Daily Insight

Most U.S. stocks fell as reports on housing and industrial production showed very weak activity remains the case. The President unveiled his mortgage-relief plan, but the market seemed unenthused.

The Dow rose just a bit as gains in shares of Wal-Mart, Proctor & Gamble and McDonalds offset declines in the industrial components of the index. The broad market and NASDAQ Composite lost a bit of ground. Mid and small-cap stocks were the hardest hit, down a bit more than 1.00%.

Two stocks fell for every one rose on the NYSE. Some 1.3 billion shares traded on the big board, 16% below the three-month daily average.


Market Activity for February 18, 2009

Treasury’s Mortgage Plan

The President announced a plan to help nine million (I don’t know how they come up with these numbers) restructure or refinance their mortgages. The program will use $75 billion to bring down mortgage rates and encourage loan modifications – sharing in the cost of reducing monthly mortgage payments (subsidizing a lower interest rate) by having the government match lender reductions to bring that payment down to 31% of borrowers’ monthly income. The Treasury will also double the amount of stock purchases of Fannie Mae and Freddie Mac to as much as $200 billion for each.

In 2008, 75% of home loans were financed by Fannie and Freddie – they’re just about the only game in town -- and the $400 million in capital injections will help to maintain a positive net worth as the government leans on them to provide liquidity for the mortgage market.

On the Economic Front

The Mortgage Banker’s Association reported their index of mortgage applications jumped 45.7% in the week ended February 13 as the 30-year fixed rate fell just below the 5.00% mark. As we’ve been talking about, this is what homeowners are looking for and if this rate can hold below 5% we’ll see several weeks’ worth of gains.

Again, refinancing activity is driving the mortgage apps index as the segment rose 64.3% last week -- although purchases did rise as well, up 9.1%.


In a separate report, the Commerce Department announced housing starts plunged 17% last month to an annual rate of 466,000 units.

U.S. builders broke ground on the fewest houses on record in January (data goes back to 1959) as tighter credit and labor-market deterioration continued to crush sales. Severe weather in January had an effect as well. Multi-family starts fell 27.9%, while single-family starts dropped 12.2%. Single-family starts are 81% off the January 2006 peak.


Commerce also stated building permits fell 5.1%, marking the seventh-straight monthly decline. This is a sign housing construction will remain depressed, as if we need another.


In yet another release, the Labor Department reported import prices fell 1.1% in January, which brings the year-over-year reading to -12.5%. My how thing have changed. It was just six months back when the YOY reading had hit +21.6% -- this is what occurs when monetary policy goes berserk. Granted, Bernanke and Co. don’t have much choice right now; however, all of the current problems can be traced back to flawed monetary policy earlier in the decade.

The plunge in petroleum prices has had the most effect on import prices, that component is down 55% year-over-year. Excluding fuel, import prices are essentially flat – down just 0.3%.


Finally, the Commerce Department stated industrial production fell 1.8% in January, marking the third-straight month of decline – all were substantial declines (down 1.2% in November, down 2.4% in December and, as stated, down 1.8% last month).

Consumer goods, business equipment, construction supply and machinery were all hit hard last month. The manufacturing component delivered the heaviest blow – this segment makes up 77% of the index and it was down 2.5% last month -- pushed lower by a huge 23.4% plunge in auto-related production. Utility activity was the sole bright spot, up 2.7% for the month.

Activity is very depressed, especially within the manufacturing sector. But when we do get a bounce in activity, or at least a flattening process, inventory dynamics should provide a boost to GDP. The inventory-to-sales ratio has jumped since this debacle truly began in September, but is still meaningfully below recessionary levels. Inventory dynamics remain in place and this will provide a catalyst to growth – if only I knew when. Beyond that there is still a sustainability issue as the government is so involved that it puts the private sector increasingly on edge each day.

I’ll be out of the office for the next three days; either David of Peter will take over during this time.

Have a great day!

Brent Vondera, Senior Analyst