U.S. stocks bounced around the cut line for most of Monday’s session in a show of either remarkable or unbelievable resilience -- considering the developments out of Spain over the weekend could be seen as a harbinger of European banking problems soon to come and mounting tensions in Korea.  But the major indices did succumb to weakness late in the day, erasing almost all of Friday’s gain in the final 90 minutes of trading.

Financials, energy and basic material shares led the market lower.  Health-care and tech were the best performing groups, but even these were down as all 10 major industry groups declined on Monday.  Tech actually spent most of the session in positive territory, up as much as 0.85% even as the broad market struggled to peek above the cut line, but sold off by 1.38% in the afternoon.

Four Spanish savings banks are set to merge in a coordinated effort by the Bank of Spain in an attempt to strengthen their solvency.  The four banks hold more than $168 billion in assets, which is kind of a big deal for a $1.6 trillion economy.  These banks went on a lending binge during the Southern European real-estate boom and as Spanish unemployment has leapt to 20% from 8% in less than two years the banking troubles are clearly widespread. 

On the Korean peninsula, the South has begun to respond, although tepidly, to the March 26 sinking of their warship.  The North has reportedly ordered their military to ready for combat.  One can hardly take anything news that comes out of the North at face value, but conditions are ripe for trouble.

We’ve mentioned a couple of times now that risk lurks around many corners, just waiting to jump out and scare the complacency out of everyone.  A couple of these risks have begun to do so.

(I apologize for neglecting to update the index table yesterday.  Nothing much has changed since yesterday’s move basically erased Friday’s increase, but I know a lot of people depend on the daily figures so again I’m sorry for that.)

Market Activity for May 24, 2010

Chicago Fed National Activity Index (CFNAI)

The CFNAI’s three-month moving average came in at -0.03 for April, up from -0.09 in March.  This is the highest reading since February 2007 and suggests that the U.S. economy is very near it historic level of economic growth – a reading of zero on this obscure survey’s three-month moving average indicates that GDP is trending at the historic average.

A commentator on CNBC reported the CFNAI’s monthly reading, stating that it came in at 0.29 while acknowledging he doesn’t know what that means.  Indeed he doesn’t, because the monthly readings are only used to calculate the three-month average, which is the only reading one should be reporting – I did say the report was obscure.

Anyway, what one takes from this is that it’s another indication the growth explosion so many have expected has not taken place.  We are growing at historic average levels – call it GDP trending 3.4% -- but as we’ve spent time discussing, coming out of the worst recession in the postwar era we should be enjoying 6-8% GDP growth. 

Following the 1958, 1974, and 1981-82 recessions (the three prior-worst postwar contractions) those are the levels that ensued.  Since this latest recession was worse than those, yet we are only managing growth in the mid-3% range (especially with about $1 trillion in fiscal stimulus and the most aggressive monetary easing in the history of central banking), it’s saying something.  As the chart below shows, at least according to this report, we’re not even hitting activity levels that followed mild recessions/downturns, such as the expansions that followed the 1990-91 recession and the 2001 downturn. 

Existing Home Sales

The National Association of Realtors (NAR) reported that previously-owned home sales rose 7.6% in April to 5.77 million units at a seasonally-adjusted annual rate (SAAR).  That topped the 5.62 million units that were expected.  In terms of single-family units alone, sales rose 7.4% to 5.05 million units.

The inventory-to-sales figure (months’ worth of supply at the current sales pace) rose to 8.4 months from 8.1 in March.  For single-family only, the figure rose to 8.2 from 7.8 months’worth in March.

The median price of an existing home rose 2.0% in April (from March) and is up 4.0% from the year-ago period.  For single-family only, the median price rose 2.3% in April and is up 4.5% y/o/y.  The median price is down 24.8% from the peak hit in July 2006 – roughly the same for single-family only, down 24.9%.  

So, sales and prices rose during the month yet the supply figures deteriorated.  That’s not the way markets generally work, at least when they are allowed to find supply/demand equilibrium without a significant level of government intrusion.   Eventually, the market does find a market clearing price; there’s no stopping it, it can only be delayed.

The supply figure was certainly boosted as the moratoria on foreclosures is no longer in play and all of those mortgages that should have been processed as foreclosures months back are beginning to hit the market.  You can see this occurring in the homes available for sale figure, which has surged 24% over the past two reporting months.  For single-family only, homes available for sale is up 15% over the past two month and 25% since December. 

As the foreclosure process continues to run its course it will lead to more houses hitting the market and that means more distressed sales, which made up 33% of sales in April.  If the sales are not there to absorb this coming supply, and odds are they won’t be with the tax credit now gone (even with mortgage rates back below 5%), then prices will come under pressure again.  First-time home-buyers accounted for 49% of April sales.  

The sales numbers will be good for the next two reporting months, as this will reflect the closings of those contracts signed in March and April (existing-home sales are counted when the contract closes), but its July and beyond that concerns me. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900