The market is dealing with a bevy of uncertainties, but chief among them for now is the housing market. Stocks do not need housing to have completely turned in order to stage a sustained rally – stocks generally turn on anticipation, prior to actual results – but when you get a well-known name stating things like the situation will cost banks and brokerages $1 trillion the equity market will get hit. Currently, housing-market related losses stand at roughly $500 billion.
I’ll add Bill Gross may just have ulterior motive here, why would he wait until now to make such a statement? He has certainly been paying close attention to what is occurring within housing and the financial sector throughout this process, yet the $1 trillion number has suddenly dawned on him? Bill Gross is also no stranger to dire predictions, such as his call back in 2002 that the Dow would fall to 4500.
Market Activity for July 24, 2008
Financials led the market lower, as the S&P 500 index that tracks these shares plunged 6.75% -- the group had caught fire over the previous six trading sessions, jumping off a 10-year low, up 30%. Consumer discretionary, the other catalyst behind the market’s recent multi-day rally, lost 2.81%; industrials also took it on the chin, losing 2.51%.Of the 10 major industry groups, none were up. The relative winners were health-care, down just 0.16%, and energy, off by 0.58%.
Getting to the economic data, the National Association of Realtors (NAR) reported existing home sales fell 2.6% in June to a lower-than-forecast 4.86 million units at an annual rate. Purchases declined in three of the four regions led by a 6.6% drop in the Northeast. The West posted an increase in sales of 1%, but also showed a 17% decline in the median price year-over-year, according to NAR. This marked the fourth-straight increase for the West, which could be a signal to the rest of the country that sellers, whom remain somewhat stubborn, need to lower prices a bit further in order for sales to kick up.
Certainly not helping sales is a wider-than-normal 30-year fixed mortgage spread. As the chart below illustrates – depicted by the yellow line – even though the 10-year Treasury sits at the very low level of 3.99%, the 30-year mortgage rate is higher than it otherwise would be due to increased risks. The current spread has widened to 260 basis points, from its normal range of 150-180 basis points. (We’re referring to the spread between the 30-year mortgage and the 10-year Treasury it runs off of.) 
On supply, the number of existing homes on the market rose 0.2% in June, resulting in the months’ worth of supply figure increasing to 11.1 – likely double where we need to be. Exacerbating this situation is rising foreclosures, which have doubled over the past year. As of the latest data, foreclosures have risen to 2.5% of the total mortgage market. Roughly 11% of sub-prime loans have entered the foreclosure process and 1.25% of prime loans are in foreclosure.
The median home price dropped 6.1% last month compared to June 2007 – although that figure is up 10% since hitting a multi-year low in February. As of June, the median price of an existing home came in at $215,000.
In a separate report, the Labor Department reported initial jobless claims jumped to 406,000 in the week ended July 19 from a revised 372,000 the previous week.We saw claims trend lower the past couple of weeks after hitting 404,000 at the end of June; now we’ve seen an expected increase from those levels, as we discussed yesterday.
The four week average, which smoothes the data out, remains below the 400k mark, as the chart below illustrates. Continuing claims, those receiving jobless benefits for more than one week, has trended lower the past two readings, falling to 3.107 million from 3.202 million in the final week of June, which is good.
But back to the four-week average, so long as we remain below 400k, the monthly job losses will remain relatively mild.
This morning crude-oil prices are extending upon yesterday’s gain. Oil hit the $124 handle on Wednesday, but has moved up a bit to $126.33 as I type.We’ll also get durable goods orders for June, which are expected to decline 0.3% as the housing and auto industries continue to hold this reading down. The ex-transportation reading is expected to post a 0.2% decline after two months of strong positive readings. What we’ll be focused on is the non-defense capital goods ex-aircraft reading – a proxy for business investment – which has rebounded of late. It will be important to see this segment increase -- specifically the shipments, which flow right to the GDP reading. If the figure gains ground for June, I’ll expect to see a 2.8%-3.0% real GDP reading for the second quarter. If not, we’re probably looking at something like 2.0% when the reading is released on Wednesday.
Have a great weekend!
Brent Vondera, Senior Analyst
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