it wisely, and prosper… :-)
Yours
truly,
www.trading-and-investing-for-beginners.com
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