Dow Heads for Resistance
Market Commentary
By WSS Research Team

By Carlos Guillen

Equity markets are again attempting to make a move to the upside, with the Dow Jones Industrial Average heading for resistance at 13,300, a level that it has failed to break through for several instances. The economic data out today was at best mixed, but the possibility that China will ramp up monetary easing efforts made the difference to put equities in the green.

Initial claims data appears to be going nowhere fast. According to the Labor Department, initial claims during the week ended August 11 totaled 366,000, increasing from the 364,000 revised figure reported for the prior week and landing lower than the Street's estimate of 368,000. Initial claims numbers appear to be flattening out, and there is still no clear direction to the trend. The jobless rate, which was 8.3 percent in July, 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 downgraded, and with jobs creation stalling, the risk is increasing that economic growth may also stall this year.

Part of the rather encouraging data today was that housing permits increased during July, rising to 812,000 from the 760,000 level reached in June and landing above the Street's consensus of 770,000. Home builders appear to be more confident that the supply demand dynamic for new homes is improving; as such, they requested more permits to build homes and apartments, giving markets an indication that the housing market is continuing to recover. However, housing starts of 746,000 in July did not meet the Street's estimate of 763,000, declining 1.1 percent month to month: more on this below.

Perhaps most disappointing today was that manufacturing in the Philadelphia region continued to decline, adding to the negative data that we received yesterday from manufacturing in the New York area that contracted at a faster pace than anticipated. The Philadelphia Fed index declined to minus 7.1 in August from the minus 12.9 posted in the prior month, landing below the Street's consensus of minus 5.0. Given that a level below zero indicates an economic contraction, this represents the fourth consecutive month of economic contraction in the region covering eastern Pennsylvania, southern New Jersey, and Delaware. It is quite clear that the repercussions of the global economic slowdown are attenuating factories' activity. At the moment there are very few indications that this trend may reverse significantly.

So the housing sector is slowly getting better but is still nothing to feel invigorated about, as the still tough jobs situation is going nowhere and the manufacturing sector is providing indications of slowing economic growth here at home. Of course, stocks are in the green today as Chinese Premier Wen Jiabao said easing inflation allows more room to adjust monetary policy, hinting once again at possible monetary easing in the region.

Mixed Construction Data Shows Optimism
By David Urani

Yesterday we made note of the sky-high homebuilder confidence reading that showed builders in their best mood since 2007. Well, it looks like they're keen to put their money where their mouth is with housing construction data coming in a bit mixed, but overall positive today. The headline reading of housing starts actually came in slightly soft at 746k annually for July versus the 750k consensus, and that was down from 760k in June. However, it was still just modestly off of June, which was the highest since October 2008.

It got more positive when one looks at permits, which at 812k were up 6.8% month to month, and up 29.5% year over year. This was the highest reading for permits since August 2008 and indicates that builders are still looking to snap up land and set themselves up for expansion. In the past, upticks in permits have preceded starts so the prospect of increased construction remains, even if starts lulled a little this month. Meanwhile, completions were at a 2-year high and suggest more inventory may be hitting the market for sales.

There remains somewhat of a question of whether homebuilders are getting ahead of themselves considering optimism and construction is at these multi-year highs. However, we should also note that existing home sales have failed to make a comparable spike higher. In fact, there are shortages of homes in many areas. Thus, we aren't too afraid that the housing market is experiencing a re-bubble. Existing homes represent the vast majority of overall home sales, and have remained relatively flat for the past couple of years. The boost in construction, and in turn builder confidence, we believe largely comes from a genuine need for new inventory, contrary to 2010 when there was a supply glut and builders froze activity (see below).

The Dow Jones US Home Construction Index of related stocks is up 3% today.

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