Market Perspective Update: September 12, 2022, the houses on "fire"
S&P 500 rebounded and closed with a rising 3.65%, finishing the three-week contiguous decline.
Dow Jones Industrial Average rebounded and closed with a rising 2.66%, finishing the two-week contiguous decline.
NASDAQ Composite rebounded and closed with a rising 4.14%, finishing the three-week contiguous decline.
Although the three markets above have rebounded with positive numbers, the price action of these three markets showed they are struggling in the ex-growth phase.
S&P 500 Index is still near the lower bound of the technical bear market, which has been down 19.34% from the recent highest price at 4778.14 on January 3rd this year.
Dow Jones Industrial Average Index had down 15.98% this year from its highest number since January 3rd. The lowest number was -19.75% on June 13th this year.
NASDAQ Composite Index was down 29.24% from its highest price at 16212.23 on November 22nd last year.
Views on Macro:
Fed Funds Effective Rate as of September 7th is 2.33%
The U.S. Treasury Bonds Yields are still in an inversion phase
As of September 5th, the 10-year Treasury yield (biweekly, ending Monday, average) was at 3.17%, and the 2-year Treasury yield was at 3.45%.
The short-term yield is higher than the long-term yield from July 11th this year, as shown in the table below. Indicating the market participants are still being bearish about the U.S. economic condition.
Consumer Price Index for All Urban Consumers: All Items in the U.S. City Average, on a YoY % change basis, was 8.48% as of September 11th. It seems like Fed's aggressive monetary policy is tackling inflation successfully.
August's UMCSI figure is 58.2, and the Expectation Index is 58; both are higher than May, June and July. The current Condition Index is 58.6, higher than the previous two months. But it is still at a trough and the same level as during the global financial crisis from 2008 to 2009.
The latest Nominal Broad U.S. Dollar Index was 123.9261; the weekly change was +0.59%.
The ISM's PMI - MoM % change is 0%, which is still at 52.8 in August compared to the previous month with the same figure, but it is close to the linear line.
The new order is 51.3 compared to the previous month in July, which was 48, and 49.2 in June was the first time that fell below 50 since May 2020.
Overall Industries performances:
Ten manufacturing industries reported growth in August, in the following order: Nonmetallic Mineral Products; Petroleum & Coal Products; Transportation Equipment; Computer & Electronic Products; Printing & Related Support Activities; Plastics & Rubber Products; Primary Metals; Machinery; Miscellaneous Manufacturing; and Food, Beverage & Tobacco Products.
The seven industries reporting contraction in August compared to July, in the following order are: Wood Products; Apparel, Leather & Allied Products; Furniture & Related Products; Paper Products; Chemical Products; Fabricated Metal Products; and Electrical Equipment, Appliances & Components
Of the 18 manufacturing industries, six reported growth in new orders in August, in the following order: Textile Mills; Computer & Electronic Products; Nonmetallic Mineral Products; Transportation Equipment; Primary Metals; and Plastics & Rubber Products.
Eight industries reported a decline in new orders in August, in the following order: Wood Products; Furniture & Related Products; Electrical Equipment, Appliances & Components; Chemical Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Machinery; and Miscellaneous Manufacturing.
The six industries reporting growth in production during the month of August — listed in order — are: Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Petroleum & Coal Products; Transportation Equipment; Machinery; and Plastics & Rubber Products.
The nine industries reporting a decrease in production in August — in the following order — are: Apparel, Leather & Allied Products; Textile Mills; Wood Products; Paper Products; Primary Metals; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Fabricated Metal Products.
“Overall, I have seen much improvement in the availability of raw materials. However, trucking issues continued, and production capacity within some industries remains tight. I have growing concerns that as cement and mineral companies run ‘all out’ to meet demand, we will see more downtime due to maintenance (issues).” [Nonmetallic Mineral Products] For various manufacturers, Ten manufacturing industries reported growth in August, especially in the Nonmetallic Mineral Products industry, which ranked in the top 2 in overall industry performance and the top 3 in the New Orders section and Top 1 in the Production section.
But the respondents in this industry also mentioned that the availability of the raw materials had improved much. However, he also mentioned that trucking issues continued, and production capacity within some industries remains tight. And he also said that he is growing concerns that as cement and mineral companies run "all out" to meet demand, they will see more downtime due to maintenance (issues).
Does it also give implied information about the companies involved in cement and mineral businesses in the growth phase? Was that why we see it ranked in the top 1 in the Production section?
“Demand from customers is still strong, but much of that is because there is still fear of not getting product due to constraints. They are stocking up. There will be a reckoning in the market when the music stops, and everyone’s inventories are bloated.” [Computer & Electronic Products] Also, the Computer & Electronic Products industry ranked the Top 4 in overall industries performance and top 2 in the New Orders section but maintained "natural" in the Production section. The respondents in this industry also mentioned that the demand from customers is still strong, which indicates there is a growth phase in the short-term period but a consideration for the future since they also mentioned the reason why the demand is still strong is that there is still fear of not getting product due to constraints. But it is an excellent sign for traders to do further research within this sector to generate high-quality long-side trade ideas.
Whatever in the Overall Industries Performances section or the New Orders section, the manufacturing industries like the Wood Product and Furniture & Related Products are still ranked at the bottom of the rankings; both are in contraction. Wood Product has been in contraction since May. The Furniture & Related Products is continuing contracting since June.
Obviously, when the Fed decided to hike the interest rate, which has been hiked since May, while it stirred the market in early 2022, these industries were affected harder than the others due to their relation to the housing market. As the interest rate increases, house demand will continue to contract, and it seems like it is still not the end of this inflation-tackling process; It is the housing market contraction that is happening "during" this process now.
We can see in the chart of the Building Permits data given by The Census Bureau that in July, the figure was 1.67 million, compared to the recent highest figure of 1.89 in December 2021. % change is -13.17%, the figure which we've worked out is not that bigger compared to 2019, but it doesn't mean it won't continue to drop. But, without any other concern, the Buiding Permits do slumping since the end of last year.
In the survey of the future housing market conditions, the latest NAHB Wells Fargo Housing Market Index is 49 in August, -10.91% changed on an MoM basis. -28.99% changed on a YoY basis. The last two slumping periods with such an amount were during 2005-2009 (before Global Financial Crisis) and early-2020, the Covid-19 shock.
The latest Single-Family House Sales for the Next Six Months is 47 in August. -4.08% changed on an MoM basis. -25.4% changed on a YoY basis.
The latest HMI Traffic of Prospective Buyers was 32 in August. -13.51% changed on an MoM basis. -39.62% changed on a YoY basis.
On the raw materials side:
The commodity of lumber price is continuing slumping since March 3rd this year. As of September 9th, the price of Lumber was $509, significantly lower than it was at the beginning of the year. Suggest that the demand for lumber or wood products is lower than in the past. It started declining before the Fed hiked the interest rate; in May, Fed Funds Effective Rate went to 0.83% from 0.33% in April.
Iron Ore futures price as of September 9th was 100.21. That was a 16.8% drop from January 3rd this year.
Copper futures price as of September 9th was 3.568 per pound. That was an 18.5% drop from January 3rd this year.
As of September 6th, the COT Report's Net Long/Short Ratio of Steel was 6.51%. Aluminum was -58.98%. Copper was -9.33%.
Based on the analysis of the economic indicators, we can see that the market conditions are still not promising in the short-term period. Even though the Fed is trying to tame inflation down and hike the interest rate in order to accomplish its 2% inflation mission, cyclical sectors like the housing market and related industries like wood products and furniture sector and others will be affected by Fed's following action harder than the others.
As far as we can see, the amount of Buiding Permits issuance is getting lower compared to the previous months. Especially in HMI and its components suggests the market is pessimistic about future housing market conditions. The last two slumping periods with such an amount were during 2005-2009 (early before Global Financial Crisis) and early-2020, Covid-19 shock.
Also, the prices of raw materials are lower than in the past, suggesting that demand from the buyer side is lower than in January. Steel Rebar is one of the primary materials for the construction industry, it can be used to create the base for floors, and Lumber, after processing, could also be used to create a house's structure. Copper is often used for cladding, electrical wiring, heating systems, oil and gas lines, rainwater systems, and roofing. But their prices have significantly dropped since early this year. They suggest that the needer, like the housing market, is no longer hot compared to the low-interest rate period in 2020-2021. Though we might not be in a recession, the housing market and its related industries are obviously in a contraction period.
I have also picked up two manufacturing industries, Nonmetallic Mineral Products and Computer & Electronic Products, and that is a good way to find out some potential growth stocks that might outperform the sector in the short term. Though this report obviously tells you that I am still maintaining a short bias for my portfolio, ensuring my portfolio is well-diversified is crucial to a trader. And that's why we are long-short traders.
Thanks for your reading!