U.S. stocks erased the gains of the previous two sessions as even additional declines in the price of oil failed to offset housing/financial market concerns. Yesterday it was a Barron’s article that raised concerns over the two GSEs Fannie Mae (FNM) and Freddie Mac (FRE), although much of the piece offered nothing new.
I’ve got my issues with Barron’s, and to be honest besides this piece I haven’t read the source in a couple of years simply because I found it a waste of time – personal opinion. But what I fail to understand, regarding the entire GSE capital raising discussion, is why the government would cause harm to the preferred shareholder – which is a hypothetical Barron’s raised in the article.
For one, they would not want to eliminate access to the capital markets, which is what putting these dividends in jeopardy would do. Two, it would worsen the capitalization issues within the banking system as whole – not exactly a desired outcome. Three, why would they change the accounting rules (for those that haven’t kept up on this, it is the hypothetical scenario that the GSEs would have to abide by new accounting rule FAS 140 that would force a capital raise right now) on FNM and FRE at a time when they are currently attempting to bail out the housing market. This would be like performing knee replacement surgery only to then introduce the patient to Shane Stant.. It doesn’t make much sense.
Bottom line, as we’ve talked about for a long time now, any day with which there’s bad press regarding the financials the market’s going down; to no one’s surprise that trend holds true.
Market Activity for August 18, 2008
Financial and consumer discretionary shares led the indices lower – down 3.58% and 1.75%, respectively. In fact, nine of the 10 major industry groups lost ground yesterday – utility shares being the only group that flashed green, up 0.10%.
We were quiet on the economic front yesterday, but did get the National Association of Home Builders/Wells Fargo index for August, which was unchanged from the July reading.
The index remained at a record low; but hey, it didn’t make a new one. Seriously though, the figure is tremendously low, as the graph below illustrates. A reading under 50 marks most respondents view conditions as poor. As the reading came in at 16 again, there aren’t many that view it otherwise.
The survey, first published in 1985, asks members to characterize current sales as “good.” “fair” or “poor” and to measure buyers traffic as well as to assess the outlook six months from now.
Builders are delaying projects as sales drop and home inventory remains hugely elevated. In the meantime, mortgage spreads continue to widen. For clarity, during normal circumstances the 30-year fixed mortgage yields 150-180 above the 10-year Treasury rate. Today that spread sits at 260 basis points, or 2.60 percentage points higher. The chart below shows what has occurred with this spread – the yellow line represents the spread and thus the higher 30-year fixed mortgage rate than would be the case under normal circumstances.
This morning we get producer prices and housing starts for July.
The producer price index (PPI) will post another ugly reading, expected to show an increase of 0.6% for the month and 9.3% on the year-over-year reading. If that expectation holds true it would mark another acceleration -- the year-over-year reading came in at 6.5% in April, 7.2% in May and 9.2% in June.
While much of this increase is due to risings oil prices for the period measured, I’ve noticed that core intermediate goods (those used in early stages of production and excluding food and energy) have jumped 8.4% over the past 12 months. The market will likely discount this July look at PPI considering the dollar strength and decline in oil of late. However, I’m not sure we’ll get a meaningful trend lower based on what has occurred in this core intermediate good number. We could very well see this rise passed along to the consumer level. Thankfully, we’ve got strong productivity improvements that remain and may quell this effect. The next three months of inflation data will be very important.
On housing starts, we should see a meaningful decline as the June figure was boosted by a change in New York City building codes, which spurred a jump in multi-family construction and overshadowed a slide in single-family units. As home inventory levels remain extremely elevated, it may take several months, if not a full year still, before this reading begins to bounce back and trend higher.
Have a great day!
Brent Vondera, Senior Analyst
I’ve got my issues with Barron’s, and to be honest besides this piece I haven’t read the source in a couple of years simply because I found it a waste of time – personal opinion. But what I fail to understand, regarding the entire GSE capital raising discussion, is why the government would cause harm to the preferred shareholder – which is a hypothetical Barron’s raised in the article.
For one, they would not want to eliminate access to the capital markets, which is what putting these dividends in jeopardy would do. Two, it would worsen the capitalization issues within the banking system as whole – not exactly a desired outcome. Three, why would they change the accounting rules (for those that haven’t kept up on this, it is the hypothetical scenario that the GSEs would have to abide by new accounting rule FAS 140 that would force a capital raise right now) on FNM and FRE at a time when they are currently attempting to bail out the housing market. This would be like performing knee replacement surgery only to then introduce the patient to Shane Stant.. It doesn’t make much sense.
Bottom line, as we’ve talked about for a long time now, any day with which there’s bad press regarding the financials the market’s going down; to no one’s surprise that trend holds true.
Market Activity for August 18, 2008
Financial and consumer discretionary shares led the indices lower – down 3.58% and 1.75%, respectively. In fact, nine of the 10 major industry groups lost ground yesterday – utility shares being the only group that flashed green, up 0.10%.
We were quiet on the economic front yesterday, but did get the National Association of Home Builders/Wells Fargo index for August, which was unchanged from the July reading.
The index remained at a record low; but hey, it didn’t make a new one. Seriously though, the figure is tremendously low, as the graph below illustrates. A reading under 50 marks most respondents view conditions as poor. As the reading came in at 16 again, there aren’t many that view it otherwise.
The survey, first published in 1985, asks members to characterize current sales as “good.” “fair” or “poor” and to measure buyers traffic as well as to assess the outlook six months from now.
Builders are delaying projects as sales drop and home inventory remains hugely elevated. In the meantime, mortgage spreads continue to widen. For clarity, during normal circumstances the 30-year fixed mortgage yields 150-180 above the 10-year Treasury rate. Today that spread sits at 260 basis points, or 2.60 percentage points higher. The chart below shows what has occurred with this spread – the yellow line represents the spread and thus the higher 30-year fixed mortgage rate than would be the case under normal circumstances.
This morning we get producer prices and housing starts for July.
The producer price index (PPI) will post another ugly reading, expected to show an increase of 0.6% for the month and 9.3% on the year-over-year reading. If that expectation holds true it would mark another acceleration -- the year-over-year reading came in at 6.5% in April, 7.2% in May and 9.2% in June.
While much of this increase is due to risings oil prices for the period measured, I’ve noticed that core intermediate goods (those used in early stages of production and excluding food and energy) have jumped 8.4% over the past 12 months. The market will likely discount this July look at PPI considering the dollar strength and decline in oil of late. However, I’m not sure we’ll get a meaningful trend lower based on what has occurred in this core intermediate good number. We could very well see this rise passed along to the consumer level. Thankfully, we’ve got strong productivity improvements that remain and may quell this effect. The next three months of inflation data will be very important.
On housing starts, we should see a meaningful decline as the June figure was boosted by a change in New York City building codes, which spurred a jump in multi-family construction and overshadowed a slide in single-family units. As home inventory levels remain extremely elevated, it may take several months, if not a full year still, before this reading begins to bounce back and trend higher.
Have a great day!
Brent Vondera, Senior Analyst
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