U.S. stocks fluctuated between gain and loss on several occasions, but finished to the down side as basic material and financial shares pressured the broad market.  

Financial shares, while surging from the depths hit in March 2009 have been trapped at a level that’s more than 60% below the 2007 peak (as measured by the S&P 500 index that tracks these shares) – the result of a quickly deteriorating profit outlook for the banks..  I’m afraid this will be the case of the market in general a quarter out.  And on top of the profit outlook, banks are now struggling with the foreclosure chaos that has arisen – delinquent borrowers claiming that signed affidavits are fraudulent because the bank official could not have possibly read all of these documents as the number of foreclosures overwhelm the industry. Also, due to securitization, there are legal claims questioning who exactly owns the title.  In the end, these borrowers are 9,12,18 months late on payment (the average is actually over 470 days -- amazing).  But for now, the foreclosure process is being thwarted yet again. 

Energy and tech shares helped to buoy the broad market as better-than-expected forecast from Hewlett-Packard helped tech and higher oil prices, back to $78/barrel after the weekly energy report showed decline in gasoline stockpiles, sparked a rally in energy stocks.  Crude inventories fell less than expected, but the move in gasoline supplies was enough to kick the price higher. 

In all, eight of the 10 major industry groups closed down for the session.  Volume came in 18% below the six-month average – that’s very weak during normal conditions, but one of the most active sessions of the past month.

Market Activity for September 29, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell for a fourth-straight week, but apps to purchase a home did increase for the first week in four.

Refinancing activity was what pushed the overall index lower – refis make up 81% of all mortgage apps.  The decline in refinancing activity occurred even as the average contract interest rate on the 30-year mortgage fell to another new low -- 4.38%.  But as we keep saying, those who can refi are waiting for 4.00%-4.25% as their next target.  And they’re going to get it I believe. 

In fact, there are members of Congress pushing a mortgage plan that would allow borrowers to refinance at a the fixed rate regardless of income, LTV or credit history.  This would certainly put a lot of money into consumers’ pockets and juice activity, but it would be quite destructive to mortgage-backed securities via a flood of prepays – and carry many other unintended consequences.  And would it really heal the mortgage market?   I don’t really have to answer that do I?  Beyond the obvious perils involved with ignoring income, LTV and credit history, such a plan will destroy any private-sector mortgage financing outlets that may still be alive.  Just another rigged market; we’ve learned nothing from the crisis.

Anyway, applications to purchase a home rose 2.4% after two weeks of decline. 

The Race to the Bottom

It was good to see the WSJ recently touch on the trend of currency devaluation in much of the world, it’s about time as this has been going on for a while now – it’s a function of the type of post-recession environment we’re in.  There’s a reason we see so many policy (fiscal or monetary) actions that are similar to those of the 1930s.  Politicians seek to look as though they’re protecting domestic jobs during a period of malaise and working to drive export activity

Nothing good comes from this race to the bottom, however.  And it turns into a vicious cycle…until it ends in destroyed trade relations.  For example, the U.S. pushes interest rates and the dollar lower, then investors run for places like Brazil where interest rates are high (and rates are high there for good reason).  This pumps the Brazilian real (their currency) higher, which results in that government intervening to devalue.  Heck, look at how the euro has rebounded (anything higher and the EU will be increasing interventions to halt that rise) – a rebound that’s a function of the latest slide in the U.S. dollar. 

Along these same lines is the equally ugly brother of currency devaluation: trade protectionism.  Protectionist tendencies are building (this time via the bill H.R. 2378, which passed the House 348-79), as we moved a step closer to allowing for the imposition of import tariffs if the Commerce Department deems an exporter a “currency manipulator” – which won’t be a tough sell as so many are involved in it right now.  This is another similarity to the 1930s and a one of the key factors that turned a nasty recession into the Great Depression.  Increasing tariffs back then hardly helped American exporters.   Quite the contrary, it hurt as the trading partner simply retaliated by imposing their own tariffs or buying more goods from other countries; as this ball got rolling the flow of trade slid 65% as one giant global trade war ensued.  

This latest bill is aimed at China and indeed we think of that country as the place we get only imports, but they are our third-largest export market.  (This is not to completely excuse China of their central planning and manipulative ways, can’t trust that regime anymore than a Russian apparatchik.  But to get into a trade/currency fight is no way to manage the relationship. A higher yuan value is in China’s self-interest – certainly selling us very cheap goods (and the quality is about as cheap) and earnings extremely low interest rates on those dollars is hardly an optimal situation.  What we should do is march over there, explain that we understand they can’t jack the exchange rate higher overnight, set an increasing valuation agenda over some period of time and publically state that China has decided this path on their own.  To try and corner them is not going to end well – it’s just dumb strategy.

Many believe that we’ve learned from these failed policies; let’s hope they’re right but I’m not totally convinced.  It’s not as if we haven’t engaged in or considered plenty of other policy paths that history has taught lead to an economic dead end – or worse, a cliff. 

For now this topic is more electioneering than anything else; the Senate doesn’t appear ready to acquiesce to the House.  But if the political momentum overcomes any rational thought (haven’t seen that before, have we?) then this sets up for a very troubling scenario.

Today’s Data

So yesterday was quiet on the data front as mortgage apps was the only release.  Today we get back to it – and sorry, on Tuesday I mentioned we had the Chicago PMI coming out yesterday; we get that very important reading on manufacturing today.  In addition, the Commerce Department releases the second revision to Q2 GDP and Labor the weekly event that is jobless claims. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900