U.S. stocks saw an opening rally fizzle, a brief increase that followed relative excitement in pre-market futures trading, as the broad market then hovered close to the cut line until 1:00 CDT as the market waited for Fed Chairman Bernanke’s afternoon testimony before the Senate. 

It was when Bernanke presented his opening remarks, illustrating just how puzzled Fed policymakers are by the lack of economic vigor even with unprecedented levels of stimulus, that the market went into its nosedive.  It was probably his comment that labor market conditions were the worst since the Great Depression (specifically referring to the level of long-term unemployment) that sparked the sell-off. 

To be expected on a day in which the broad market lost roughly 1.5%, all 10 major industry groups closed lower.  Consumer discretionary and energy shares led the decline, while telecom and industrials were the relative winners.  It’s strange for industrials to perform well on a relative basis following discussions on the lackluster behavior of the economy – but I guess abnormal is the new normal these days.

I can’t go without mentioning the President’s signing of FinReg yesterday. 

This photo is likely to be historic – and you know I don’t mean in a good way.  In terms of its potential to do economic damage, is this the equivalent of the Smoot-Hawley Act (signed into law June 17, 1930)?  We’ll find out.  The timing sure seems to be inopportune as credit continues to contract.  I’ve seen photos of the Smoot-Hawley signing – politicians smiling, slapping one another on the back as if it were a great legislative victory for the country.  We, of course, now know it was anything but.

Market Activity for July 21, 2010

Mortgage Apps

The Mortgage Bankers Association’s weekly applications index rose 7.6% last week, as apps to purchase a home rose for only the second time since the tax credit expired on April 30. 

The 7.6% increase in overall mortgage apps continues to be driven by refinancing activity (refis now account for 79.4% of the total index), which rose 8.6% last week as the average rate on the fixed 30-year mortgage fell to an all-time low of 4.59%.

Purchases rose 3.4% last week after sliding 42% since the week ended April 30.

Crude-Oil

We haven’t talked about the price of crude in a while; there hasn’t been much to say really as it has traded in a range $68-$78 since the flash crash on May 6.  The price had been making its second run in as many months for the $80 level, until the Energy Department released its weekly report yesterday showing crude stockpiles rose 360,000 barrels – a decline of 1.2 million was expected.

Further, gasoline stockpiles also increased more than expected, up 1.12 million barrels, as refinery run rates hit the highest level in about three years – clearly that supply is outpacing demand.  Fuel consumption is up 2.5% from the year-ago period, but 7.7% below that of three years back. 

Prices held in there pretty well.  Oil fell just 88 cents to $76.89/barrel and wholesale gasoline closed down a penny to $2.07/gallon (which results in about $2.60 at the pump).  But what looked to be a march to $80 for oil has been stopped – for now.  The storm brewing in the Caribbean may make $80 a reality again in quick order.

Bernanke on the Hill

Fed Chairman Bernanke reiterated, much like the latest FOMC minutes portrayed, that policymakers remain collectively confused by the state of the economy.  Bernanke stated that while the FOMC plans for an exit from their unprecedented level of monetary easing, “we also recognize that the economic outlook remains unusually uncertain.”  Thus, even as they remain prepared to remove their extraordinary degree of easing they may just make it more extraordinary in the near future.  Some may view that as flexibility, I view it as complete confusion. 

Bernanke tried to put a good spin on things, for sure the last thing he wants to do right now is scare the market, but it is clear that policymakers are uneasy with the fact that we can’t manage trend growth, much less the above-level of economic expansion that normally follows recessions, even with:  the Fed at zero, massive government spending, record low mortgage rates, the FHA backing more mortgage loans than ever at their ridiculously inept 3.5% down payment requirement, and banks attempting to modify delinquent borrowers like never before. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900