Markets Start the Year Off With Volatility
By Chris Puplava, January 3, 2007
The markets bolted out of the gates with the December release of the Institute for Supply Management's (ISM) manufacturing Purchasing Manager's Index (PMI).
The index posted a surprising rise back into expansionary territory (>50) by rising to 51.4 after falling to contractionary territory (<50) with a reading 49.5 in November. November marked the first time the PMI index fell below 50 since April of 2003 and the rise back into positive territory helped lift the markets in early morning trading.
Source: Institute for Supply Management
Further fueling a rise in the markets was a break-down in energy as crude oil sold off to start the year, falling below $58 a barrel with the continued warm weather in the eastern United States that prompted traders to sell energy commodities in anticipation of lower demand for heating fuels. In New York City the temperatures are in the 50s with the possibility for temperatures to reach in the lower 60s over the weekend. The mild weather pattern is explained below with figures and commentary from AccuWeather.com.
How about a round of golf? Thursday will certainly be warm enough throughout most of the East. Even way up a Caribou, Maine, where there is usually 2 feet of snow on the ground by now, the temperature will be ridiculously high. The extremely mild weather can be entirely attributed to the strength of the Pacific jet stream. It simply will not let any arctic based systems enter the game. Feast your eyes on the projected temperatures for Thursday. Sixties in the nation's capital and forties as far north as Montreal, Canada. Though wet weather will invade the East Thursday night and Friday, it will remain quite mild.
Here is an overview of North America Thursday showing the awesome extent of the current warm weather. January often has mild spells but not over such a broad area all at once. The split flow you see is the culprit. The northern jet, which transports frigid air masses, is way up there; this has allowed the Pacific branch to have complete control. Waves in this southern portion of the jet stream often bring somewhat colder air out of southern Canada, but the bitter stuff stays far away. The benefits of a pattern like this include no weather-related travel delays and a large savings on heating costs. Will it ever change? You better believe it will. The slide into real winter begins next week.
Brutal cold waves are a trait of January. They occur when the jet stream takes on a greater north-to south component. This is called a high amplitude pattern, which is able to dislodge bitter cold from arctic regions and transport it southward into the lower 48 states. This evolution is expected to occur throughout North America over the next two weeks. Get ready; winter is coming!
In other news, the Bureau of Census released construction spending for November, which decreased 0.2% and came in at $1.184 trillion, up 0.1% from November 2005.
Source: Moody's Dismal Scientist, Data: Bureau of Census
The decrease in November came from a 1.6% decline in private residential construction, which is down 11.1% over last year's levels. In stark contrast to private residential construction, private nonresidential construction increased 1.4% in November and is up 18% over last year's levels.
Source: Census Bureau
In other related housing news, the Mortgage Bankers Association of America (MBA) released their weekly applications survey which showed a rebound in the purchase and refinance indexes after the rather large decline in the week ending December 22. Overall, mortgage demand increased 3.6% with purchase applications rising 4.3% and refinance applications rising 2.2%. The purchase index is 3% lower from a year ago with the refinance index up 20% as more and more adjustable rate mortgages (ARM) reset.
Source: MBA: Weekly Mortgage Application Survey
The markets turned south in early afternoon trading with the release of the Fed's December 12th minutes, showing that members believe economic growth will remain below potential with housing remaining the dominant factor in the slowdown, and auto sales also contributing. A few members commented that �downside risks to economic growth in the near term had increased a little� and with comments that economic activity in the second half of 2006 were likely �a touch softer than had been expected.� These comments spooked investors as the Dow Jones Industrial Average saw its triple-digit gain evaporate and turn negative over a two hour period.
Not only did housing remain a factor in the current economic slowdown but Fed members also commented on auto sales, which happened to be released today and supported Fed members concerns as General Motors U.S. sales fell 9.6% last month with a 19% decline in truck sales and a lowered 2007 production forecast. Ford also put in disappointing numbers with U.S. sales dropping 13% in December over last year's levels with overall 2006 sales down roughly 8% over 2005. The decline in Ford 2006 sales came from a reduction in truck and sport utility vehicle sales as gasoline prices remain at high levels over 2005.
December's decline for Ford came principally from disappointing sales from its top-selling vehicle, the F-Series pick up truck. F-Series sales were down 21% over last year's levels where the company sold 89,491 in December 2005 compared to 70,580 last month. Overall for 2006 the company�s F-Series sales fell 12% from 2005 year's level of 901,493 to 796,039 in 2006. The company blamed the disappointing sales on the softness in housing construction and higher fuel prices.
Since the first part of the year foreign auto sales, which produce relatively smaller and more fuel efficient cars than domestic automakers, have continued to rise as domestic auto sales have retreated. Toyota�s sales beat Ford in July and November as it gains market share in the United States. Some analysts are even predicting that Toyota will eclipse Ford as the number two largest automobile seller in the U.S. behind General Motors. In December the Big Three�s market share fell to 52%, a record low.
In contrast to Ford�s performance in 2006, Toyota reported its best year ever, with sales up 12.9% for the year with selling 2,542,524 vehicles and Honda also putting in a positive year with sales up 3.2% to 1.5 million vehicles.
Source: BEA: Auto and Truck Sales, Production, Exports and Inventories
The stock market rose in early morning trading by the positive surprise in the ISM index as mentioned above before giving back their gains after the release of the FOMC minutes before staging a later afternoon rally to finish marginally positive. The FOMC announcement erased an early triple-digit gain by the DJIA, though the Dow rebounded to post a small gain of 11.37 points to close at 12,474.52. The S&P 500 was down slightly, falling 1.70 points to close at 1416.60, and the NASDAQ was up marginally, rising 7.87 points to close at 2423.16. Investors bid up Treasuries today on the unnerving comments of slower growth and housing concerns by the Fed with the 10-year note yield falling to 4.664%, down nearly 1% by falling 4.6 basis points. The dollar index posted a solid gain on the day, rising 0.68 points to close at 83.95. Advancing issues representing 51% and 50% for the NYSE and NASDAQ respectively, with up volume representing 46% and 47% of total volume on the NYSE and NASDAQ.
Energy commodities were down on the day as traders sold crude on warm weather in the Eastern U.S. The sell off in energy pulled precious metals down with gold falling $12.80/oz to $627.70/oz and silver falling $0.63/oz to close at $12.555/oz. Base metals also saw a strong sell off with high mid single-digit percent declines with copper leading the pack, down 6.58% as LME copper stocks rose 4.25% on the day followed by Zinc, which was down 5.41% and saw a 2.29% increase in LME inventories.
Overseas markets were mixed with the largest advances coming from Germany's DAX index and London's FTSE 100 index, up 0.15% and 0.13% respectively. Brazil's Bovespa index posted the largest decline, falling 2.07%.
The ten S&P 500 sector performances were mostly up with seven out of ten sectors finishing in the green to start the New Year. Industrials and consumer staples led the pack, up 0.56% and 0.55% respectively while energy sector was the clear drag on the S&P 500 with its 3.67% decline followed by a 0.46% decline seen in the material sector.
© 2007 Chris Puplava