First, for those of you who are nervous or shell-shocked about what happened in the market last week, take a deep breath and relax a bit. The week is over and we have the weekend to sort through the damage to figure out what happened. If this is your first major market sell-off, welcome to the
complete world of investing.
The DIA's (Dow Industrials) lost 2.3%, the SPY's (S&P 500) lost 2.4% and the QQQQ's (NASDAQ) were down 2.7%. It could have been a fair amount worse. Around 3:30 PM Eastern Time on Thursday, major index purchases occurred for all three averages. My guess - largely based on the size and technical timing of the orders -- is this was program trading. These purchases shaved this week's losses by about .5%. The primary reason for this week's sell-off was the near unanimous public statements coming from Federal Reserve Bank presidents, who stated inflation was a concern, implying interest rate increases were guaranteed for the foreseeable suture. If only 1 or 2 Fed Presidents made this type of statement, the markets would have thought the statements reflect the standard stance of an inflation hawk. However, 7 Fed Governors have essentially said the same thing over the last month. One of Greenspan's greatest legacies is his desire to make the Fed more transparent. These combined actions are clearly a result of that policy. There can now be no doubt the Fed will raise rates at its next meeting. In addition, barring a change in the upcoming public statements of Fed officers, a policy of continued hikes - hikes through the early part of next year - is now far more likely.
For those of you who are concerned about the coming week's trading, let me offer some reassurance. First, it's a new trading week. The market will consider a brand new set of variables. While last week is still an important consideration, the new economic information will play a very important role. From a short-term technical perspective, all three averages are sitting on the lowest Bollinger Band, implying a sharp downward move is unlikely. In addition the Williams' % number and fast stochastics of all three averages are oversold. In short, the market stands a technically oversold level. While it may not rocket back into rally mode, the percentages state a continued sell-off is highly unlikely.
The Treasury market was caught between various economic cross currents this week. On the bearish side, the market has sold-off since the beginning of September because of the perception the Federal Reserve will continue raising interest rates. Several reports this week - especially the prices paid component of the ISM manufacturing and service indexes - support this view. Additionally, Federal Reserve officials spoke with a unanimous voice this week, publicly stating inflation was still their major concern. Halting this month long sell off was the perception that 4.40% was an attractive yield for the 10-year treasury, therefore inducing some purchasing. In addition, the bond market usually benefits during a stock market sell-off, as traders put their money in US Treasuries as a safe haven investment. Finally, Friday's NY Subway scare added to the flight to safety mentality in the market, saving the 10-year from an early morning sell-off. The long-term daily chart is approaching oversold levels, although there is still some upward room for interest rates to move.
Oil lost nearly 7% this week. There are several economic trends working on prices. On the bearish side, the US Government announced it will tap into the strategic petroleum reserves and the strategic heating oil reserves if there is a demand crunch. The government announced this on Monday and it overshadowed the market all week. The second is the perception high prices are lowering consumer demand. Crude oil imports were down 1.3 million barrels last week, indicating a possible decrease in overall demand. Bicycle sales are increasing, indicating consumers are looking for alternate methods of transportation. Although distillate imports increased, this is partly due to imports from Katrina relief efforts. On the bullish side, US refinery capacity is still down. According to the Minerals Management Service, 78% of daily gulf oil refining capacity is still shut-in, and 64% of gulf gas capacity is shut-in. There are reports that up to 15% of US refining capacity will be shut down for several weeks. In short, the refining situation is terrible and may create a supply crunch should the North experience a sharp cold snap. From a technical perspective, crude oil is clearly in oversold territory indicating last week's sell-off may be over.
A combination of fundamental and technical factors influenced the dollar this week. The dollar rose on Monday as the ISM manufacturing number showed an increase in activity. The dollar has risen since the beginning of the year because the US economy is growing faster than its Asian and European counterparts. This report merely confirmed that trend. The dollar sold-off on Thursday largely because of technical factors: the dollar is near highs versus both the yen and euro. Technical indicators were in overbought territory triggering selling. The dollar rebounded on Friday's jobs report, as far fewer jobs were lost than predicted. The dollar remains technically expensive versus the euro and the yen. In addition, as the US moves into the 4th quarter, forex traders will be looking for signs the US economy is either maintaining its strength or showing signs of weakness.
Monday: US Auto Sales
Car: 621,923 vs. 582,761, up 7 percent Truck: 678,979 vs. 827,921, down 18 percent Big Three vehicle: 731,453 vs. 886,551, down 17 percent Asian vehicle: 507,617 vs. 459,967, up 10 percent European vehicle: 61,832 vs. 64,164, down 4 percent Total vehicle: 1,300,902 vs. 1,410,682, down 8 percent
This marked the first month where there were no employee pricing discounts and it showed. GM's truck sales were down 30% and Ford's were down 28%. Chrysler's auto sales were up 26% while their truck sales were only down 2%. Obviously, the Japanese carmakers with better fuel mileage fared well. Toyota's car sales increased 22%, Honda's increased 20%, and Nissan's increased 27%. It appears higher gas prices are already having a pronounced effect on car buying behavior. This does not bode well for Ford or GM, unless they have the ability to revamp their product line for 2006.
Monday: Construction Spending
Total construction spending increased .4%, residential spending increased .2% and nonresidential spending increased .7%. Realistically, the total amount of spending on each sector has been fairly constant for the last 5 months, with residential spending vacillating between 619 and 622 million and nonresidential spending vacillating between 481 and 487 million. This number would be important if either number moved sharply in either direction. However, slight movements are less significant to the markets as a whole.
Monday: Institute for Supply Management Survey
The PMI indicates that the manufacturing economy grew in September for the 28th consecutive month. The PMI for September registered 59.4 percent, an increase of 5.8 percentage points when compared to August's reading of 53.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI in excess of 42.7 percent, over a period of time, generally indicates an expansion of the overall economy. The September PMI indicates that both the overall economy and the manufacturing sector are growing.
This report indicates the manufacturing economy is on strong footing. It also indicates Katrina's overall effect may be more muted than previously considered. It's also important to note the prices paid component of this report rose sharply, which added to the inflationary and continued path of raising interest rate fears of traders.
Wednesday: Institute for Supply Management Service Index
ISM's Non-Manufacturing Business Activity Index in September dropped to 53.3 percent from August's 65 percent, indicating a slower rate of growth of activity in September. The last time the index was this low was when it registered 52.6 percent in April 2003. This month, eight sectors report increased business activity, six are reporting decreased activity, and three indicate unchanged activity compared to August.
The industries reporting the highest rates of growth of business activity in September are: Construction; Communication; Mining; Insurance; and Retail Trade. The industries reporting the highest rates of contraction of business activity in September are: Agriculture; Entertainment; Real Estate; Business Services; and Finance & Banking.
First, as with the week's manufacturing report, the prices paid component jumped. This made market participants more concerned about the possibility of further Federal Reserve rate hikes. Secondly, real estate was an industry reporting a higher rate of contraction. This may indicate the housing market is indeed slowing. The overall index and its components indicates a services expansion, although at an overall slower pace.
Thursday: New Manufacturers' Shipments
New orders for manufactured goods in August increased $9.7 billion or 2.5 percent to $395.2 billion, the U.S. Census Bureau reported today. This followed a 2.5 percent decrease in July. Shipments, up for the fourth consecutive month, increased $6.6 billion or 1.7 percent to $393.5 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.1 percent increase in July. Unfilled orders, up for the fourth consecutive month, increased $9.2 billion or 1.6 percent to $590.0 billion. This was at the highest level since the series began and followed a 1.0 percent July increase. Inventories, down following two consecutive monthly increases, decreased $0.6 billion or 0.1 percent to $463.7 billion. This followed a 0.6 percent July increase.
Katrina's rebuilding efforts are already having an effect. Looking at the data's individual components, construction equipment, iron and steel mills and ventilation equipment all saw large increases, indicating rebuilding orders are having a positive effect. Rebuilding material also dominated the unfilled orders increased with primary metals unfilled orders increasing 5% and construction machinery unfilled orders increasing 5.9%. The other big increase occurred in the computers area, with orders increasing 12.1% and unfilled computer orders increasing 6.4%.
Friday: Employment Numbers
Nonfarm payroll employment was little changed (-35,000) in September, and the unemployment rate rose to 5.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The measures of employment and unemployment reported in this news release reflect both the impact of Hurricane Katrina, which struck the Gulf Coast in late August, and ongoing labor market trends. Over the 12 months ending in August, payroll employment grew by an average of 194,000 a month and the unemployment rate trended downward
There was a great deal of concern about this number before its release. Estimates of the job losses ranged from -125,000 to -200,000, making this number a relief to the markets. Looking at the internals, retail and hospitality took big hits with respective losses of 88,000 and 80,000. Manufacturing continued its losses of the last 5 years with losses of 27,000. Construction gained 23,000, while professional services increases 52,000 and health/education increasing 49,000. Average hourly earnings increase .2%. September CPI has not been released yet so we don't know its effect on wage growth.
