U.S. stocks rallied yesterday, recouping all of the Tuesday’s late-session sell-off and then some.  I really hope the bounce wasn’t fostered by April’s large increase in pending home sales, for if it was the gains will be quickly erased.  Then again, what else is new these days as we continue to circle the roundabout -- Big Ben, Parliament.

Energy shares led the way, jumping more than 4% as the drubbing the group took over the previous 26 sessions (down 18% and much worse for those directly related to the accident in the Gulf of Mexico) encouraged some bargain hunting, along with some likely profit taking for those who had been short the shares.  Basic material and financial shares were also among the top performing groups.  The laggards were consumer staples and telecoms, the previous session’s top performers.

For the day at least, the market forgot about the European debt contagion, the fiscal dilemma within our own states and localities, renewed Korean and Middle East tensions, the rolling housing mess, etc. 

Again, I find it hard to believe the pending home sales drove the rally; anyone who’s paying attention knows that home sales will slump again as we get into the July sales data.  Maybe it was more about traders wanting to get in ahead of what will be a big headline May jobs number on Friday.  The overall figure will be driven by census jobs as May is the peak hiring month for the decennial event.  We’ll need at least 200K in private-sector payroll growth for the market to rally post-release. 

Market Activity for June 2, 2010

Mortgage Applications

The Mortgage Bankers Association reported their applications index rose for the fourth week in five, but again it was all refinancing activity as purchases declined.  No tax credit?  Then, no sale. 

Refinancing activity rose for a fourth-straight week, which is also the length of time the 30-year fixed mortgage rate has remained below 5.00% -- up slightly last week to 4.83% from 4.80%.

Purchases continued to evaporate, plunging 38% over the past four weeks.  This is the hangover from the tax credit-led sales; that subsidy pulled sales forward, stealing them from the rest of the spring/summer buying-season.  

Pending Home Sales

The National Association of Realtors (NAR) reported that pending sales for previously-owned homes rose 6% in April (an increase of 5% was expected).  This rounds out a big bounce over the last three reporting months as pending sales (contract signings) jumped 8.3% and 7.1% in February and March, respectively. 

Frankly, even though a 6% increase is a big number, particularly on the heels of the bounce in the previous two months, I was looking for a larger increase.  The April pending sales data covers the final push from buyers to get in prior to the expiration of the tax credit (must have had a contract signed by April 30).  These pending sales will show up as official existing-home sales in May and June, as they are not counted until the contract closes.  The subsequent  months are going show considerable weakness, as touched on above. 

In terms of region, sales soared 29.5% in the Northeast (the only region to post decline in the previous month), rose 7.5% in the West, were up 4.1% in the Midwest and fell 0.6% in the South. 

Vehicle Sales

Year-over-year vehicle sales were up big in May, but of course the comparisons over the past five months have been the easiest the auto industry has seen in at least 28 years, and possibly ever when one considers the magnitude of the decline a year ago. 

Total vehicle sales rose 17.3% to 11.64 million units seasonally-adjusted at an annual rate (SAAR) from 9.92 million units in May 2009 – a 30.2% decline from the May 2008 level as the recession was still in play, credit was available only to the most qualified of borrowers, and GM and Chrysler filed for bankruptcy. 

I want to get excited about sales increases and overall consumer spending rebounds as much as the next guy.  However, there is too much data and policy decisions that more than suggests the recovery is hardly durable – has the juice, the “escape velocity” as economists like to call it, to propel consumer activity and overall economic growth in a lasting manner. 

According to the Federal Reserve, the average maturity for a car loan is over five years (63 months), the average rate is 4.28%, the average borrowed is $28,000 and LTV is at 90.  That amounts to a monthly car payment of $500.  Even for the borrowers who can take advantage of zero percent financing, which has made a comeback, the monthly payment is $445.  If the economic recovery fails to prove durable, this additional borrowing will spell trouble. 

The bright spot was the 24% y/o/y increase in truck sales, which shows there is some spending coming from small business/sole proprietors.  Again, the comparison was about as easy as it comes.

Have a great day!

Brent Vondera