Market Commentary

In late trading, the 10-Year Treasury Note was up by 5/32, lowering its yield to 3.88%; the Dow was up by 152.25 points to 11,384.21; and the Nasdaq was up by 51.10 points to 2,294.42.

The economic data released today did not have much of an impact on the markets. The level of pending home sales fell sharply in May following a sharp spike in April. The move was largely anticipated. And the report on wholesale inventories for May was stronger than expected. Both inventories and sales rose during the month, leaving inventory levels extremely lean.

Support for financial stocks came on Fed Chairman Ben Bernanke's remarks that the temporary lending program for investment banks might be extended. The head of the OFHEO said that Freddie Mac and Fannie Mae were not facing obstacles to obtaining more capital. And the head of JPMorgan said that though credit conditions could worsen in the short term, the longer outlook is more optimistic.

After taking a solid hit yesterday, the financial sector was lifted by the improved trader sentiment. And the broad market found support from the drop in oil. The price of a barrel of light, sweet crude oil for August delivery fell by $5.33 on the New York Mercantile Exchange to settle at $136.04.

In the last two trading sessions, the price has fallen by $9.25. Profit-taking and a stronger dollar are being cited as reasons for the pull-back.

Stocks generally benefit from lower oil prices because of increased spending elsewhere, but both stocks and bonds benef from the reduced inflation pressure. High energy prices increase production and transportation costs which can translate into higher final prices on goods. Inflation dilutes the value of dollar-denominated investments and strengthens the case for higher interest rates.

There are no major economic releases slated for tomorrow so the weekly mortgage application data from the Mortgage Bankers Association and the oil inventories report from the Energy Information Administration will get extra attention.

Both mortgage applications and crude oil inventories have been slumping lately. If the application data contains some surprises, they will likely be attributed to the Independence Day holiday disruption. The oil inventory report will be the stronger influence.

10:30 AM EDT : Both stocks and bonds are chopping in narrow channels around unchanged levels in early trading this morning. Stocks are finding some support from hopeful news regarding the credit markets but the start of the earnings report season is keeping traders in a cautious mood.

The economic news of the day was mixed. The National Association of Realtors reported that its index of pending home sales fell in May by 4.7%, a larger decline than the 3.0% that forecasters had predicted. But the originally reported rise in April of 6.3% was revised to a jump of 7.1%.

The information is somewhat dated and its significance is diluted by the fact that the index is just an indicator of upcoming actual sales. The data was first published in 2005 with data going back to 2001. The index is a measure of the seasonally adjusted, annualized rate of contract activity in a month. The NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.

Another reason May's headline figure has not had a large effect on the markets is that the current weakness in the housing sector is well-known.

The second economic release of the day was the report on wholesale inventories for May and it was more bullish than anticipated. Like the pending home sales report, it too is rather dated. It also does not offer a complete picture of inventory levels since it does not include manufacturer or retailer data. A more complete report is slated for release on the 15th of the month.

In today's report, the Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 0.8%, a bigger increase than the 0.6% that had been predicted. April's previously reported gain of 1.3% was revised up slightly to 1.4%.

May's gain was a seventh consecutive expansion. A rise in supplies is a bullish indicator if it is perceived as anticipating rising demand and that is the case according to the latest data. The level of sales rose by 1.6% in May, matching April's increase.

The stronger outflow versus inventory expansion caused the inventory-to-sales (I/S) ratio to fall to a record low of 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Low turnover times mean there is high pressure to replace supplies and it is, therefore, a positive economic indicator.

Stocks are finding some support from word from the head of the Office of Federal Housing Enterprise Oversight (OFHEO, the regulator that watches over the mortgage market agencies, Fannie Mae and Freddie Mac) that the two agencies are sufficiently creditworthy to raise funds. Fed Chairman Ben Bernanke also helped soothe credit anxieties by saying that the Fed lending program for investment banks may be extended.

The declining price of oil is also favorable to the stock market. In recent trading, the price of a barrel of light, sweet crude for August delivery was down by $5.10 to $136.27. Lower energy prices free up business and consumer financial resources for expenditure in other parts of the economy . . . .