Eurozone Instability Weighed on the Markets

Markets

For the week of Monday, September 24, 2012 through Friday, September, 28, 2012:

• Standard & Poor’s 500 Index: -1.33%
• Dow Jones Industrial Average: -1.05%
• NASDAQ Composite: -2.00%

The markets began a pull back this week beginning on Monday when we received weak German economic data. Discord over plans for a European banking union brought out sellers. Technology shares slumped while defensive sectors, such as, utilities and consumer staples rose. On Tuesday, the markets tumbled again after a Fed official criticized recent stimulus efforts. Investors likely also reacted to Caterpillar, Inc. (NYSE: CAT) lowering its long-term profit forecast. Seen as a bellwether for the market, the heavy-machinery maker’s outlook was regarded as an indicator of weak global economic health.  Technology and financial stocks led declines across all 10 of the S&P sectors.

Wednesday brought more downward movement as stocks fell for a third straight day, with energy and technology shares posting the steepest declines. Investors were likely spooked by eurozone instability and a slightly disappointing report on the U.S. housing market.

Stocks rose on Thursday amid bets on China’s economic stimulus measures and on news that American jobless claims fell more than forecast last week. Friday brought another down day, erasing almost all of Thursday’s gains.

Economic Data

• Chain Store Sales Snapshot:
  • The ICSC chain store sales index rose 0.6%, with improved traffic at discounters and specialty apparel stores.
  • Year-over-year, growth improved to 2.9%, as the index fell slightly compared to the same week last year.
• Case-Shiller Home Price Index:
  • The 10-city and 20-city composites increased 0.6% and 1.2%, respectively, from last year.
  • On a not seasonally adjusted month-to-month basis, the 10-city index is up 1.5%, while the 20-city index is up 1.6%.
  • Gains for both the 10- and 20-city indexes are up 0.4%, after the seasonal adjustment, slightly weaker than the non-adjusted rate.
• Conference Board Consumer Confidence:
  • The Conference Board index of consumer confidence reached its highest level since February jumping to 70.3.
  • The rise was aided by the expectations segment, and present conditions had an improved outlook as well.
  • The strong bounce back in confidence is encouraging for the consumer outlook after last month’s decline raised some red flags.
• New Home Sales:
  • After July’s upward revision, new single-family home sales declined 0.3% month-to-month for August to an annualized rate of 373,000 units.
  • The report continues to show the housing market is slowly reviving.
    • Home sales are up 28% from August 2011, and the months of supply are low and stable at 4.5 months.
    • The median sale price of new homes in August was $256,900, up approximately 17% over the year.
• Jobless Claims:
  • Initial claims for unemployment insurance fell 26,000 to 359,000.
  • Some of the decrease, however, is a result of temporary business shutdowns in Puerto Rico and some southern states in the wake of Hurricane Isaac.
  • The four-week moving average fell by 4,500 to 374,000.
  • This the first decline in the four-week moving average since early August.
• Durable Goods:
  • New orders for durable manufactured goods fell 13.2% in August, erasing July’s slight gain.
  • Excluding transportation, new orders fell 1.6%.
    • Total shipments fell 3.0%
  • Inventories were up 0.6%.
  • However, the details of the report were better than the headline number:
    • Core capital orders rose 1.1%
    • Shipments rose 1.7%.
• Gross Domestic Product:
  • Real GDP second quarter growth slowed to a disappointing 1.3 %, down from 2% in the first quarter.
    • This was a downward revised from 1.5%, initially reported in the advance release and from 1.7% in the second release.
  • The slowing came primarily from a decline in durable goods consumption and fixed investment.
    • Farm inventories, consumer service spending, and exports led the downward revision.
    • Corporate profits added 1.1% (not annualized) after a 2.7% decline in the first quarter.
    • Well below growth in the prior two quarters, domestic income rose only 0.2%.

Earnings

• Lennar Corp. (NYSE: LEN)
  • More signs of a recovering housing market are evident in Lennar Corps.’ higher earnings.
    • Sales of existing homes have been strong in recent months.
    • Even in hard-hit areas, including Las Vegas and Phoenix, consumers feel comfortable enough to buy.
  • Once saddled with bloated inventory and minuscule demand, the new-home market is also healing.
  • Lennar Corp. reported a profit of $87.1 million, or $0.40 per share, up from $20.7 million, or $0.11 per share a year earlier.
    • A $12.8 million income-tax benefit due to the reversal of deferred tax assets also helped the quarter’s report.
    • Revenue was up 34% to $1.1 billion.
    • Gross margin on home sales improved to 23.2% from 21.2%.
  • As an indication of future business, the company’s backlog grew 79% to 4,513 homes.
• Paychex Inc. (NASDAQ: PAYX)
  • Paychex Inc. reported a net income increase of 3%, citing an improving client base, payroll check business, and higher client retention.
  • The company reported earnings of $153.1 million, or $0.42 per share, compared to $148.9 million, or $0.41 per share, in the same quarter last year.
  • Revenue increased 3% to $578.2 million, just shy of analysts’ expectations of $584.3 million.

Interest Rates

• Treasury prices rose, as investors continued to seek refuge from Europe’s sovereign-debt crisis.
  • The two-year Treasury rate held flat at 0.26%.
  • The five-year Treasury rate fell five basis points to 0.64%.
  • The 10-year Treasury rate slid 12 basis points to 1.64%, falling below the 6-month average.
  • The 30-year Treasury yield fell 13 basis points to 2.81%, which is well below the 3% it touched earlier this month.

Disclosures

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