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Economic news continues to support the view that the U.S. is in a serious recession. Data Wednesday was heavy with several reports moved up due to Thursday’s Thanksgiving holiday. Despite the fact economic news was disappointing, stocks continued their rally Wednesday with hopes a Santa Clause rally is underway. Reports on durable goods orders, consumer sentiment, personal income and outlays, NAPM-Chicago and new home sales all were released this morning, along with a speech about the economy by President-elect Obama.

On Monday, existing home sales fell to an annualized level of 4.98 million units, slightly below expectations. This report showed a further decline in home prices with supply rising during October. Today, the new home sales report was much weaker than expected with the annualized rate falling to 433,000. This was a decline of 5.3 percent and well below expectations for a reading of 450,000. Sales are down 40.1 percent from the year ago period, nearly the lowest year on year decline in the 40-years of data. The most discouraging fact is that supply swelled to 11.1 months, up from 10.9 months in September. As a result, new home prices continued to fall, down 1.7 percent month to month and off 7.0 percent from the year ago period.

Jobless claims for the week ending Nov. 22 fell by 14,000, but remained above the 500,000 level at 529,000. Continuing claims, which have been rising sharply, actually fell for the prior week by 54,000 to 3.962 million. This release coincides with the BLS monthly household survey, but with claims above 500K, we can expect to see large declines in nonfarm payrolls for November.

The personal income and outlays report for October showed that consumers are cutting back on their spending habits. Personal incomes did rise 0.3 percent, 2-tenths more than expected, but consumer spending fell 1.0 percent. At least the slowdown in the economy is easing inflation pressures with the core PCE price index flat for the month. The year on year core PCE rate stands at 2.1 percent, down 3-tenths from September. It seems that within a few months, the core PCE will be in the Fed’s comfort zone between 1.5 percent and 2.0 percent.

One of the main reasons for a decrease in pricing pressures has been the huge drop in energy prices. Crude inventory levels for the week ending Nov. 21 rose by 7.3 million barrels. Weakness in the economy is slowing demand with retail gasoline prices well off their summer highs. Despite this news, oil prices on Wednesday rose $3.67 a barrel to close at $52.90. News that China had cut interest rates, along with stimulus packages in the U.S. and Europe has energy traders seeing a possible pickup in demand in 2009.

Earlier in the week, the Conference Board reported that its consumer confidence index was stronger than expected. However, this was not confirmed by the University of Michigan consumer sentiment index today. This index fell nearly three points to a reading of 55.3 when economists were expecting a reading of 57.9. Both current conditions and the expectations component were lower coming in at 57.5 and 53.9 respectively. The concern is that declining sentiment will be a detriment to spending during the important holiday shopping season. Retailers across the board have been lowering guidance on expectations spending will be much lighter than in prior years.

Business activity in the Chicago area continued to decline with the NAPM-Chicago report showing a reading of 33.8. This was a decline of 4 points and was much lower than expectations. The employment component fell more than 8 points to a reading of 33.4, which doesn’t bode well for November employment report. Only the prices paid index was in expansion territory above 50, but only slightly at 50.7.

Probably the most disappointing report this morning was the durable goods report for October. New orders fell by 6.2 percent, much worse than expectations for a decline of 2.6 percent. Even with transportation excluded, new orders still fell a sharp 4.4 percent. Nondefense capital goods orders fell 3.6 percent, showing that capital equipment spending is likely to be weak in the months to come. In the past year, new orders for durable goods are down 10.6 percent. This data doesn’t bode well for fourth-quarter GDP, which was expected to be weak even before this report.

Mr. Obama announced that former Fed Chairman Paul Volcker will be heading up the new President’s advisory committee. Mr. Obama also promised to have an economic plan ready to go the first day he is in office. It seemed that his optimistic attitude was viewed bullish with stocks rallying for the fourth consecutive session.


Jody Osborne

Senior Staff Writer & Options Strategist

Optionetics.com ~ Your Options Education Site

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