Stocks Fall for 3rd Consecutive Day on Weak Housing Data

By Chris Puplava, August 23, 2006

The markets initially opened up on the day but reversed course after a greater than expected decline in existing home sales was released. The National Association of Realtors (NAR) released their monthly existing home sales report today for July, which showed sales of 6.33 million units, down 4.1% from June and down nearly 12% from last year's levels.

Figure 1. Year/Year % Change

Source: Dismal Scientist

The decline in existing home sales was broad based as all four regions showed decreases in July relative to June, with the greatest decline seen in the Midwest, down 5.9% from June, and the smallest decline seen in the South, down 1.2% from June. Weakening sales lead to an increase in the months of supply on the market, rising to 7.3 months, the highest levels seen since 1993. Weakening sales is also reining in house price appreciation with the single-family home price rising 1.5% on a year-over-year (YOY) basis, a far cry from the 12% YOY rate averaged in 2005. The slow down in housing is gaining momentum, with home equity loans dropping for ten straight weeks now, which will weigh on consumer spending.

Figure 2.

Source: Asha Bangalore, The Northern Trust Company
Daily Global Commentary 08.21.2006

The current economic expansion is more closely tied to housing than previous expansions when viewing the importance of home equity extraction on consumer spending to fuel GDP, as well as the proportion of job growth concentrated in the housing industry. Not only will a slow down in housing lead to decreased consumer spending vis-à-vis mortgage equity extraction, but it will also lead to a loss in job growth seen from the housing sector that will weigh on overall job growth which has been weak compared to previous expansions. This was seen in the June employment report that I commented on previously (see "Sixth Largest Trade Deficit in History Seen in May").

Figure 3. Job Growth: Total and Construction %

Figure 4. Construction YOY Job Growth

Source: Asha Bangalore, Paul Kasriel, The Northern Trust Company
U.S. Economic Outlook: August, 2006

Further signs of a weakening economy were seen last week as Ford announced last Friday that it would cut its 4th quarter production by 21% (168,000 units), temporarily shutting down plants in the U.S. and Canada. The company also announced that 3rd quarter production will be 20,000 units below its previous announcement and 78,000 units below last year. This will bring Ford's production to 9% lower than last year at just over 3 million units.

Chairman and Chief Executive Bill Ford said in a note to employees, "We know this decision will have a dramatic impact on our employees, as well as our suppliers," but that "This is, however, the right call for our customers, our dealers and our long-term future."

The Wall Street Journal, citing unidentified sources, reported Friday that Ford is considering shutting down more factories and cutting salaried jobs and benefits by 10% to 30%. Standard & Poor's Ratings Services and Moody's Investors Service both put Ford's credit ratings on review for possible downgrades further into junk territory.

Also last week, Boeing announced their plan to shut down C-17 cargo plane production at their Long Beach plant in California as Congress did not fund the new purchases. This decision is likely to affect thousands of Boeing workers and companies that supply parts for the C-17, with 5,500 Boeing employees in California, Missouri, Georgia and Arizona directly tied to the C-17 program. The decision will first hit the 25,000 employees of the nearly 700 companies in 42 states that supply parts and systems for the plane, Boeing said.

Today's Market

The negative housing sales report weighed heavily on housing related industries and those tied closely to the economy, with the biggest industry decliners on the day Manufactured Housing (-2.95%), Recreational Goods (-2.65%), Residential Construction (-2.42%), Building Materials Wholesale (-2.34%) and Metal Fabrication (-2.26%).

A better than expected oil inventory report today showed crude oil inventories falling 0.6 million barrels last week, half of the 1.2 million barrel draw down expected, with gasoline inventories actually rising 0.4 million against expectations of a 1.9 million barrel draw down, and refinery capacity utilization rose to 92.8%.

The petroleum report released today lead to a decline in gasoline and crude oil prices, with the biggest decline seen in gasoline, which fell 8.38 cents to $1.8555 on the NYMEX, and West Texas Intermediate Crude (WTIC) fell $1.40 to settle at $71.70 on the NYMEX.

Advancing issues represented 30% and 31% for the NYSE and NASDAQ respectively, with up volume representing 30% and 38% of total volume on the NYSE and NASDAQ.

All of the broad market indices were down, with the DJIA posting a loss of 41.94 points to close at 11,297.90. The S&P 500 was down 5.83 points to close at 1292.99, and the NASDAQ was also down, falling 15.36 points to close at 2134.66. The 10-year Treasury note yield rose to 4.813%, and the dollar index posted a loss on the day, falling 0.04 points to close at 85.13.

Overseas markets were all down with Latin markets showing the greatest losses. Brazil's Bovespa and Mexico's Bolsa Index were both down, falling 3.18 and 1.16% respectively. Japan's Nikkei stock average fell 0.11%. London's FTSE 100 fell 0.72%, Germany's DAX index fell 0.74%, and France's CAC-40 declined 0.89%.

Only one sector put in a positive performance as the decline today was broad based. The only positive performance came from health care (+0.02%) followed by slight losses in telecommunications (-0.04%), financials (-0.11%), and consumer staples (-0.16%). The greatest losses came from energy, utilities, and consumer discretionary, posting losses of 1.44%, 1.01, and 0.83% respectively.

Have a pleasant weekend,

Chris Puplava

Contact Information

Christopher M. Puplava
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