U.S. stocks began the session under pressure as traders sent pre-market futures lower on the heels of disappointing top line results from IBM.  But you can’t hold a good market down; stocks rallied in the afternoon to close strong to the plus side.

The news from Goldman Sachs didn’t help stocks at the outset as operating income slid 85% from the year-ago period, missing estimates.  Trading revenue dragged the results lower, which wasn’t a surprise as peers have reported the same thing -- stating clients have been less willing to take on risk.   But the 40% drop in trading revenue was a surprise.

However, stocks turned around mid-day on speculation that Fed Chairman Bernanke, in his semi-annual testimony to Congress today on the state of the economy, may announce the implementation of the next round of stimulus.  No, not the full-blown QE2 we’ve been talking about, that will likely be a few months down the road yet, but word is the Fed will stop paying 0.25% on excess reserves that banks hold at the Fed.  The thought is that this will spur them to lend more.  Good luck with that one. 

I don’t think it is Bernanke’s style to announce policy shifts at this venue.  But regardless, if this kind of thing boosts the market, it’s no wonder it has found a way to advance three of the past four sessions even as the economic data continues to make a turn for the worse.  I too want stocks to go higher, but not for ridiculous and artificial reasons; when such things are the impetus behind rallies none of us are going to like the inevitable downside. 

Basic materials led the rally, the total Fed going to provide more juice play, with energy and industrial not too far behind.  Health-care was the only group to close lower for the session.  

Market Activity for July 20, 2010

Housing Starts and Permits

The Commerce Department reported that housing starts (breaking ground on new residential construction) fell 5.0% to 549,000 units at a seasonally adjusted annual rate (SAAR) in June after May’s 14.9% plunge that was revised down from original print of -10% last month.  The consensus estimate was for starts to fall just 2.7%.

How could economists have been relatively sanguine on home building?  Even after May’s 10% slide (or what was the believed to be 10% decline), to expect just a 2.7% drop from there is sanguine in my view based on the depressed state of the new-home construction market.  The same is true for all of these analysts/economists who believe a double dip will not occur simply because it is so rare – they too are overly optimistic.  Well, I’m sorry but the whole economic environment is atypical and thus even if double dips are rare you must prepare for outliers.  After all we’ve gone through, and after all the time everyone has had to study how long these credit/debt-led recessions can last, too many people still don’t get it – and you know what that means.

Anyway, getting back to the data, unlike May’s decline, which was driven by an 18.8% dive in single-family unit construction, June’s results were driven by a 21.5% slide in multi-family units – single-family starts slipped 0.7% in June.

As we discussed Monday, and on various other occasions, the new home market is contending with intense competition.  The number of distressed properties on the existing home side of the market continues to grow and that curtails new-home sales and sends prices below the cost of construction, in many cases.  It will be some time (some time?  I don’t know how to quantify that term, maybe a couple of years still) before residential construction returns to a level that looks even remotely normal. 

I’d expect another round of artificial housing-market stimulus to be coming down the pike.  This will get most people all excited again; you’ll hear the same vacuous comments we heard when the tax credit was in place: The housing market has found bottom and is back in rebound mode.  But policymakers’ grasp for anything that provides a quick fix will prove fleeting, as the only real fix is time and jobs. 

On the permits side, which is a good indicator of future construction, they rose in June after two months of decline.  June permits were also driven by multi-family units, which jumped 19.6%.  Single-family units, which account for about 80% of new-home construction, fell 3.4% after back-to-back 10.3% declines for May and April. 

Have a great day!