Dividend cuts from a number of insurance names, as they get hammered by mark-to-market and a falling stock market and thus have to put additional money aside to support annuity guarantees, kept financials down even as Fed Chairman Bernanke reiterated bank nationalization is not in the cards.
It appeared those comments from Bernanke, along with some clarity with regard to the Treasury’s “bank stress test” and future capital injections plan, is what helped stocks rally in the afternoon session. The S&P 500, for instance, jumped 3.5% after lunch until it all fell apart again in the final 30 minutes of trading.
Industrial shares led the market lower, the index that tracks these shares fell 2.86%, with health-care and basic material stocks not far behind. Worries the economy will take quite a while to bounce back put pressure on material and diversified manufacturing shares. The sole winner was telcom, which added 1.01%.
Market Activity for February 25, 2009
Crude
Crude oil rose to a three-week high, jumping 6.36% yesterday, after the weekly Energy Department report showed gasoline inventories fell 3.32 million barrels to 215.3 million last week. Motor fuel consumption averaged nine million barrels per day over the past four weeks, up 1.7% from the same period last year. The price of crude is up 25% since February. While half of this move is due to the March contract expiring on the 20th (the April contract traded higher than that expiring March contract) the rest is due to gasoline fundamentals.
Refineries have also reduced production, which is normal for this time of year as they retool to shift from heating oil to more gasoline production.
Oil supplies went in the other direction (although as you can see the supply of gasoline can drive the price of crude) as supplies at Cushing, Oklahoma (where traded West-Texas Intermediate crude is delivered) rose 34.5 million barrels to the highest level since April 2004.
Oil trades in contango right now, meaning you can buy the front month contract and sell later month contracts at a higher price. This means oil is being delivered to Cushing for storage. The opposite of contango is backwardation, the situation in which the front month trades higher than months forward.
Mortgage Applications
The Mortgage Banker’s Association reported that mortgage applications fell in the week ended February 20 as the 30-year fixed mortgage rate moved above 5.00%. We’ve talked about how activity bounces when that rate moves into the 4% handle and vice versa when it moves back above 5%, and this seems to be the case.
The outlier to this view is the rebound that occurred in the week ended January 30 even as the 30-year mortgage rate hit 5.29%, but this may have been because the prior week’s decline was so large. Therefore, the bounce was a function of coming off of that low level. A rate below 5.00% is still the target and if we can get below that level for an extended period we may begin to see some sales and refi activity that helps to absorb supply and lower servicing costs.
Purchases fell 2.6% last week and refinancings dropped 19.1% after a big 64.3% jump in the prior week.
Existing Home Sales
The National Association of Realtors (NAR) reported that existing home sales fell 5.3% in January (that was weaker-than-expected and the increase in December was revised lower) to 4.49 million units at an annual rate. Multi-family activity led the decline as sales for this segment slid 10.2%. Single-family existing home sales fell 4.7% last month.
In terms of region, sales in the Northeast fell 14.7%, the Midwest and South both declined 5.7% and the West was flat (the West region has endured the largest foreclosure activity and thus the largest price decline – sales seem to have found a bottom for now as a result).
On supply, the number of existing homes on the market continues to come lower – which is a good thing for when sales do bounce back, supply (relative to the sales pace -- the month’s worth of supply figure) will come lower quickly. The issue right now is the job market and general lack of confidence. We get those two things turned around and this housing correction will have run its course rather quickly.
On that last point, this is why we’ve argued the way to go is to focus on economic growth and let the housing market correct as it will. Policy makers keep talking in terms of doing the opposite (focusing on housing and allowing hope for a rebound to spur economic activity), which will only prolong the housing correction as the consequences of their actions have adverse effects. We cannot turn jobs around on a dime, but by focusing on incentives (lowering tax rates on capital, labor income and profits -- and thus raising after-tax returns on these activities) we can stop the bleeding and allow the growth in economic activity take care of the rest. That’s when confidence turns and that’s when we’re back in business.
Unfortunately, the administration is out with next year’s budget and they are wasting no time raising taxes. It’s not that this is a surprise, but the fact that they are moving, even if incrementally, so quickly on this front is very concerning to me. In this budget proposal, there will be limits on deductions for those in the top two income tax brackets and higher tax rates on hedge funds.
We’ll then see the current income tax rates rise across the board as they revert back to the pre-2003 levels; the capital gains and dividends rate will revert as well (end of 2010). And you watch, the middle class will be hit hard as well – not just from the perspective of lower economic growth and stock market activity as higher tax rates are destructive to after-tax returns, but more directly via their paychecks. Anyone who believes that payroll taxes (FICA) will not be increased is not in tune with the agenda, in my humble opinion.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment