Bank of Japan Joins the Party

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Stocks traded higher form the open after the Bank of Japan raised its asset purchase target in an attempt to add liquidity into the market and weaken the yen. Existing home sales data was better than expected and was an early catalyst for buyers. Buying pressure waned throughout the day and the S&P 500 finished 0.12% higher on the day. 

The Bank of Japan action today showed its increased desire to end the era of deflation. They announced a large increase in their Asset Purchase Program (APP) of 10 trillion yen. The flip side is they are doing this in response to forecasts for slower economic growth. 

The energy sector underperformed the broad market today. Oil continued its recent slide falling 3.6%. Oil prices have fallen by over 9% since last week. The Department of Energy reported that oil inventories saw a build of 8.534 million barrels versus an expected build of 1.4 million barrels. 

Semiconductors were an area of underperformance today. Semis came under pressure due to rumors that Samsung will cut production. Makers of semiconductor capital equipment, the companies that make the huge machines that make semis in the fabs, were also down. 

Homebuilders, autos, and banks outperformed the market today. All three areas have exposure to quantitative easing through the government’s program to purchase mortgage backed securities. U.S. housing starts increased by 2.3% in August. The numbers were not spectacular but the positive trend in housing data remains intact. Performance in the financial space was strong in light of several downgrades of the space from brokers today. Downgrades were based largely on valuation. These sorts of downgrades are to be expected after a sharp run higher in any particular industry. 

Industrials finished slightly ahead of the market. Bellwether MMM said their earlier announced growth target has now become a “stretch” number. This is a fancy way of saying it will be real tough to meet projected sales growth targets. In a less favorable environment the stock would have sold off on such news. MMM finished slightly higher today. 

At the open tomorrow, transportation stocks will be under pressure as Norfolk Southern lowered its earnings outlook after the close. They cited lower shipments of coal, merchandise and strength in intermodal shipments.  Another take on the Norfolk announcement is that it is a positive for Union Pacific as they are more heavily exposed to shale, as opposed to coal, and has a stronger intermodal business than Norfolk. 

Tomorrow the economic calendar is full of announcements. Initial claims, continuing claims, Philadelphia Fed and Leading Indicator data will be released tomorrow. 

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About Thomas J Smith CFA

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