U.S stocks failed to hold the intraday high as the broad market fell off in the final hour, but the upswing made it four straight winning sessions; the S&P 500 is within 4% of the April 23 20-month high.  After that, the next upside target is the pre-Lehman mark of 1250. 

The market surely continues to price in a massive QE2 (and Bernanke better not disappoint when they do roll it out) but was also helped by things more fundamental, namely another really nice earnings report from Intel, released after the bell on Tuesday.  The consumer business remains challenged, but the company’s enterprise segment is rolling as businesses continue to spend and emerging-market growth remains hot. 

Profit results from JP Morgan Chase (JPM) also played a role, but more so in those early-session gains – I think the market took a closer look at the results and had some reservations about that one.  JPM was able to beat bottom line estimates (top line missed as revenue fell 15%) because the bank released more loan-loss provisions (reduction in cash set aside to protect against loans gone bad and that adds to earnings), an action I think will come back to bite the banks in the near future as they are forced to repurchase more bad loans (which amounted in a $1.5 billion loss for this latest quarter in JPM’s case) and home-price declines erode the loan book. 

The industry loan book is improving for now as credit-card delinquency rates decline.  But I wouldn’t be surprised to see the government force mortgage-loan principal reductions on the banks in yet another effort to keep people in their homes and as an eventual solution to this foreclosure fraud probe that is gathering steam by the day, and that means more losses. I don’t know what incurs higher losses, taking possession and selling the property at distressed levels or forced principal reductions – if the goal is to make all underwater mortgages suddenly in line with property values, then I think the latter may be more costly. 

Ultimately, Fed money-pumping was the go signal yesterday as basic material, industrials and energy shares led the rally.  Telecoms and financials were the session’s losers.

Volume was actually above the six-month average – first time that’s happened since late July. 

Market Activity for October 13, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index jumped 14.6% in the week ended October 8, following five weeks of decline.  But the increase was solely driven by refinancing activity as the average contract interest rate on the 30-year mortgage dipped within that 4.00%-4.25% range we’ve been talking about that will fuel the next refi wave. 

Applications to refinance a mortgage surged 21.0% as the 30-year fixed mortgage rate fell to 4.21% -- that’s on average nationally.  However, despite another consecutive record low 30-year rate, applications to buy a home fell 8.5% after the previous week’s 9.3% increase. 

Import Prices

The Labor Department reported that import prices fell a larger-than-expected 0.3% for September (expected to fall 0.2%) but it was all due to the energy component – oil prices fell in August and didn’t begin to bounce again until late September; the way the government calculates a reporting month’s numbers involves the back-half of the prior month and the first-half of the reporting month.

Excluding fuels, import prices rose 0.3%, but outside of the 0.8% increase within the food & beverages component most import-price increased were tame.  That will change in the coming months as the dollar slide began in the back-half of September – a lower dollar makes import prices more expensive, although this connection is muted a bit right now as firms worldwide have very little pricing power. 

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Brent Vondera, Senior Analyst

Phone: 636-449-4900