This morning’s rally in equity looks awfully familiar. Yesterday’s missive about this same time was almost identical . . . Oil is up, dollar is weak, euro is strong this morning helping to fuel the rally on Wall Street. However, yesterday all through the afternoon, we watched the rally slowly lose steam and the Dow finished the day down 20 points. Volume is light again today, so we’ll watch and see if the Bulls can hold on to their gains and finish the day in positive territory long term installment loans with bad credit. In economic news this morning, import prices for May fell .6% m-o-m, a 1.2% drop had been anticipated by the experts. Prices in April were revised to show a 1.1% increase. The Empire State Manufacturing Survey for June registered a reading of 19.6, just shy of the 20.0 for which analysts were looking. These reports aren’t major and have had little impact on the market thus far. The bullish traders were knocked off their horses yesterday by Moody’s downgrade of Greece’s debt to junk status. It was a reminder that the European financial situation is not fixed. Absent of such an event today could spell a positive close in equities. The Dow and the S&P 500 have not had a winning streak of more than 2 days in a couple months. The NASDAQ was able to hold on to a gain yesterday of just under 1 point, to extend it’s winning streak to 3 days, and looks like today should be it’s fourth. Yet, the NASDAQ finished the day yesterday 25 points below it’s beginning of the year start on Jan 1, 2010.
10.2 Debt-equity mix and weighted average cost of equity The debt-equity (D-C) mix identifies the debt and equity financing percentages for a corporation. In a company with a 40-60 debt-equity mix, 40% of its equity comes from debt equity sources (bonds, loans, and mortgages) and 60%
from equity sources (shares and retained earnings). Most projects are financed with a combination of debt and equity capital, which is made available specifically for the project or obtained from the equity funds of a corporation. The weighted average cost of capital (WACC) of the funds is calculated by the relative fractions, from sources of debt and equity. If exactly known, such fractions are used to calculate the CPPC; otherwise, the historical fractions for each source are used in the relationship: CPPC = (fraction of equity capital) (cost of equity capital) + (fraction of debt capital) (cost of debt capital)
Hence, the pricing from Wednesday morning (we did have an improvement that afternoon) and this morning is only off by anywhere from 7 to 25 bps to the worse. Whew! Not too bad. This morning’s economic news releases have let a little air out of the balloon for equities from yesterday’s inflated rise upward. Advance Retail Sales for May fell 1.2%, when analysts were looking for an increase of .2% — looks like the consumer is taking a little break from spending this past month. This is the worst drop since Sept of 2009, and excluding autos (a decline of 1.1%) it’s the worst drop since March of ’09.
Consumer Confidence continues to shine as June’s survey came in at 75.5, up from the 73.6 posted the month previous. Analysts were expecting a reading of 74.5 and continues to show that we are an optimistic bunch here in the USA. It just strikes me as a bit humorous that this confidence reading carries so much weight with traders. It’s not REAL purchases or REAL money, it’s just optimism . . . which is good, of course. From the direction of trading so far today, it’s not having much of a positive effect. Business inventory data for April showed a .4% increase short of the .5% for which the experts were looking.
The first report released this morning in regards to the US economy was the latest ADP Employment Change report which told us that payrolls from private corporations increased by 55K in May. This number was a bit of a disappointment as analysts were looking for 70K. This off 10K from the upwardly revised number of 65K in April. Tomorrow the Labor Dept reports its Unemployment figures and will tell us how many jobs were created from their analysis. Initial Jobless Claims for the week ending May 29 came in at 453,000 – down 10K from the week previous, but not much of an improvement. Continuing jobless claims actually increased 31K from last week . . . the wrong direction for those claiming the employment situation in our country is getting better.
First Quarter nonfarm productivity’s final reading showed an increase of 2.8%, down from the 3.6% in the last revision. Unit labor costs for Q1 fell 1.3%, which is good, but not as good as the 1.6% anticipated. Factory orders for April increased 1.2%, but not as good as the 1.7% expected. We have a pattern here, can you see it? The ISM Services Index for May did come in at 55.4, almost at analysts expectations of a 55.6 reading. Most of the reports this morning were disappointing, and missed expectations. Thus the weakness in equity markets today, and the subsequent quieting in credit markets.
Equity markets are trying once again to stage a rally and are doing a pretty good job so far, but it is early. Bullish traders must feel like they are pushing a truck up hill every time they try to get a rally going in the stock market. Yesterday, after pushing this truck all day, they apparently stopped pushing about ½ hour before the close of trading . . . and the truck rolled back right over them! We saw, not only all the gains of the day wiped out yesterday at the end of trading, but the Dow closed down over 112 points by the close! Must be frustrating for those Bulls. Boo hoo hoo.
Speaking of frustrating . . . when we finally get some improvement in credit markets yesterday, it’s too late for banks to issue improved pricing. Then when we hope for some carry through this morning, the stock market is back up and credit markets are worse. Fortunately for us, pricing yesterday on our mortgage rates was just slightly improved from Friday’s and this morning’s rates are just slightly worse than yesterday’s. Secondary Marketers don’t chase the bond market rallies, but at the same time, there’s room to offer competitive rates when the bond markets creep backwards. They just don’t like the big surprises.
The only economic news of the day, outside of auto sales trickling across the news wires all day, is the Pending Home Sales for the month of April. Guess what . . . it was up! Who would have suspected that? Not any of US in the industry. April’s signed sales contracts figure was up 6.0% over the month previous, besting estimates of a 5.0% increase. March’s numbers were revised to show a 7.1% increase over the month previous. Y-O-Y pending homes sales in the month of April are up nearly 25%, about the same as March’s Y-O-Y, and better than expectations.
The month of May saw the Dow drop 7.9% (the S&P 8.2%) and it was the worst May on the Dow since 1949. Pretty impressive! The Dow is now down 2.8% for the year so far having lost about 56 points for the week last week. Bullish traders, I’m sure, were hoping to have a good week last week to overcome the dismal month up to that point, but it just didn’t happen, and the Dow ended the bleak month with a 122 point loss on Friday.
As mentioned, it seemed the losses would carry right into this week and month, too, the way the markets opened this morning. But then, we rec’d word that the ISM Manufacturing Index for May came in at 59.7, just slightly above the 59.4 anticipated. Then the big surprised of the day came from the construction sector of the economy. April’s Construction Spending showed a 2.7% increase from the prior month, besting the mere .1% increase expected. These reports were enough to reverse the trend in equity markets and catapult us to positive territory.
Trading is light, though, and nobody seems to be real excited about jumping in to this volatile market, so things should stay pretty calm today with equity markets remaining lack luster through out the session. The big economic report, of course, is the unemployment report due on Friday. Analysts are all over the board with their expectations of how many jobs were created in May. www.luxfunding.com
Today is the last business day of May, and if you’re going to lock a loan it is probably better to do so early rather than late (after the bond market closes, and hedging loans becomes more problematic). We have already had Personal Income and Consumption. Later we have the University of Michigan Survey. A critical component of any recovery is the establishment of household incomes improving. Tax receipts are up, indicating that someone’s income is going up although unemployment is still high. (Stay tuned for next Friday’s unemployment data, expected to show a large nonfarm payroll gain!) Coming in about as expected, April’s Personal Income was +.4% and Personal Income/Consumption was unchanged. It is always nice to see savings is picking up although it is at the expense of consumption. After the news we find the 10-yr yield at 3.31% and mortgages between .125-.250 better in price than yesterday afternoon.
This morning’s missive is being brought to you by the number “200.” It has been the parameter number of trading swings on the Dow this week. On Tuesday the Dow dropped 225 points (after 125 point loss on Monday) to come back all the way to a 25 point closing mark loss for the day – a double 200 point move for the session, down and then back up. On Wednesday, the Dow shot up 130 points only to finish with a 70 point loss – spooky isn’t it? Today, the Dow is up exactly 200 points. There’s got to be some conspiracy here.
Unfortunately, for us mortgage hacks, we can’t seem to catch a break. When the equity markets drop and credit markets rally, investors (secondary marketing pencil pushers) are reluctant to chase the market. However, when equities shoot up like a rocket, as is the case today, credit market traders run for cover to avoid getting soaked – and such is the case today. When the Dow shot up 240 points right out of the gate early this morning, the 10 year Note shot up to 3.35, from a close of 3.19 last night. It’s hard to predict anything these days. The Volatility Index is down 13% today, but still up 40% since the beginning of the year.
The 2nd estimate for the 1st Q GDP was revised downward to a rate of 3.0%, from 3.2% at the first estimate. Some had expected it to actually rise to 3.3%, but that doesn’t appear to be the case. Initial Jobless Claims for the week ending May 22 came in at 460K, slightly above the 455K anticipated. Continuing claims came in at 4.61M, down from 4.66M last week, and in line with expectations. Thus, bullish traders are taking the opportunity to make up some of the losses from the last couple weeks. The bulls have certainly been hammered for the last month. The intraday high for the Dow occurred on April 23 when the Dow hit 11,205 – at the close of business yesterday the Dow closed at 9,974 – that represents a 1,231 point slide or 11%!
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The stock markets have sure seen some wild activity this week! Yesterday when I sent out rate sheets we had been down as much as 225 points on the Dow, only to finish the day down only 25 points – a 200 point whipsaw session! Bullish traders on Wall Street attempted to keep the rally going today as the Dow shot up 125 points right out of the gate. It seemed we had a glass floor yesterday, today we have a glass ceiling as traders have struggled to keep those gains of 100+ points for the Dow. A strengthening dollar throughout the morning is a possible culprit.
Bullish traders are trying to capitalize on the Durable Goods orders reported this morning as rising an impressive 2.9% in April, much stronger than the 1.5% increase anticipated. However, exclude transportation, and the orders fell a whopping 1.0% compared to the .5% expected – this is on the heels of the previous month’s numbers being revised upward to 4.8% — a 5 year high.
Bullish traders are also taking fuel from the New Home Sales for April which jumped a surprising 14.8% month-over-month to an annualized rate of 504K units. This number is way above the 425K figure for which many analysts were looking. This pales in comparison to the month previous which jumped 30%. Maybe this has something to do with the expiring tax credit at the end of April, but then, what do I know? Maybe this is why the rally ran out of gas early this morning.
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