THE KEY ECONOMIC LANDMARKS WE PASSED
A mixed basket of data last week for housing on a base level. However, even with the miss from existing home sales, there was a silver lining. The number of all-cash deals fell to 23% and the number of purchases from investors fell to 12%. Homeowners now have a better chance of maneuvering in the market and could find themselves with accepted offers instead of being bulled over by the deep pockets of cash investors. The housing market is starting to get back in balance. It could use help from the labor market (higher wages) and mortgage lenders (easing of standards). The rental market will only cool off when home ownership becomes affordable and viable again for the young professionals in their twenties who still live in mom and dad’s basement.
2. Durable Goods: -18.2% vs. -18.0% est.
On a headline view, this report looks downright abysmal but then you remember last month was +22.5%. The entire drop was simply transportation coming back to earth after the massive surge in airplane orders (Boeing) in the previous month. Ex transportation, we actually had a really good showing. August was up 0.7% and July was revised higher by 0.3%. Orders and shipments in the “core” group (ex defense, ex air) were both positive and point toward further strength down the line. Unfilled orders and inventories both stand at historic highs for the data series.
3. Q2 GDP: 4.6% vs. 4.6% est.
Not a lot to say here. The final estimate for Q2 printed in line with expectations and we can finally put to rest the winter drop/spring rebound conversation. The chances of holding a +4% GDP in Q3 and Q4 are slim, but it would be stellar to see a three handle or the high twos. Even if we pull in 2.5% growth for the remaining two quarters, we sit at sub 2% for the year…
LAST WEEK’S MARKET IN THE REAR-VIEW: “Voila!…tility”
On an absolute level, volatility (as measured by the CBOE VIX) is still low in comparison to its historical mean. However, last week we had a 20%+ spike in the index as stocks went on a roller coaster ride. The slope was down all week, even with a mid and end of week bounce. Thursday brought out the sellers in heavy fashion and red was the color of the day. It did not matter what size stock you were, on Thursday it was down, down, down. The S&P 500 and Russell 2000 both ended the day down over 1.5%. The Dow had the largest point drop since July 31st. Most of the downdraft was focused on global growth concerns. The U.S. economy is the shining star right now and thus, the dollar has been heavily bid. Commodities have suffered as a result with crude oil treading water above two-year lows.
LOOKING THROUGH THE WINDSHIELD
The deluge of data begins. With month end numbers and NFP Friday in the mix, I will be busy all week reading econ reports. Expect a lot from me in next week’s post. If I were to pick out two numbers I am focusing on this week, they would be employment within the ISM Manufacturing number and hourly earnings in the employment numbers on Friday. I personally think the United States is working towards a second industrial revolution and will pull workers from overseas back to the mainland. The competition in wages is starting to slim down and technological advances here (think 3D printing) are starting to give us a second wind. Wage growth, as I have said many times before, is important in respect to labor slack.
It looks like the last few days of September are setting the tone for October, generally a month which invokes fears of a crash (you can thank 1987 for that one). Large cap stocks continue to widen the gap between their small cap counterparts. The rally in equities this year has been dominated by large companies. As of Friday, the spread was slightly over 11% with the Russell 2000 negative by nearly 3% for the year. Looking at the table below, you can see the divergence in market breadth. We are strong believers of mean reversion here at Astor. I am sure there is a group of traders out there who see an opportunity to place a spread trade in order to capture the reversion (i.e. Buy Russell, Sell S&P). Then again, there is always risk of a further widening. We have spent the last few years drinking from the Fed Fountain and it has been sweet. Soon we will have to scout for other sources of liquidity (no pun intended).