This week, the market was up through Thursday, Sept. 2, mostly because stocks rallied on Wednesday on surprise higher readings from the ISM Manufacturing Index. The Index rose from 55.5 to 56.3 in August, suggesting manufacturing conditions are holding up. China’s manufacturing is also up, so with both the United States and China growing, the market rallied, specifically with a strong performance in Industrials.
Both Personal Income and Consumer Confidence were up this week. Income grew 0.2% from the previous month, on top of an increase of 0.3% in wage and salary income. Spending was up 0.4%, showing the strongest growth in durable goods. The consumer’s savings rate fell slightly to 5.6% following two months where the reading was above 6%. However, this still shows consumers are working to rebuild their balance sheets. Consumer Confidence rose to 53.5 in August, ahead of economists’ expectations of 51. 0.
The Case-Shiller Home Price Index, the leading measure for the U.S. residential housing market, announced home prices rose for a third straight month in June, noting at 3.6% gain in second quarter as compared to second quarter 2009.
Initial jobless claims were down 6,000 to 472,000 for the week; however, the ADP National Employment Report showed privates sector jobs fell by 10,000. Large businesses with 500 employees or more added 1,000 new employees, but medium-sized businesses cut 5,000 workers in August. Small businesses dropped payrolls by 6,000.
The FDIC’s quarterly report raised the number of banks on its “problem list” to 829, which is slightly more than 10% of all U.S. banks. This is not to say all 829 are expected to fail. The FDIC is asking these banks to raise their capital and forcing them to take write-downs. In some cases, the FDIC is requesting management changes. The FDIC chairwoman, Sheila Bair, said that the banking sector is gaining strength and that most asset quality indicators are moving in the right direction.
Banks’ profitability has returned to a pre-Lehman crisis level; however, lending remains stagnate. We feel banks will not be making a ton of money in the future as they are facing several new regulations. Their fee income will fall as consumers will not be hit with $30 fees for bounced checks. We suspect for those of us who have free checking services, it may not remain free much longer.
Continuing the up streak, over the past week, the yield curve has shifted higher—a welcome sign—with both the 10-year and 30-year Treasuries gaining around 0.2%. Every sector was up through Thursday, lead by Consumer Discretionary, Financials and Industrials. We are not at all surprised, as gains in these sectors generally signal a turnaround.
While there has been so much talk in the media about the consumer not spending, we feel the market is showing a different story. Costco Wholesale Corp. (NASDAQ: COST) reported same-store sales were up 7% in August; Macy’s Inc. (NYSE: M) same-store sales were up 4.3%, Khol’s Corp. (NYSE: KSS) was up 4.5%; J.C. Penney Company, Inc. (NYSE: JCP) was up 2.3%; Nordstorm Inc. (NYSE: JWN) was up 6.3%; while, Saks Inc. (NYSE: SKS) was up only 1%. To us, this indicates the average consumer is spending, but the rich consumer is still pulling back. Although, it might suggest that the purse-strings are still tight, or that the consumers’ tastes have changed, and they are opting for house brands over luxury brands.
Rounding out the week in mergers and acquisitions activity, Burger King Holdings Inc. (NYSE: BKC) agreed to be acquired by investment firm 3G Capital Management, LLC in a deal worth $4 billion. The news of the potential buyout pushed Burger King shares up approximately 15% on Wednesday prior to the deal’s confirmation on Thursday, when shares soared up another 24%.