Mel's Blog

September 5, 2012 Market News

September 5th, 2012 9:29 AM by Mel Samick

Costs continue to rise due to the worst U.S. drought in at least 50 years. Consumer confidence and spending may be restrained as affects of the drought push Americans' grocery bills higher later this year. The U.S. Department of Agriculture has declared almost 1,600 counties in 32 states as natural-disaster areas after the drought seared millions of acres of pasture and cropland. It will take time for agricultural commodity increases to show up on grocery store shelves because food companies buy raw materials months in advance. Food prices are projected to increase an average 4 percent, annual rate, in the nine months ending June 2013, up from 1.5 percent currently. That may trim real disposable incomes and reduce spending. The projected food price increase will squeeze budgets of households already contending with a 13 percent gain in gasoline prices since early July and unemployment that is stuck above 8 percent three years into the economic recovery. Consumer sentiment has yet to return to pre recession levels, confidence gauges show. While the effect on total inflation will be limited and transitory, food and fuel costs have a disproportionate impact on confidence because consumers make frequent stops at grocery stores and filling stations. Food and fuel together account for about 24 percent of the Consumer Price Index. The average price of a gallon of gasoline at the pump rose to $3.75 on Aug. 26, up 42 cents since July 1, according to AAA.

Stocks finished higher in volatile trading on the final day of the month, after Fed Chairman Bernanke did not explicitly signal any monetary easing was imminent, but reiterated his promise that the Central Bank stands ready to act. Federal Reserve Chairman, Ben Bernanke, said the Central Bank stood ready to come to the aid of the economy if necessary, although he stopped short of giving specifics about more monetary easing. In his speech to central bankers in Jackson Hole, Wyoming, Bernanke expressed "grave concern" about the stagnation of the labor market. The Fed meets on September 12 and 13. All three major averages also closed higher for August. European shares finished higher amid optimism the ECB will announce a new program of bond buying this Thursday.

The latest reports on new and existing home sales seem to indicate that the housing market is beginning to find its footing again. While most believe the recovery will be slow, the free-fall appears to be over for both sales and prices. The housing market has been a relative bright spot in the U.S. economy in recent months - and home building is expected to add to economic growth this year for the first time since 2005. As homebuilders gain confidence and real estate agents claim demand is back, one would think investors would jump right back in for fear of missing the bottom. Investors in housing are buying up as many distressed properties as they can find, but investors in the mortgage market are still sidelined, burned by the subprime bust that left many of them with huge losses. Fannie Mae, Freddie Mac, and the Federal Housing Administration back more than 90 percent of all new loans, whereas they were barely one third of the market during the housing boom. Only Redwood Trust, which doesn't originate loans but issues securities on pools of largely jumbo loans, is squarely in the game and growing. Redwood, a real estate investment trust (REIT), which has returned 33.4 percent this year, is now looking to get into the agency mortgage market as well.

September is often a bad month for stocks. An unusually heavy calendar of major events this year could ramp up volatility even more after a quiet late August. Markets are looking for answers on three big fronts in September. Can European leaders and policy makers put into action the promises made this summer for dealing with the debt crisis? Will the next batch of data show China's economy getting better or worse? And, will the sputtering U.S. economy get another dose of monetary stimulus?

So what's coming up this week? It's going to be a busy week despite being shortened by the Labor Day holiday. Last week we witnessed Mitt Romney graciously accept something he paid millions of dollars for, the Republican nomination for President. The Democratic National Convention starts Tuesday. Oh yeah, there is also some economic news coming out. Weekly Mortgage Apps will come out on Wednesday, Jobless Claims on Thursday, and the Government Jobs Report on Friday.

Mel

Information Provided by NYCB Capital Markets

Posted in:General
Posted by Mel Samick on September 5th, 2012 9:29 AM

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