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"Dog Days" of Summer Ending Soon
By Louis Navellier
August comes to an end tomorrow, but we will likely see another week or two of light summer trading surrounding the coming Labor Day weekend. Last week, many traders cleaned out their inventory in advance of last Friday's big downward second-quarter GDP revision, but the revision was less than feared, so the market rallied. This week, traders will remain cautious about the impending August payroll report, which is likely to show additional government job losses, and slow private-sector job growth.
Stat of the Week: July Home Sales Drop 27%!
On Tuesday, the National Association of Realtors announced that July existing home sales dropped a record 27.2% to a 15-year low and that the inventory of unsold homes rose to a whopping 12.5 months! Then, on Wednesday, the Commerce Department announced that new home sales declined 12.4% in July and the inventory of unsold new homes rose to an 11-month supply. Ouch! Clearly, a double-dip in the housing market is underway. Shockingly, 14% of all U.S. mortgages are now delinquent, and about one in 10 mortgage holders are potentially facing a foreclosure. Actual foreclosures in the pipeline are near an all-time high of 4.57% of all mortgages. Clearly, the housing market is not even close to recovering.
In other economic news, the Commerce Department announced on Wednesday that durable goods orders rose 0.3% in July, due largely to a 13.1% gain in the transportation segment, due to strength in the aircraft sector. Unfortunately, economists were expecting a much bigger (2.7%) gain in durable goods. Outside the transportations sector, durable goods orders fell 3.8%, the biggest drop in 18 months. However, June's 1.2% decline was revised to only 0.1%, so there is hope that July's small gain can also be revised upward.
Despite these economic woes, there were some rays of hope. On Thursday, the Labor Department said that the number of people filing first-time unemployment claims fell 31,000 in the latest week to 473,000. Unfortunately, the four-week average rose 3,250 to 486,750, so the trend is still flat-lining.
On Friday, second quarter GDP growth was revised down from 2.4% to 1.6%, which was better than economists' consensus estimate of 1.3%. This massive downward GDP revision was caused by a soaring June trade deficit, which was caused by rising imports and collapsing exports. The widening trade deficit subtracted a whopping 4.45% from second quarter GDP. Overall, imports soared 32.4% last quarter, while exports rose only 9.1%. But the best GDP news was that business spending rose impressively, at a 17.6% annual pace, while the weakening dollar should help U.S. exports recover in the third quarter.
In another piece of good news on Friday, the latest University of Michigan/Reuters consumer confidence survey improved to 69.9, up from 67.8 in July. Frankly, this rise in consumer confidence was a welcome surprise, since consumer spending represents about 70% of GDP growth. Overall, Friday's upbeat news and Thursday's lower jobless claims helped to lift the stock market from Dow 9985 to 10150 on Friday.
In the meantime, economic news from around the world was mostly positive last week. On Wednesday, Germany's Ifo index showed that business confidence rose to 106.7 in August, up from 106.2 in July. The Ifo index is now at its highest level since mid-2007. As a sign of growing confidence in Germany, the Bundesank, Germany's central bank, recently revised its forecast for 2010 GDP growth from 2% to 3%.
Corporate Cash Fuels More Merger Mania
Merger mania remains alive and well. After Hewlett-Packard (HP) bid $24 per share for 3Par (PAR) last week, Dell (DELL) countered on Thursday with a bid of $24.30 per share. On the same day, HP raised its all-cash offer to $27 per share. Apparently, HP really wants 3Par, since it then raised its bid to $30. HP's generous offer (equivalent to $1.88 billion in cash for 3Par) may be the winning bid, but after Labor Day, I expect to see more mergers and acquisitions, since many corporations are loaded with cash.
Corporate cash has soared from just 3% of market capitalization (in 1999) to over 12.5%, and it is still rising fast, due to a record number of new bond market offerings. Now that corporations can borrow at 5% or less, many are refinancing their existing debt, redeeming debt, buying back their stock, raising their dividends and making strategic acquisitions. I expect merger mania to continue after Labor Day. That will help keep a floor under the overall stock market going into the November mid-term election season.
Overall, I notice that investors, voters and even most politicians are increasingly looking to the private sector to drive the economic bus once again, insuring that third quarter earnings will likely remain strong.
Countdown to November: Market Rally Ahead?
Speaking of the November mid-term elections, Republicans outvoted Democrats by about 2 to 1 at state and local primary elections last week, so perhaps the November mid-term elections could be swayed by a high Independent and Republican turnout vs. a low Democrat turnout. Clearly, President Obama will have to work with an entirely different Congress next year. The stock market loves political gridlock, so the coming political shift could be good for the stock market. After November, we could also see some tax rate relief in 2011, giving investors a break on the scheduled capital gains and dividend tax increases.
As the federal government's fiscal-2010 budget year ends (on September 30), the federal budget deficit is clearly out of control. Last Thursday, Standard & Poor's said that the U.S. government needs to take steps to preserve its AAA credit rating in fiscal 2011, presumably under a more parsimonious Congress. S&P has repeatedly warned that the federal government's gigantic deficit and debt burden may cause S&P to downgrade the U.S. from AAA to AA after the November mid-term elections if concrete steps are not taken, similar to what Britain did after their May election with their ensuing "tax and axe" plan. Last Tuesday, S&P cut Ireland's long-term rating to "AA-" and assigned the country a negative outlook, so a downgrade for the U.S. is possible, since our budget deficit (as a percent of GDP) is similar to Ireland's.
In the meantime, the minutes from the August 10th Federal Open Market Committee (FOMC) revealed that there is growing opposition within the FOMC to the Fed's current actions, with at least 7 of 17 Fed officials expressing reservations about further Fed easing. Despite this growing dissent, Fed Chairman Ben Bernanke told the world in Jackson Hole that the Fed is not out of ammunition and still has options.
In his speech at Jackson Hole, Bernanke acknowledged that the pace of economic growth had been "less vigorous" than the Fed was expecting and that the pace of the U.S. job growth had been "painfully" slow. Bernanke also acknowledged that the Fed was surprised by the "sharp deterioration" in the U.S. trade balance that caused Friday's massive downward GDP revision. Translated from Fedspeak, he said the Fed will print more money and expand "quantitative easing" despite the internal debate within the FOMC.
In summary, thanks to strong business spending and faltering confidence in government spending to stimulate the U.S. economy, Wall Street is cautiously optimistic that the private sector will now drive the economic bus. Next Friday's August payroll report will likely show us more evidence of that fact, with government jobs shrinking further, while private sector jobs increase, although at a painfully slow rate.
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