U.S. stocks gained good ground Monday, extending the rally to three days – a move that’s recovered half of the past month’s losses.

Yesterday’s session was propelled by the announcement that AT&T plans to buy T-Mobile USA; although, it must ultimately pass antitrust scrutiny. M&A activity almost always gives the market a boost and yesterday traders liked the fact that a large company showed the confidence to engage in a major deal even in the face of swirling “black swan” events.   In terms of this three-day rally, that G-7 currency intervention, may just have returned life to the yen carry trade – that trade basically died on Wednesday night when the yen strengthened beyond belief, but now that the G-7 has placed a floor under $/yen life has returned to an old standby for the stock trader.

I don’t think one can chalk yesterday’s rally up to an easing of exogenous risks. Surely this past weekend it appeared like the Japanese nuclear fiasco had improved as it was reported that TEPCO hooked power up to all six reactors.  However, yesterday morning we woke up to find that the most troubled number 2 and 3 reactors had black smoke billowing from them once power was connected, which forced a disconnect of that power supply.   (This morning we hear that all reactors have been connected again but not switched on as it’s unclear the water pumps will work.)

Further, uncertainty in the Mideast also increased as it looks like a military coup is in the works within Yemen – we’ve been backing that president as a means of relative stability.  Add this onto Bahrain, Syria, Libya, Egypt (which isn’t even on the map of concern any longer with what’s occurred lately) and Hamas looking to cause trouble again and that picture remains an ugly one with Islamists looking for opportunities to fill the void. 

Energy, industrials, tech and basic material shares all outperformed the broad market.  Telecom was the only group out of the 10 majors to close lower for the session, as shares of American Tower (AT&T won’t have a need to build more infrastructure now that they’re getting it with the T-Mobile purchase) and Sprint (which is left as a weaker player) got hammered. 

The greenback has moved into what I see as the danger zone of the 75 handle on the Dollar Index (DXY) as it closed at 75.40 yesterday, and is quickly heading for 74 this morning.  The G-7’s intervention may be helping the dollar against the yen, but the buck continues to lose ground against the euro, pound and Canadian dollar.  If 75 on DXY doesn’t cause trade and currency wars (a 1930s redux) then it will most certainly engender import prices to double-digit increases; it may just incite overall consumer inflation, beyond food and energy prices, to harmful levels – the only thing that will stop it is an economic environment that remains too weak. 

Market Activity for March 21, 2011

Sector Activity for March 21, 2011

Existing Home Sales

The National Association of Realtors (NAR) reported that existing-home sales fell more than twice the level expected in February, down 9.6% (expected to fall 4.5%) to 4.88 million units at a seasonally-adjusted annual rate (SAAR).  The big news is that prices fell for an eighth-straight month to a new cycle low.  Housing is in full-blown double-dip mode even if most analysts refuse to believe it – the massive supply of homes (both official and shadow), the pending sales data, and mortgage applications over the past three months have all signaled this was on the horizon. 

Sales of single-family units (which account for 87% of all previously-owned sales) fell to 4.25 million units SAAR in February, which is well-above the all-time low of 3.36 million hit in July but below the 15-year average of 4.77 million.  And the big problem is that nearly half of these sales are coming from distressed properties, which is what’s driving prices lower. 

The number of single-family homes available for sale rose to 2.97 million (from 2.92 million in January), which represents 8.4 months worth of supply at the current sales pace.  While the number of homes for sale is 25% below the peak of four-million units hit last summer, it remains 25% above the 15-year average – and this does not include the shadow supply that ranges another 4-7 million units, depending on the estimate. 

The median price of a single-family existing home fell 1.1% in February to $156,100 (the lowest level since February 2002), which is 32% below the 2006 peak.  Over the past 12 months, the median price is off 5.2%. 

Nearly 40% of the homes sold in February were distressed properties, and as prices decline it almost assures that more short-sale and foreclosed properties will hit the market as more borrowers go negative on their mortgages and simply walk away – it’s a function of borrowers not putting enough down in the first place, but with prices down 32% on average, even those that put the more appropriate 20% down could be underwater. 

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Have a great day! 

Brent Vondera, Senior Analyst