While the market is up big today on the hopes that the Fire Department will soon arrive with its $700 billion rescue package, we received quite a bit of very bad economic news from the real economy. New home sales plunged in August, falling 11.5% from July and are down 34.5% from a year ago. This is the lowest pace of home sales for any August since 1982. It is also well below consensus expectations of a decline of just 1.0%.
Plunging prices didn't get the housing merchandise moving either. The average price of a new home fell by 11.8%, and the median by 5.5%...IN A MONTH! The inventory situation is still very troublesome, as declining sales offset the decline in the number of new homes on the market.
At the current sales pace, it would take 10.9 months to clear out the existing inventory. That is down only slightly from the most recent peak of 11.2 months back in March of 2008 and not far below the all time record of 11.6 months in April of 1980. A normal figure for months of supply is more like 4 to 5 months. Given that credit markets were still relatively functional in August, at least compared to what we are seeing now, it is very likely that the September numbers will be much worse than August.
In the Manufacturing sector, total orders for Durable Goods fell 4.5% -- the biggest decline since January. The January decline was mostly payback for a very big increase in the December number, but this time the July increase was very modest. Orders for Capital goods -- excluding transportation equipment and defense, or core capital goods -- were down 2.0%.
On the employment front, the news was not much better. Weekly unemployment claims rose by 32,000 to 493,000. The four week moving average rose to 462,500. Some of that increase was due to the recent hurricanes and the resulting severe gasoline shortages across the Southeast. However, given the freeze-up in the credit markets, I would not expect the number to fall back anytime soon. This week's number was the worst we have seen since the spike following 9/11.
The credit market remains frozen. The spread between the rate on a three month T-Bill and what banks lend to each other for three months, known as the TED spread, is still at 3.00%. Normal is about 0.40% and it had been running at about 1.0%. In the previous waves of trouble over the last year (i.e. during the Bear Stearns bailout), the spread got to about 2.5%. The spread between the yield on the very highest quality commercial paper, for example from General Electric (GE) and what mere mortal firms have to pay to borrow for a month, the A2/P2 spread, is off the charts at near 4.00%. It has never before gone over 2.00% and is normally at about 0.30%.
Stay in the companies who have the strongest balance sheets and which either don't have to use the commercial paper market, or if they have to can get the best rates. Firms like Exxon (XOM) and Coca Cola (KO) would be examples of this.
Read the full analyst report on XOM
Read the full analyst report on KO
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.