U.S. stocks, as measured by the S&P 500, extended the latest rally to five sessions and have closed green for 14 of the past 16 sessions.   Santa Claus has delivered a nice little rally for December as the S&P 500 has gained 6.6% since the month began.  Thanks Santa! 

Gosh, I hope he hasn’t heard about all of my critical comments.  Remember Santa, coal is harmful to the environment so don’t deliver it to my house. 

The day’s economic data wasn’t exactly helpful as mortgage apps slid 18.6% last week and the latest GDP revision and existing homes sales results both missed expectations.  And on GDP, the revision showed the growth remains way too dependent on inventory rebuilding; real final sales (GDP minus the change in inventories) have never been weaker in the postwar era at this point in the recovery cycle. 

Financial, utility, energy and consumer staples outperformed.  Tech and basic material stocks were the biggest losers, both closing down on the day. 

The CRB Index advanced for a fourth session, led by an increase in prices for hogs, wheat, aluminum and cattle (new high for cattle, so add that to the record list along with cotton and copper).  The energy complex also saw all components push higher.

The price of crude rose a bit on a larger-than-expected decline in inventories – down 5.33 million barrels, expected to fall just 3.40 million.  However, all of the decline occurred in PADD3 (Gulf Coast district) and as we talked about last week this is simply the managing of year-end inventories due to how the region taxes those stockpiles (meaning those supplies are still floating in shipping containers). The increase in the price of crude would have been much greater than $2 on a 14 million barrel stockpile decline over the past two weeks if it that decline was for real.    Gasoline inventories rose as demand fell 1.5% for the week. 

Market Activity for December 22, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index slid 18.6% last week as refinancing activity plunged 24.6% (sixth week of decline and a seven month low) and purchases fell 2.5%, following the previous week’s 5.0% decline. 

The average contract interest rate on the 30-year mortgage held steady at 4.85% for the week ended December 17, which is a surprise considering the Fannie Mae Commitment Rate jumped 21 basis points.  This means the spread between that commitment rate and the actual rate at the market slid from 40 basis points to 20 over the past week. 

Q3 GDP Revision

Wow, this was quite a surprise – and not in the good sense.  The latest revision to third-quarter GDP was expected to come in at 2.8% (and I think the whisper number was 3.0%) from the previously estimated reading of 2.5%.  It came in at 2.6% at a real annual rate. 

The higher expected revision was all based upon that higher revision to October retail sales and the narrower trade deficit for that month.  However, while the drag from net exports (the trade deficit) was less than it was in the previous estimate, the boost that everyone was expecting on the personal consumption side was not there.  In fact, the latest numbers show that it was less of a contributor to GDP.   That was the big surprise, that personal consumption was not stronger. 

The worst aspect of the report in my mind was that inventories were revised up again, accounting for 62% of the growth in GDP.  As a result, the real final sales figure (GDP minus inventories, which is a proxy for final demand) slipped to 0.9% at an annual rate for the third quarter, down from an already very weak 1.2%.  Even I was expecting this final demand number to improve, but instead it remains stuck at pathetic levels – this figure averages 4.0-5.0% growth during the early stages of recovery. 

The bottom line is that the economy continues to grow below trend, nowhere near strong enough to fuel the degree of job growth we need to make this cycle self-sustaining as it deals with deleveraging. 

Existing Home Sales

The National Association of Realtors (NAR) reported that existing home sales rose 5.6% in November to 4.68 million at a seasonally-adjusted annual rate (SAAR) after October’s 2.2% decline – November sales were expected to rise 7.1% to 4.75 million SAAR.  Single-family sales of previously-owned homes rose 6.7% for the month; sales of condos and co-ops fell 1.9%. 

As usual, I’ll focus on the single-family data regarding the specifics. 

Sales of previously-owned homes have bounced off of the 15-year low hit in July, but as the chart below illustrates have just barely moved above what everyone believed to be the cycle’s floor back in early 2009.  We’re likely to see another pullback over the next couple of reporting months as purchase applications have slipped again, the rise in rates (even as they remain at seriously low levels) surely isn’t helping in this very weak labor-market environment. 

The official supply figures improved.  The number of homes available for sale fell to 3.2 million from 3.26 million in October.  The problem is the actual number is at least double this level because there’s a shadow inventory that ranges between 4-7 million properties.  There are 3.6 million housing units that are vacant and currently being held from the market, according to the Federal Reserve Bank of Dallas.  

The months worth of supply eased to 9.3 from 10.1 in October.

The median price of an existing home pretty much held steady in November, down ever so slightly to $171,300 from $171,500 in October. 

Correction

Yesterday, we talked about household debt servicing relative to disposable income and overall household debt levels.  I pasted a chart of debt servicing that has been discontinued.  Below is the chart I meant to show:

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Merry Christmas!

Brent Vondera, Senior Analyst

Phone: 636-449-4900