Better than Expected Earnings Buoy Markets
Market Commentary
By WSS Research Team

By Carlos Guillen

In a day when the economic data would have normally put equity markets in the red, investors have managed to push the numbers aside and focus on the better than expected results that a number of companies have recently delivered. The market continues to demonstrate resilience, and it is quite compelling, but the macroeconomic fundamentals are just not very encouraging at all.

The trading session got started with depressing Initial Claims data that were worse than expected and just disturbing. According to the Labor Department, initial claims during the week ended July 14 totaled 386,000, increasing from the 352,000 revised figure reported for the prior week and landing above the Street's estimate of 365,000. Initial claims numbers had ticked encouragingly lower in the prior week, but now it appears that the number of firings has sharply reversed. Given the current higher than normal unemployment rate and the less than expected nonfarm gains, the initial claims data is indicating the employment backdrop will get worse. The jobless rate, which was 8.2 percent in June, has been stuck above 8 percent since February 2009. At the moment the economy is counting on consumption to give it the little bit of growth that many on the Street have already been downgrading, and with jobs creation stalling, the risk is increasing that economic growth may also stall this year.

Another report showed that the index of leading indicators worsened after improving in the prior month. The Conference Board announced that its index of Leading Economic Indicators decreased by 0.3 percent in June, landing below the Street's consensus estimate of a 0.2 percent decline. The results were not encouraging as there were less positive components than in the prior month. Of the ten components that make up the leading indicator, only 4 were positive in June compared to 7 positive components in May. On the positive side, the leading economic index increased 1.0 percent in the prior six months, which is a nice improvement from the 0.5 percent growth that occurred in the six month before that. In essence, the data is still signaling that the economy will likely continue to expand through this year, but slower than prior indications.

Manufacturing data in the Philadelphia region added to the signs of slower economic growth for the third consecutive month as new orders and employment declined. The Federal Reserve Bank of Philadelphia's general economic index rose to minus 12.9 in July from minus 16.6 in the prior month, landing below the Street's consensus of minus 10. Given that a level below zero indicates an economic contraction, this represent the third consecutive month of economic contraction in the region covering eastern Pennsylvania, southern New Jersey, and Delaware.

In all, the macroeconomic gauges are just not encouraging at all, but equities continue to climb. The hope continues to be that the Fed will step in with further monetary easing if the economy gets even worse, and this will surely prop stocks higher.

Feel-Good Housing Market Trips Up
By David Urani

Existing home sales were quite the disappointment today when they came in at a 4.47 million annual rate in June, down 5.4% from May and below the 4.65 million consensus. After revisions, May turned out to be flat, so this means the existing market was soft for two months running.

One trend that's been showing up in recent months has been a shortage of inventory in some places, and that may be holding sales back to an extent. That's especially true in the West, including parts of California. Looking at the non-adjusted figures, the West was flat while the other regions actually increased, so the low inventory observations may hold true in this case.

Yet, looking at the broader picture, seasonally adjusted sales were down in all regions which suggests there's more at play. As I've been warning, it seems demand has finally been dented by the overall macroeconomic panic. That being said, on a non-adjusted basis sales were up overall (+3.1%) which is typical this time of year. But, considering June is usually a good month and there was a whiff of slowdown the increase was smaller than usual.

The way I see it, home sales are still holding up but are not currently impervious to the macro-picture as some might have been thinking. We can still take solace from the fact that non-adjusted sales continued to be higher than the previous month, and that median and average prices were reportedly stronger while inventory was down 3.2%.

Homebuilding stocks are taking a hit today on the existing sales news as some measure of exuberance over the perceived housing rebound is rubbing off. But nevertheless, as I've stated previously, I think new home sales can be a little stronger than existing considering the aforementioned shortages of supply in markets like mid-priced homes in California, natural gas-boom areas like North Dakota and Pennsylvania, and various other places like D.C.

Yet, what may be hitting homebuilders as much as the existing sales report is quarterly results from NVR (ticker: NVR), which missed on revenue due to an increased order cancellation rate to 16.3% from 12.5% year over year. Hopefully this isn't a widespread trend, we'll see soon from other builders' reports. Perhaps the latest economic malaise is starting to give some buyers cold feet; that would certainly be a natural reaction. I think the housing rebound can continue over time as the supply/demand picture continues to show improvement but it makes sense that a faltering economy like this would rein in the excitement.

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