|
The
Stock Market Pulse
$49.95/month value
November 03rd,
2008 Edition
Weekly review of the markets
Last week,
didn’t end on a very positive note. The low of October 10th
was our last hope. The Nasdaq even breached but managed to close higher
by the end of the week.
Monday
at the open some good news on the new home sales contributed to bring the
market over Friday’s close after a lower open. Sales of new home
increased 2,7% last month while average price
decreased 0,9%. Oil price continued its slide. A rumor about a merger
between Goldman Sachs and Citigroup was refuted. The
overall day was rather calm as the price seemed to be holding at the
Friday’s close levels but with half an hour to go, the wheels fell off!
The S&P500 closed down 1,9% but managed to stay over the low of
October 10th
Tuesday
the consumer confidence
index was in store for us and we were expecting a weak
result of 52, but it actually came out at 38… The worst result ever! But
lucky for us, the good performance over in Asia
and Europe combined with surprising results from Occidental Petroleum, Valero Energy and U.S. Steel was enough
to stimulate the bargain hunters into buying, plus, there were many short
coverings which created a massive rally. All sub-indexes of the
S&P500 finished much higher.
Wednesday
we were expecting the FED to cut the interest rate by 50 points. Durable
goods surprised with 1,1% vs
0,8%. This result combined with a 9,8% increase of Oil prices were
sufficient to hold the market up until the official announcement of the
rate cut at 2h15 and as planned, the fed cut the rate by 50 basis points
bringing the Fed Funds Rate to 1,25%. At these levels, there’s not much
more the Fed can do… Although it was widely expected, the market still
moved up on the news. GE announcement that it would need to cut costs to
stay profitable in 2009 because of reduced sales reversed the trend
though. This news is important because GE is very
diversified worldwide thus it was a cruel reminder that the crisis was
indeed around the globe… Good news is , we
managed to close without losing much of the gains from Tuesday, which in
itself was good news…
Thursday Asian banks also cut their rates
following the Fed’s lead. The surprise today was that even if all points
to a 10th consecutive month of job losses in the November 7th
jobless claims report, the market finished higher!
Friday
the Chicago PMI plummeted from 56,7
to 37,8 and so did the Michigan index going from 70,3 to 57,6… Facing these results
consumers confirmed their fragile financial situation. The markets opened
unaffected opening pretty much at Thursday closing levels. After a brief
hesitation the markets continued to ignore the bad news coming out on all
sides and added to Thursday’s gains. It is starting to look like
investors are willing to look further down the road and are buying back
in slowly but surely.
This Week
Last week ended what is now known as one of the worst
in the history of the stock market. The fact is, it could have been even
worst considering we had a bunch of bad news which by themselves used to
beat the markets down but regardless, this week we ignored it all and
finished the week much higher. It now seems all bad news are numbered in
and, unless an unforeseen disaster hits us, we found the bottom… Are we
ready to start the long climb back up? Nothing is more uncertain. Last
week saw a stabilization real estate with sales of new home. Monday we
will see the construction spending results. We’re already expecting a
reduction of 0,8% . We will also see both ISM
results this week. Friday is going to be important with the jobless
claims report. The earning season is over and most companies announced
modest growth, if at all for the next trimester but that, the market
already factored it is.
This week will be very interesting although still
volatile mostly because of last week’s rally. If we manage to finish the
week even higher it might be the final signal that we have reached a
bottom and although we might not move up uninterrupted from here we might
have stopped the bleeding which will represent an opportunity of a
lifetime to get back in the markets from here and expect a rarely seen
yields for years to come, especially if you get in board at the beginning
of the recovery…
Technically, it does look like we found a bottom on
all three indexes. The triangle figures on the S&P and the Dow were
broken against the preceding trend and the Nasdaq flag was also broken,
which is bullish. The problem though is that these breaks were not
achieved after a reduction in volumes which is what the theory requires
but given the high volatility we are seeing these days it might still be
valid… Time will tell… To see what I’m talking about I attached a chart
of the SPY which mimic the S&P500 :
Now the Dow:
Now here’s the economic calendar for this week:
Economic calendar
(Reports I consider will impact the market the most with definitions and
expectations)
( Soon to be a section for Investor Rules members only
) Not a member yet? Just go to
http://www.InvestorRules.com/gold-membership.html
Monday
November 03rd
Construction Spending
10:00 AM
Definition
The dollar value of new construction activity on residential,
non-residential, and public projects. Data are available in nominal and
real (inflation-adjusted) dollars.
Why Do
Investors Care?
Construction spending has a direct bearing on stocks, bonds and
commodities because it is a part of the economy that is affected by
interest rates, business cash flow and even federal fiscal policy. In a
more specific sense, trends in the construction data carry valuable clues
for the stocks of home builders and large-scale construction contractors.
Commodity prices such as lumber are also very sensitive to housing
industry trends.
Businesses only put money into the construction of new factories or
offices when they are confident that demand is strong enough to justify
the expansion. The same goes for individuals making the investment in a
home.
A portion of construction spending is related to government projects such
as education buildings as well a highways and streets. While investors
are more concerned with private construction spending, the government
projects put money in the hands of laborers who then have more money to
spend on goods and services.
That's why construction spending is a good indicator of the economy's
momentum.
ISM
Mfg Index
10 :00 ET
Definition
The Institute for Supply Management surveys more than 300
manufacturing firms on employment, production, new orders, supplier deliveries,
and inventories. A composite diffusion index of national manufacturing
conditions is constructed, where readings above (below) 50 percent
indicate an expanding (contracting) factory sector. Export orders, import
orders, backlog orders and prices paid for raw and unfinished materials
are also measured, but these are not included in the overall index.
(Institute for Supply Management)
Why Do Investors Care?
Investors need to keep their fingers on the pulse of the economy
because it dictates how various types of investments will perform. By
tracking economic data such as the ISM manufacturing index, investors
will know what the economic backdrop is for the various markets. The
stock market likes to see healthy economic growth because that translates
to higher corporate profits. The bond market prefers less rapid growth
and is extremely sensitive to whether the economy is growing too quickly
and causing potential inflationary pressures.
The ISM manufacturing data give a detailed look at the manufacturing
sector, how busy it is and where things are headed. Since the
manufacturing sector is a major source of cyclical variability in the
economy, this report has a big influence on the markets. More than one of
the ISM sub-indexes provides insight on commodity prices and clues
regarding the potential for developing inflation. The Federal Reserve
keeps a close watch on this report that helps it to determine the
direction of interest rates when inflation signals are flashing in these
data. As a result, the bond market is highly sensitive to this report.
Tuesday
November 04th
Motor
Vehicle Sales
Definition
Unit sales of domestically produced cars and light duty trucks (including
sport utility vehicles and mini-vans). Individual manufacturers report
usually report sales on the first business day of the month. Motor
vehicle sales are good indicators of trends in consumer spending.
Why Do Investors Care?
Since motor vehicle sales are an important element of consumer spending, market
players watch this closely to get a handle on the direction of the
economy. The pattern of consumption spending is one of the foremost
influences on stock and bond markets. Strong economic growth translates
to healthy corporate profits and higher stock prices. The bond market
focus is on 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, although motor vehicle sales moderated to a lesser extent.
A low interest rate environment through 2005 curtailed the decline in
motor vehicle sales. Granted, since automakers offered many incentives to
boost sales in the past several years, their profits have suffered.
In a more specific sense, auto and truck sales show market conditions for
auto makers and the slew of auto-related companies. These figures can
influence particular stock prices and provide insight to investment
opportunities in this industry. Given that most consumers borrow money to
buy cars or trucks, sales also reflect confidence in current and future
economic conditions.
ICSC-Goldman Store Sales
7:45ET
Definition
This weekly measure of comparable store sales at major retail chains, published
by the International Council of Shopping Centers, is related to the
general merchandise portion of retail sales. It accounts for roughly 10
percent of total retail sales.
Why Do Investors Care?
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. 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 ICSC-Goldman index is one of the most 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 New
Orleans and the Gulf
Coast in 2005. The
ICSC-Goldman Sachs store sales series previously was known as ICSC-UBS
before Goldman Sach's involvement with ICSC.
The name change took place with the September 30, 2008 release.
Redbook
08:55 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, once again, it was widely watched in the
aftermath of Hurricanes Katrina and Rita which hit New
Orleans and the Gulf
Coast in 2005.
Consumer Confidence
08:55 ET
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.
Factory Orders
10:00 ET
Definition
Factory orders represent the dollar level of new orders for both durable
and nondurable goods. This report gives more complete information than
the advance durable goods report which is released one or two weeks
earlier in the month.
Why Do
Investors Care?
Investors want to keep their fingers on the pulse of the economy because
it usually dictates how various types of investments will perform. The
stock market likes to see healthy economic growth because that translates
to higher corporate profits. The bond market prefers more moderate growth
which is less likely to cause inflationary pressures. By tracking
economic data like factory orders, investors will know what the economic
backdrop is for these markets and their portfolios.
The orders data show how busy factories will be in coming months as
manufacturers work to fill those orders. This report provides insight to
the demand for not only hard goods such as refrigerators and cars, but nondurables such as cigarettes and apparel. In
addition to new orders, analysts monitor unfilled orders, an indicator of
the backlog in production. Shipments reveal current sales. Inventories
give a handle on the strength of current and future production. All in
all, this report tells investors what to expect from the manufacturing
sector, a major component of the economy and therefore a major influence
on their investments.
Wednesday November
05th
Bank Reserve Settlement
Definition
A two-week period that ends every other Wednesday during which commercial
banks must meet reserve requirements stipulated by the Federal Reserve.
Why Do
Investors Care?
Sometimes banks are scrambling to meet their required reserve amount on
Wednesday. If banks are having problems meeting reserve requirements, the
federal funds rate market will feel the brunt of it since the federal
funds rate is the rate which banks charge each other for the use of
overnight funds. Usually, small regional banks have more than ample
funds, while large money center banks are the ones in need of the funds
because they loan their funds more extensively. Most of the time, small
regional banks will lend overnight funds to large money center banks.
When there is little liquidity in the banking system, the federal funds
rate can shoot up sharply on a Wednesday because the money center banks
are willing to pay whatever it takes in order that their reserves are
meeting the Fed's requirements.
Oddly enough, liquidity trends can change over the course of the day.
It isn't unusual to see the fed funds rate shoot up early in the day, but
drop just as much near the end of the day. Consequently, since many short
term rates are tied to the fed funds rate, short-term dated instruments
such as 7-day CDs or even 30 and 60 day CDs can see their rates vary
sharply on bank reserve settlement Wednesday.
Incidentally, not having funds to meet reserve requirements is usually
not the sign of a bank in financial trouble. However, it is a sign of
poor reserve management on the part of the bank since it covers prior
week's reserves.
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.
Challenger Job-Cut Report
7:30ET
Definition
A monthly report on the number of announced corporate layoffs. It is not
adjusted for seasonal variations. The report indicates trends in the
labor market.
Why Do
Investors Care?
These statistics on layoffs help us gauge the strength of the job market.
Fewer layoffs suggests more people have jobs.
Every job comes with an income, which gives a household spending power.
Spending greases the wheels of the economy and keeps it growing, so the
stronger the job market, the healthier the economy.
There's a downside to it, though, which is relevant these days. When few
people are looking for jobs, businesses can have a tough time finding new
workers. They might have to pay overtime 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.
The Challenger report breaks down the layoffs into industries, which
provides insight to trends that likely will effect
stock prices in specific industries. Note that not all announced
layoffs culminate in actual layoffs.
ADP Employment Report
8:15 ET
Definition
The ADP national employment report is computed from a subset of ADP
records that in the last six months of 2006, represented approximately
364,000 U.S. business clients and approximately 22 million U.S. employees
working in all private industrial sectors. The data are collected for pay
periods that can be interpolated to include the week of the 12th of each
month, and processed with statistical methodologies similar to those used
by the U.S. Bureau of Labor Statistics to compute employment from its
monthly survey of establishments. ADP contracted with Macroeconomic
Advisors to compute a monthly report that would ultimately help to
predict monthly nonfarm payrolls from the
Bureau of Labor Statistic's employment situation. The ADP report only
covers private (excluding government) payrolls at this time. (Automatic
Data Processing (ADP)/Macroeconomic Advisers)
Why Do
Investors Care?
Market players have become accustomed to the excitement on employment
Friday and realize the rich detail of the monthly employment situation
can help set the tone for the entire month. While economists have
certainly improved their nonfarm payroll
forecasts over the years, it is not unusual to see surprises on
employment Friday. To that end, the new ADP national employment report
can help improve the payroll forecast by providing information in advance
of the employment report.
The employment statistics also provide insight on wage trends, and wage
inflation is high on the list of enemies for the Federal Reserve. Fed
officials constantly monitor this data watching for even the smallest
signs of potential inflationary pressures, even when economic conditions
are soggy. If inflation is under control, it is easier for the Fed to
maintain a more accommodative monetary policy. If inflation is a problem,
the Fed is limited in providing economic stimulus. Initially, the ADP
national employment report will not have wage information, but their goal
is provide wage information, along with industry and regional information
as well.
Nonetheless, by tracking jobs, investors can sense the degree of
tightness in the job market. If wage inflation threatens, it's a good bet
that interest rates will rise; bond and stock prices will fall. No doubt
that the only investors in a good mood will be the ones who watched the
employment report and adjusted their portfolios to anticipate these
events. In contrast, when job growth is slow or negative, then interest
rates are likely to decline - boosting up bond and stock prices in the
process.
ISM Non-Mfg Survey
10:00ET
Definition
The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across
the United States, including agriculture, mining, construction,
transportation, communications, wholesale trade and retail trade.
Beginning with the January 2008 report, a new composite index was made
public and is now the headline number. It is considered an indicator of
the overall economic conditions for the non-manufacturing sector and
consists of four equally weighted indexes: business activity, new orders,
employment, and supplier deliveries.
Why
Do Investors Care?
Investors need to keep their fingers on the pulse of the economy because
it dictates how various types of investments will perform. By tracking
economic data like the ISM non-manufacturing survey's business activity
index, investors will know what the economic backdrop is for the various
markets. The stock market likes to see healthy economic growth because
that translates to higher corporate profits. The bond market prefers less
rapid growth and is extremely sensitive to whether the economy is growing
too quickly-and causing potential inflationary pressures.
The ISM manufacturing index has a long history - dating to the 1940s.
This new report (beginning in 1998) was originally not adjusted for
seasonal variation, but the ISM has since established seasonally adjusted
figures for several of the ISM non-manufacturing components (including the
business activity index) since 2002 and a composite index starting in
2008. As a result, the ISM non-manufacturing survey has garnered more
attention and is almost as widely followed by financial market
participants as its manufacturing cousin.
EIA Petroleum
Status Report
10:35 ET
Definition
The Energy Information
Administration (EIA) provides weekly information on petroleum inventories
in the U.S., whether produced here or abroad. The level of inventories
helps determine prices for petroleum products.
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 U.S. consumer prices have moderated
whenever oil prices have fallen, but have accelerated when oil prices
have risen.
Thursday November
06th
Chain Store Sales
Definition
Monthly sales volumes from individual department, chain, discount, and
apparel stores are usually reported on the first Thursday of each month.
Chain store sales correspond with roughly 10 percent of retail sales. Chain
store sales are an indicator of retail sales and consumer spending
trends.
Why Do
Investors Care?
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. 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. Spending
at major retail chains did slow down in tandem with the equity market in
2000 and 2001 and again in 2003, but strengthened in 2004 and 2005.
Chain store sales not only give you a sense of the big picture, but also
the trends among individual retailers and different store categories.
Perhaps the discount chains such as Target and Wal-Mart are doing well,
but the high-end department stores such as Tiffany's are lagging. Maybe
apparel specialty retailers are showing exceptional growth. These trends
from the monthly chain store data can help you spot specific investment
opportunities, without having to wait for the quarterly or annual
reports.
Just a few words of caution. Sales are reported as a change from the same
month, a year ago. It is important to know how strong sales actually were
a year ago to make sense of this year's sales. In addition, sales are
usually reported for "comparable stores" in case of company
mergers.
Monster Employment Index
06:00ET
Definition
Monster collects job postings from 1,500 web sites (including
Monster.com) and creates an index of job availability, akin to The
Conference Board's help wanted index. The difference between the two is
that one collects help wanted advertising from newspapers and the other
collects from online posting. The Monster index is not seasonally
adjusted.
Why Do Investors Care?
In addition to providing insight on the general strength of the economy,
this report gives a sense of how many jobs employers are trying to fill.
If that number is relatively high, it could mean there is a shortage of
available workers and companies may have to offer higher wages to attract
them. This leads to wage inflation, which is bad news for the stock and
bond markets. Federal Reserve officials are always worried about the
potential for inflationary pressures.
When the employment index measuring job availability is falling, this
bodes well for the bond market because it implies a drop in labor demand
and perhaps an economic downturn. While the Fed worries about inflation,
they also are concerned about rising unemployment. A rising jobless rate
can mean a more accommodative monetary policy.
The equity market prefers to see healthy economic growth and thus would
rather see increases in the employment index. An increase in job demand
means that consumers will have more money to spend on goods and services
- and this ultimately affects profits.
BOE Announcement
07:00ET
Definition
The Bank of England Monetary Policy Committee consists of nine members.
The Committee meets monthly for two days, usually during the first week
in the month in order to determine the near-term direction of monetary
policy. Changes in monetary policy are announced immediately after the
meetings, but no details are available until the minutes are published
two weeks later.
Why Do
Investors Care?
The Bank of England determines interest rate policy at their monetary
policy meetings. The MPC is composed of the Governor, two Deputy
Governors, two Bank Executive Directors, and four experts appointed by
the Chancellor of the Exchequer. The MPC meets monthly (usually the first
Wednesday and Thursday of the month) to determine interest rate policy.
Unlike the Federal Reserve, Bank of Japan, or the European Central Bank,
the Bank of England has an established fixed inflation target of 2
percent. The Bank uses the consumer price index to measure inflation.
As in the United States,
market participants speculate about the possibility of an interest rate
change at these meetings. If the outcome is different from expectations,
the impact on British markets -- and to some extent in Europe
-- can be dramatic and far-reaching. The interest rate set by the Bank of
England, serves as a benchmark for all other rates. A change in the rate
translates directly through to all other interest rates from gilts (fixed
interest government securities named after the paper on which they were
once printed) to mortgage loans.
The level of interest rates affects the economy. Higher interest rates
tend to slow economic activity; lower interest rates stimulate economic
activity. Either way, interest rates influence the sales environment. In
the consumer sector, few homes or cars will be purchased when interest
rates rise. Furthermore, interest rate costs are a significant factor for
many businesses, particularly for companies with high debt loads or who
have to finance high inventory levels. This interest cost has a direct
impact on corporate profits. The bottom line is that higher interest
rates are bearish for the stock market, while lower interest rates are
bullish.
ECB Announcement
07:45ET
Definition
The European Central Bank Governing Council consists of 18 members. The
Committee meets twice a month. The first monthly meeting of the month is
devoted to monetary policy. Changes in monetary policy if any are
announced immediately after the meetings. A press conference is held
about 45 minutes after the meeting ends. A statement is read concerning
their action -- or lack of it -- followed by a question and answer
period. The ECB does not publish any minutes for its meetings.
Why Do
Investors Care?
The European Central Bank determines interest rate policy at their
Governing Council meetings. The Council is composed of the six members of
the Executive Council and 12 presidents of member central banks (Bank of
France, Bundesbank, etc). The Governing Council
meets twice monthly (usually the first and third Thursdays of the month).
Monetary policy issues are generally discussed only at the first meeting
of the month. The European Central Bank has an established inflation
ceiling of 2 percent. The ECB's measure of
inflation is the harmonized index of consumer prices (HICP). Decisions
are reached by consensus. No vote is taken.
As in the United States,
European market participants speculate about the possibility of an
interest rate change at these meetings. If the outcome is different from
expectations, the impact on European markets can be dramatic and
far-reaching. The interest rates set by the ECB serves as a benchmark for
all other rates in the eurozone.
The level of interest rates affects the economy. Higher interest rates
tend to slow economic activity; lower interest rates stimulate economic
activity. Either way, interest rates influence the sales environment. In
the consumer sector, few homes or cars will be purchased when interest
rates rise. Furthermore, interest rate costs are a significant factor for
many businesses, particularly for companies with high debt loads or who
have to finance high inventory levels. This interest cost has a direct
impact on corporate profits. The bottom line is that higher interest
rates are bearish for the stock market, while lower interest rates are
bullish.
Jobless
Claims
08:30ET
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.
Productivity and Costs
8:30ET
Definition
Productivity measures the growth of labor efficiency in producing the
economy's goods and services. Unit labor costs reflect the labor costs of
producing each unit of output. Both are followed as indicators of future
inflationary trends.
Why Do
Investors Care?
Productivity growth is critical because it allows for higher wages and
faster economic growth without inflationary consequences. This is a hot
topic these days with the economy so strong, the labor market so tight,
yet inflation so well-behaved.
Some Wall Street experts assert that dramatic productivity advances
are allowing the economy to sustain a much faster pace of growth than
previously thought possible. Fed chairman Greenspan has expressed
skepticism about those assertions, however. In either case, the
productivity data give investors important clues on how stocks and bonds
can be expected to perform, and the market reactions to these releases
show the true importance of productivity growth.
EIA Natural Gas Report
10:35
ET
Definition
The Energy Information Administration (EIA) provides weekly information
on natural gas stocks in underground storage for the U.S.,
and three regions of the country. The level of
inventories help determine prices for natural gas products.
Why Do
Investors Care?
Natural gas 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 natural gas. 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 natural
gas may not be as strong. If inventories are rising, this may push down
oil prices.
Friday November 7th
Employment Situation
08:30 ET
Consensus NonFarm Payroll
Consensus Average Hourly Earnings
Consensus Unemployment Rate – Level
Consensus Average Workweek – Level
Definition
The employment situation is a set of labor market indicators. The
unemployment rate measures the number of unemployed as a percentage of
the labor force. Nonfarm payroll employment
counts the number of paid employees working part-time or full-time in the
nation's business and government establishments. The average workweek
reflects the number of hours worked in the nonfarm
sector. Average hourly earnings reveal the basic hourly rate for major industries
as indicated in nonfarm payrolls. (Bureau of
Labor Statistics, U.S.
Department of Labor)
Why Do Investors Care?
If ever there was an economic report that can move the markets, this is
it! The anticipation on Wall Street each month is palpable, the reactions
are dramatic, and the information for investors is invaluable. By digging
just a little deeper than the headline unemployment rate, investors can
take more strategic control of their portfolio and even take advantage of
unique investment opportunities that often arise in the days surrounding
this report.
The employment data give the most comprehensive report on how many people
are looking for jobs, how many have them, what they're getting paid and
how many hours they are working. These numbers are the best way to gauge
the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. This
sector data can go a long way in helping investors determine in which
economic sectors they intend to invest.
The employment statistics also provide insight on wage trends, and wage
inflation is high on the list of enemies for the Federal Reserve. Fed
officials constantly monitor this data watching for even the smallest
signs of potential inflationary pressures, even when economic conditions
are soggy. If inflation is under control, it is easier for the Fed to
maintain a more accommodative monetary policy. If inflation is a problem,
the Fed is limited in providing economic stimulus.
By tracking the jobs data, investors can sense the degree of tightness in
the job market. If wage inflation threatens, it's a good bet that
interest rates will rise; bond and stock prices will fall. No doubt that
the only investors in a good mood will be the ones who watched the employment
report and adjusted their portfolios to anticipate these events. In
contrast, when job growth is slow or negative, then interest rates are
likely to decline - boosting up bond and stock prices in the process.
Pending Home Sales Index
10:00ET
Consensus -3%
Definition
TThe National Association of Realtors developed the pending home sales
index as a leading indicator of housing activity. As such, it is a
leading indicator of existing home sales, not new home sales. A pending
sale is one in which a contract was signed, but not yet closed. It
usually takes four to six weeks to close a contracted sale.
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 the pending
home sales index which measures 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
Wholesale Trade
10:00ET
Definition
Wholesale trade measures the dollar value of sales made and inventories
held by merchant wholesalers. It is a component of business sales and
inventories.
Why Do
Investors Care?
Investors need to monitor the economy closely because it usually dictates
how various types of investments will perform. The stock market likes to
see healthy economic growth because that translates to higher corporate
profits. The bond market prefers a slower rate of growth that won't lead
to inflationary pressures.
Wholesale sales and inventory data give investors a chance to look
below the surface of the visible consumer economy. Activity at the
wholesale level can be a precursor for consumer trends. In particular, by
looking at the ratio of inventories to sales, investors can see how fast
production will grow in coming months. For example, if inventory growth
lags sales growth, then manufacturers will need to boost production lest
product shortages occur. On the other hand, if unintended inventory
accumulation occurs (i.e. sales did not meet expectations), then
production will probably have to slow while those inventories are worked
down. In this manner, the inventory data provide a valuable
forward-looking tool for tracking the economy.
Consumer Credit
15:00 ET
Definition
The dollar value of consumer installment credit outstanding. Changes in
consumer credit indicate the state of consumer finances and portend
future spending patterns.
Why Do
Investors Care?
Growth in consumer credit can hold positive or negative implications for
the economy and markets. Economic activity is stimulated when consumers
borrow within their means to buy cars and other major purchases. On the
other hand, if consumers pile up too much debt relative to their income
levels, they may have to stop spending on new goods and services just to
pay off old debts. That could put a big dent in economic growth.
The demand for credit also has a direct bearing on interest rates. If
the demand to borrow money exceeds the supply of willing lenders,
interest rates rise. If credit demand falls and many willing lenders are
fighting for customers, they may offer lower interest rates to attract
business.
Financial market players focus less attention on this indicator
because it is reported with a long lag relative to other consumer
information. Long term investors who do pay attention to this report will
have a greater understanding of consumer spending ability. This will give
them a lead on investment alternatives.
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,
Eric LeRiche
http://www.InvestorRules.com
|
