Most U.S. stocks slipped for the first session in four as the broad market followed international bourses lower, but the declines were mild.  A negative report on mortgage applications continued to suggest existing-home sales will endure another round of weakness, apps to purchase a home are down seven of the past nine weeks. This may have contributed to the weakness, but frankly I doubt the market is even paying attention – it’s more likely to be locked in to signals from the Fed, and yesterday Bernanke’s testimony before Congress didn’t offer anything new.

Consumer discretionary, telecoms and consumer staples were the winning sectors.  Energy and basic material shares led the seven of the 10 major sectors that declined on the day lower.

The CRB Index advanced for the first session in four as the prices of corn, wheat and gasoline drove the measure higher.  The price of wholesale gasoline rose for a third-straight session (up 34% since Bernanke’s August 27 speech in which he signaled the coming of QE2), even as the latest energy report showed gasoline stockpiles surged 4.66 million barrels last week to a 20-year high.  And the crack spread (refiners’ margin) has exploded, which means refiners have every incentive to accelerate production, yet gasoline prices continue to rally, closing at $2.53/gallon (about $3.15 retail).   We’re probably seeing the top end of this range as demand destruction will take hold before we hit $3.50.

It was a day in which global exchanges moved closer to total consolidation.  The London Stock Exchange Group began talks to buy the Toronto Exchange and Deutsche Boerse is in advanced talks to buy NYSE Euronext (to own 60% of the entity).    Reportedly, the merger involving the NYSE will have duel offices (NY and Frankfurt) and CEOs.  Proposing duel CEOs is just a ploy to get around the political tensions that may block the merger, but there will be just one executive team making the decisions.  The one that will ultimately be calling the shots is the team that resides in the dominate marketplace. 

Once upon a time the U.S. marketplace was unequivocally the dominant market with which to do business; the place to go public and to domicile.  Despite the fact that Mark Haines begins his CNBC show with: “Live, from the financial center of the universe this is Squawk on the Street.”  That phrase has become increasingly anachronistic by the year and it began with the Sarbanes-Oxley Act; the Dodd-Frank Wall Street Reform Act will diminish us even more.  We’ve got to get our status as the leading financial hub back and it must start now. 

Market Activity for February 9, 2011

Sector Activity for February 9, 2011

Mortgage Apps

The Mortgage Bankers Association reported that its applications index fell 5.6% last week, following two weeks in which the measure was essentially flat – up 11.3% in the previous week and down 12.9% in the week before that. 

Both refinancing and purchase activity declined last week. Applications to refinance a mortgage fell 7.7% and apps to purchase a home slipped 1.4%.  The average contract interest rate on the 30-year mortgage rose 32 basis points to 5.13% -- the first move back above 5% since April. 

This applications report is a pretty good signal of existing-home sales trends a couple of months out.  Since apps to purchase a home are down 12% over the past nine weeks, we’re probably looking at another round of weakness when the official sales figures roll in for February and March.

Bernanke: Purveyor of Everything that is Good, Not Responsible for the Consequences

Fed Chairman Bernanke’s first appearance before the new House Budget Committee yesterday, led by members who continue to be highly critical of monetary policy actions and the Fed’s dual mandate, was less entertaining than expected.   (He still has some time before running into his nemesis Ron Paul again at the next Humphrey Hawkins, but Paul headed a sub-committee hearing yesterday focused on the question: “Can Monetary Policy Really Create Jobs?” – I don’t think the Fed Chairman is required to speak before a sub-committee, so he’ll escape that intense grilling.)

The most interesting comment I heard came from House Budget Committee Chairman Paul Ryan as he reiterated the idea that our monetary policy is exporting inflation to emerging economies.  Bernanke dismissed this, as he did during the National Press Club event last week, saying that things like oil, food and copper prices are due to rising demand – suggesting that this is the sole reason for the increases and thus the Fed can’t be blamed for higher commodity prices; yet he almost bragged during a few weeks ago that the policy has driven stock prices higher.  So he can take credit for rising stock prices, but is blameless for rising commodity prices…ok.

It seems more than coincidence that the CRB Index has jumped 30% since August 27 (when Bernanke first signaled QE2 was coming). It’s not like economic activity within emerging markets suddenly blossomed in August, it’s been strong for 18 months.  Why did commodity prices fall 11% during the first eight months of 2010 even as emerging-market activity remained strong if commodity prices are only a function of demand?  It was more likely a result that the consensus believed quantitative easing had come to a close (and remember what stock prices were doing, down 15% and unable to get off the mat until the August 27 rescue).  And specifically, why did copper prices (which are not affected by weather-related events as one can say for food prices) fall 8% in the first eight months of the year, yet surge 40% since QE2 was effectively announced?  The answer seems pretty clear to me. 

Finally, Bernanke stated that the FOMC remains “unwaveringly committed” to price stability.  Let’s remember that statement over the next couple of years. 

I’ve personally been concerned about future inflation since the Fed began its quantitative easing campaign in early 2009. However, we have many economic challenges over the next couple of years and that is likely to put pressure on growth and keep inflation lower than it otherwise would be (and I’m not saying that growth necessarily causes inflation, but that’s another discussion).  But due to the nature of this move in stocks (pushed higher by Fed policy) combined with the weak state of the job market (rising stock prices are currently a larger impetus behind spending), it is likely that when stocks pull back again, spending will follow and the inflation that the Fed is engendering will ultimately take a while to get underway. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900