U.S. stocks declined for a second-straight session, with most of the move occurring in the afternoon.  The slide pushed the S&P 500 below the 200-day moving average.

The day’s economic releases were offsetting as the existing home sales report for May was much worse than expected, while the latest regional manufacturing survey was strong.  The ABC consumer confidence reading for the week ended June 20 was not released until after the close.

Energy shares led the broad market lower.  They bounced briefly after a New Orleans District Court judge halted the moratorium on deepwater drilling, but summarily slid after the Obama Administration stated it will appeal. 

All 10 major industry groups closed down for the day, telecoms and health-care being the relative winners as they fell just 0.56% and 0.89%, respectively. 

In a sign the market has about zero confidence the economic recovery will progress into a full-fledged expansion, yesterday’s $40 billion went very well on all fronts.  Demand was strong as the bid-to-cover ratio came in at 3.45 (the four-auction average is 3.07), both indirect (foreign central banks) and direct bidders came in above average, and all for the lowest yield since December -- 0.738% for two years. 

Market Activity for June 22, 2010

Existing Home Sales (all charts are single-family only)

The National Association of Realtors reported that existing-owned home sales fell 2.2% to 5.66 million units at a seasonally-adjusted annual rate (SAAR) in May from an upwardly revised 5.79 million units in April, or up 8.0% from March. 

This wasn’t supposed to occur, not yet, as this data measures contracts signed in April (the tax credit deadline) – the consensus estimate was for a 6.0% increase to 6.12 million units.  The fact that previously-owned home sales have begun to decline again already, not really expected to begin the hangover until the July data is reported, shows that the retrenchment may be substantially worse than previously expected -- unless, contracts took longer to close due to the influx of contract signings in April.  Thus what was expected for May will show up in June. Even so, July will begin the retrenchment period as sales have been pulled forward by the subsidy, and that’s when the next round of nasty begins for the housing market. 

Single-family only sales fell 1.6% to 4.98 million units SAAR , which follows large back-to-back increases of 7.8% and 7.7% in March and April, respectively. 

The median price of a previously-owned home actually rose a rather robust 4.2% on a month-over-month basis, up to $179,600 from $172,300 for April.  A lot of good that did, sellers are going to be in for reality shock because prices still have some downside.  For single-family units, the median price rose 4% to $179,400.

The months’ worth of supply figure, the inventory/sales ratio, ticked down to 8.3 from 8.4 in April.  At this elevated position, even after the large pickup in sales during the previous two reporting months, its shows we’re going to hit 9 months plus again as sales plunge over the next few months – even higher unofficially due to shadow inventory (or properties that have not yet progressed through the foreclosure process). 

For single-family only, supply fell to 7.8 months worth from 8.1 in April. 

First-time buyers accounted for 46% of May sales, 15% more than the historic average.  Distressed properties accounted for 31% of May sales, which is a level that has remained constant for several months.  When the inevitable surge in distressed properties hitting the market arrives, banks begin to dump these properties, it’s going to be felt in prices. 

This is a very weak report, single-family home sales are just 23% above the cycle low (also an 11-year low, hit when the financial crisis was in full effect) even with the tax credit subsidy, a fixed 30-year mortgage rate below 5%, and Fannie, Freddie and FHA backing more than 90% of all originations.  I think the cycle low is in jeopardy of being breached when the credit expiration hangover kicks in. 

Richmond Fed

The factory activity gauge out of the fifth Fed district (the area the Richmond Federal Reserve Bank covers) decelerated to a reading of 23 for June from May’s 26 – a reading above zero marks expansion and 23 shows very good activity.

The internals of the survey looked good too.  New orders fell but remained at a fairly robust level; the employment figures looked good, as the number of employees and the average workweek indices rose, although wage growth decelerated.  The only bad number came from order backlogs, which fell all the way back down to a reading of 3 from 16 in May. 

So, overall Richmond showed factory activity remained robust in June, but this measure is not as important as the factory gauge out of the Philly region, which posted some disappointing employment readings when it was released last week.  Also, just like Philly, the decline in order backlogs may be signaling trouble in the coming months. 

ABC Confidence

The confidence survey from ABC News improved ever-so-slightly in the latest week (ended June 20), but as the chart below shows remains deeply negative.

Waiting for the Fed

It won’t all be about the Fed today, the FOMC ends its two-meeting this afternoon, as we also get new homes sales but the market will certainly be focused on any change in the language of their statement at 1:15 CDT. 

Undoubtedly, there will be no change in their rate policy, ZIRP will live on for quite a while still.  How long is a while?  Maybe for another year, possibly into 2012 believe it or not.  But we’ll watch to see how the language changes due to the renewed weakness within certain economic data combined with problems in Europe and the potential drag the euro zone economy will have on global growth. 

Beyond that, as we round out the year and get into 2011, expect to see a new round of quantitative easing (a massive new program that makes the previous $1.5 trillion in bond purchases look paltry) along with a moratorium in interest paid on deposits held at the Fed – in an attempt to get velocity rolling again.  The Fed will try its darnedest to incite inflation (because they see this as the lesser of two evils as they fear a summary recession and deflation).  I don’t think they’ll stop another economic downturn in the near future, but over time they will be successful in achieving the goal of driving price higher.  The return to normal is out in the distant future I’m afraid. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900