This is the third-straight Monday in which stocks got off to a bang. Two weeks ago we rallied as the G-20 meeting concluded with all members pledging to keep stimulus plans going. Last Monday stocks celebrated APEC’s (Asia Pacific Economic Cooperation) members’ comments that they would do the same. Yesterday, stocks were juiced by a statement from the president of the St. Louis Fed that the central bank should continue to buy mortgage-backed securities – and the way that housing is becoming conditioned to these low rates the Fed will likely have to get the 30-year mortgage rate down to 4.50%, or below, to keep that market going.
All 10 major sectors gained ground on the session. One would have thought basic material stocks to have led the rally, with the easy-money trade alive and well, but it was telecoms that propelled the session. It’s no coincidence that it was just Friday in which bond maven Bill Gross, via his monthly letter, recommended buying these shares because economic growth will mirror utility growth rates as Washington seeks to regulate anything and everything. The attractive yields on stocks such as Verizon and AT&T (nearly double that of the 10-year Treasury) obviously have something to do with the rally in these shares as well, with the Fed at zero.
Volume on the NYSE Composite came in under 940 million shares, 23% below the six-month daily average.
Market Activity for November 23, 2009
Commodity Prices and the GreenbackThe CRB index (an index that tracks a basket of commodities) is closing in again on the post-crisis high (touched a month ago) as Fed officials continue to express that the central bank will need to remain very loose for a long time. Last week’s speeches by various Fed officials didn’t offer specifics but their easy-money opinions were evident and some of the formerly hawkish (in terms of their inflation concerns) FOMC members have become dovish – that’s an important point to be aware of. Comments became more specific though on Sunday night as St. Louis Fed Bank President James Bullard stated the Fed many keep rates aggressively low to 2012 and the mortgage-backed security purchases program should be extended. This sent commodity price higher Monday, with metals leading the charge. Gold hit a new closing high of $1,165/oz., aluminum hit $2,035/metric ton (well below the 2008 spike but back to 2005 levels when economic activity was robust), and copper is up to $310/lb.(closing in on levels hit when home construction was going gangbusters). Oil remains near $80/barrel even as fundamentals suggest something closer to $40 is appropriate – of course crude likely has some Iranian-lunatic premium priced in.
This is all the loose Fed/dollar-down trade – none of these prices appear to be justified base on supply/demand fundamentals. The trade had chilled out a bit, pretty much moving sideways, over the past three weeks but looks set to roll again in the near term. (Looking out a few months the trade is likely to pull back as the economy shows its legs remain wobbly, before resuming its uptrend.)
The dollar hit the 74 handle on the Dollar Index again yesterday, a sustained move below 75 is viewed as a sign the greenback will test the all-time closing low of $71.33 hit in April 2008. If you dozed off over the previous two sessions you missed the dollar rally. Policy makers, and I’m talking about the Fed not Washington as politicians want the dollar to keep falling, will not become concerned until the Dollar Index settles in at 74. This morning it has bounced a bit back to 75.21.
Existing Home Sales – The Last Hoorah? (for a while at least)
The National Association of Realtors (NAR) reported that previously-owned home jumped 10.1% last month to 6.1 million at a seasonally-adjusted annual rate (SAAR) from September’s downwardly revised 5.54 million. This blew by the expectation for a 2.3% rise to 5.7 million units. Single-family sales rose 9.7% to 5.33 million – the highest level since February 2007; condo/Co-ops sales rallied 13.2% to 770,000 SAAR – the highest reading since March 2007.
The median price of a single-family existing home fell 1.6% to $173,100 – off by 6.8% over the past 12 months and down 25% from the cycle peak hit in July 2006.
The supply figures continue to move in the right direction as the homes available for sale reading dropped to 3.00 million from 3.10 million. At the current sales pace it would take this inventory (inventory/sales) 6.8 months to sell off – that’s down from 10.6 months hit in November 2008. Anything over 6.0 months worth is traditionally viewed as a buyers market, but this is a major move lower by this measure of supply.
We must, however, be cognizant of the inauspicious reality that banks are holding back the foreclosure process – the rate of foreclosure is not keeping pace with the increase in 90-day delinquency rates. Thus, there is a shadow supply, as some have termed it, that has yet to hit the market. Last week, NAR stated that that the total of mortgages either 90-days late or in foreclosure hit four million through September, so it is pretty-darn likely we’ll see the supply figures rise meaningfully again over the next several months.
Is this the last housing market hoorah for a while? October’s sales data were undoubtedly fueled by a rush to get in before the first-time homebuyers tax credit expired (must close by November 30 and contract closings are taking 6-8 weeks), We now know that the credit has been extended through April, but that wasn’t made official until November, thus those looking to take advantage had to get in. This existing homes figure is based upon contract closings, thus these are contracts that were signed in August and early September. Keeping this in mind, the November reading should receive a boost from late-September/early October purchases, but the back-half of October probably saw an immediate sales halt.
We may soon be watching quite a reversal take place as the efficacy of the tax credit is unlikely to have the same powerful effect as it did during the traditional home-buying season and most have already taken the $8K lure. From there, it seems pretty clear to me that when the credit eventually expires home sales will endure another round of significant weakness.
Fed-induced rock-bottom interest rates are certainly helping the housing market as well, but the market still has to contend with a jobless rate north of 10% (a reading north of 7.5% is highly unusual in the U.S.) and supply that is currently held from the market but must eventually hit. Since the market has become conditioned to these rates, ever a slight increase in mortgage rates will do massive damage to housing. The Fed will do everything in its power to hold down rates but for how long and at what price?
Eighteen months back we believed housing would begin to recover in the spring of 2009 – meaning durable sales activity and a sustained increase in prices. That estimate appears to be correct at the present. Unfortunately, I now believe it will prove to be quite inaccurate, which will become evident over the next 12 months.
The housing market has two very serious pressures to deal with over the next year. One, prime fixed-rate mortgage delinquencies make up 54% of the quarterly increase in loans 90 days past due but not yet in foreclosure – that’s according to the Mortgage Bankers Association. This is a lot of supply that will be thrust onto the market, and unless the labor market bounces back quickly, which is unlikely, the problem will persist. Two, we have Alt-A and option ARM resets to get through – and this is likely a major concern within the Fed, undoubtedly one of the main reasons they’re holding their benchmark rate at zero.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment