Update 1:05 p.m.:
The bond market was the active market today. The Treasury’s 5-year auction provided a spark no one was expecting. (see previous update) This led to some heavy buying in treasuries, but a lot of the buying was likely coming from speculative accounts who had been short treasuries. At the beginning of the week expectations were that the rising stock market and the Treasury auctions would drive yields higher. Traders seemed to position for that. The surprise in the auction today caused a scramble to cover those positions. The 2-year closed at .61%, the 5-year rallied by 14/32s to yield 1.70%, and the 10-year gained 15/32s to yield 3.00%. For the last few weeks, the 30-year bond was the best performer, but that issue closed up only 8/32 to yield 4.07%.
The stock market spent another very dull day in a narrow range. Very briefly in the last hour the Dow sunk to -75, but the selling abated as quickly as it began. The Dow closed down 40 points. The Dow performed better than the other major indexes. The S&P decline by .7%, and the NASDAQ lost over 1%. Equity bulls have been disappointed that stocks have not been able to gain and maintain momentum this week, but that’s no reason to throw in the towel just yet.
The only economic news tomorrow will come from Weekly Jobless Claims. Economists are looking for something close to last week’s number. The guess is that claims will be 460k.
Update 11:30 a.m.:
The Fed's Beige Book didn't have any significant headlines. The report noted that the economy is continuing to grow but some districts reported that growth was slowing. Commercial real estate was noted as struggling.
Dealers were fearful of the Treasury's 5-year note auction today as the last two had been very poorly received. Not so this time. The Treasury received bids three times the amount allotted, foreign interest was high, and the yield came in lower than expected. This lifted bond prices, especially in the 5-year sector. The 2-year is .62%, the 5-year is higher by 12/32s to yield 1.72%, and the 10-year is now higher by 11/32s to yield 3.01%. Much of the activity can be ascribed to short-covering.
The stock market remains quite dull. The Dow has traded as low as -50 but is now down 35 points. Volume is light.
Update 7:30 a.m.:
The first hour of trading has been decidedly quiet. Stocks opened slightly lower, traded to +10 on the Dow, and the index is now down 35 points. Volume is very light.
Bond prices rallied on the Durable Goods Orders number, but that rally faded quickly leaving prices close to unchanged. The 2-year is .64%, the 5-year 1.77%, and the 10-year is clinging to a 2/32 gain to yield 3.04%.
Morning Comment:
The stock market ended yesterday very close to unchanged on the day, and it appears stocks will open down only slightly this morning. Dow futures are down 29 points in pre-opening trading. Futures were unchanged until the release of June Durable Goods. Orders were expected to increase by 1%, but new orders fell by 1% instead. Ex-transportation orders fell by .6% vs. the expected gain of .4%. These numbers were clearly weak, but this volatile series is not one that receives much attention or has lasting impact. Markets in Europe are quiet.
Bond prices are slightly higher this morning after the selloff yesterday. The 2-year is .64%, the 5-year 1.76%, and the 10-year is higher by 8/32s to yield 3.02%. The Treasury will auction a new 5-year note today. The last auction went very poorly, and dealers are wary as this auction approaches.
The Fed will release its latest version of the Beige Book, a report on economic conditions from the 12 regional banks. This one should get some attention after Bernanke’s description of the economic outlook as “unusually uncertain.”
The non-financial companies of the S&P 500 have reported cash and near-cash investments at an all-time record of $837 billion. Downsizing and the earnings recovery have led to the massing of this huge pile of cash. It’s also been recently reported that the confidence level of the CEOs of the top companies has soared at the same time consumer confidence has stayed at deep recession levels. Yet despite having confidence and piles of cash, these same CEOs have not increased their hiring plans. They have replaced some capital equipment, most notably making technology upgrades, but they have balked at hiring and expanding production or servicing facilities. Why?
There are probably a lot of reasons for this, but it starts with what they are really confident about. Although the latest confidence readings from businessmen was very high, the number is likely high due to that big pile of cash and the improvement in earnings. Their stocks (and bonuses) have been rewarded time and time again for cutting expenses and reporting earnings that “beat expectations” due to cost controls. So the CEOs are fat and happy the way things are. They only have to look at Amazon to fear even talking about spending money before they make it.
Amazon reported good earnings and revenues last week, but the stock got hammered when Amazon said it had ramped up spending on distribution facilities. Although this is the lifeblood for growth of Amazon, short-sighted analysts and traders made them pay. This lesson was not lost on other CEOs. What Wall Street does reward companies for spending that cash is when companies announce they will buy back their own stock – which is the most unproductive use of cash you can think of.
The situation of cash-happy companies is hopeful but troubling at the same time. It’s great that U.S. companies are in such great financial shape, but it’s troubling that the CEOs are not willing to spend for the future. Those business confidence readings are telling and misleading. Clearly, CEOs are confident in their companies own financial position, but they aren’t confident in the economic future of the country.
I’ll be back with updates.
Dwight Johnston
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