U.S. stocks decline for a third session, but held in there well considering the horrible new home sales data, which came in much worse than expected.  The broad market bounced between gain and loss on a couple of different occasions, nothing new there, but a very late-session dip pushed the S&P 500 into negative territory. 

At one point in the morning session, immediately following the housing data, the broad index was down 1.3% and at one point in the afternoon, shortly after the FOMC statement was announced, the index was up 0.4% -- although not quite sure what drove even the blip up as a more pessimistic Fed statement offset the traders’ delight of ZIRP for eternity.  We touch on these releases below.  Again though, considering mortgage apps fell for the latest week, new home sales collasped and the Fed was more negative on economic conditions (but not too much as they are very sensitive about scaring the market right now) stocks held up well.

Four of the 10 major industry groups gained ground for the day, led by telecoms and consumer staples.  Utility stocks led the losers.  I don’t know what’s going on with this traditional area of safety over the past couple of sessions.  Maybe it’s the GofM fiasco, which gets worse by the day, and the worry that it will drive cost higher and damage southeastern power plants that use ocean and coastal waters for cooling purposes. I’ll note that oil in the water is not yet causing a problem in this regard, at least according to NextEra’s (formerly Florida Power & Light) CEO.

Market Activity for June 23, 2010

Mortgage Applications

The Mortgage Bankers Association reported that its applications index fell 5.9% during the week of June 18, as both purchases and refinancing activity weighed on the figure.

Refinancings fell 7.3% last week following the 21.1% jump in the prior week.  Purchases slipped 1.2% after the previous week’s 7.3% rise, which ended a four week plunge that sent purchasing apps down 42% since the tax credit expired on April 30.  The decline in the latest week comes even as the average rate on the 30-year fixed mortgage fell to 4.75%. 

New Home Sales

The Commerce Department reported that new home sales plunged 32.7% to 300,000 units at a seasonally-adjusted annual rate (SAAR) in May, both a new cycle and all-time low – 12% below the previous low of 339,000 units in January 2009, which many believed to be the bottom in new home sales; let’s hope the bottom has been put in this time. 

A large month-over-month slide was expected but this is nearly twice the estimate, and that was off of a large 11.5% downward revision to the April reading (446K units as opposed to the 504K initially estimated last month). 

By region, the South (largest new-home region) saw sales fall 25%; the West registered a 53% plunge; the Northeast recorded a 33% decline; and the Midwest reported a 24% drop.

On a non-adjusted basis 28,000 new homes were sold in May, also a record low.

The median price of a new home fell 9.6% from a year ago to 200,900 (December 2003 level) from $202,900 in April, and by the sales results there’s more downside to come – home builders are really struggling, not just due to weak demand fundamentals but from competition of distressed existing homes hitting the market.

As expected, the inventory/sales ratio surged back, rising to 8.5 months worth of supply at the current sales pace from 5.8 months worth in April – so it spent one month below the long-term average of 6.2 months worth only to shoot back to 38% above. 

The new homes available for sale (not adjusted for the sales pace, just the straight number) barely budged as it came in at 213,000 units, down just 1,000 from April.   This figure looks headed for the 1960s lows, as the chart below shows, and it may get there based on market conditions and that means a cessation in building. 

A lot of good the housing subsidy did, like chugging a two-story beer bong delivered from that French Quarter balcony – the hangover is a rough one.  Yeah, the tax credit put money in the pockets of mortgage borrowers and pumped up retail sales in March and April, but just as we saw via the May retail figures there will be an offsetting weakness to that those big early spring results.  And I really hope all of those new FHA-backed borrowers, and their sickly 3.5% down, can keep making payment or the housing market woes will increase.

Another hope, that Congress doesn’t come up with another goofy don’t-call-it “stimulus” plan that further extends and pretends only to delay the inevitable. 

FOMC

So the latest FOMC meeting came to a close yesterday and on the surface it didn’t appear that much changed from the prior meeting, except for the date.  But looking beyond the rate decision – and they decided on a 9-1 vote (Hoenig remains the lone dissenter) to keep ZIRP in place and the famous phrase “exceptionally low level of the federal funds rate for an extended period” intact.

But with regard to the comments on the economy specifically, the FOMC’s statement did change a bit, reflecting the weakening within certain data we’ve received over the past six weeks.  Such as:

* The Committee noted that financial conditions have become less supportive of economic growth, largely reflecting developments abroad – so there’s that focus on what’s going on in Europe.

* They also commented on commodity prices, noting the overall decline – although, while the most important commodity of all, oil, is currently $76/barrel vs. $85 at the time of the April meeting, develops in the GofM and regarding policy might just keep crude from falling as much as weak demand would otherwise determine.

You can kind of see how things are setting up for the release of the FOMC’s minutes (specific notes from the meeting that will be released in three weeks) when the Fed’s economic growth, employment and inflation estimates arrive.  As we talked about a couple of weeks back, they’re likely to revise their estimates yet again – the third revision in about six months.  Those revisions will be downgraded, but the Fed will be very careful not to be too honest, as one of their main objective right not is not spooking the markets. 

And for a couple other quick comments:

One, I find it interesting that the FOMC only comments on commodity prices when those prices are easing – that’s very telling, shows their bias to keeping things extremely loose.

Second, Bernanke seems to be gearing up for the next round of QE, something I’ve repeated for three weeks now, but bring it up again because the cautious FOMC statement offers additional indication more Fed asset purchases are coming.  It sounds crazy to say at these levels, but there may very well be more money to be made even in longer dated Treasury securities – at least in the intermediate period.  When rates do eventually rise (whenever that may be), however, it is likely to be an extremely harsh move. 

Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900