U.S. stocks declined for a sixth-straight session, the longest losing streak since February 2009, and yesterday’s move would have been worse if not for a solid session for energy shares.

We were without a major economic release again yesterday, but get back to it this morning with trade, jobless claims and wholesale inventories.

Besides energy, utility shares also closed higher. The other eight of the 10 major industry groups ended lower, led by basic material and financial shares.

The price of crude bounced back above the $100/bbl mark after OPEC members failed to agree to Saudi Arabia’s supposed recommendation that the cartel increase production and the weekly energy report showed stockpiles fell 4.8 million barrels (expected to rise another 1.05 million -- halts four weeks of huge increases if memory serves).  The price of wholesale gasoline held at $2.98 even as those stockpiles rose 2.2 million barrels (a nine-week high) and gasoline demand fell 2.6% last week.  The national average retail price is down to $3.73, after peaking at $3.99 a month ago.

Another great 10-year auction took place yesterday as the bid-to-cover came in at 3.23 (last 12 mos avg is 3.10) with indirect bidders (foreigners) taking down 50.6% -- and all for a rate of 2.96%; the 10-year yield is down to 2.93% this morning.  Primary dealers took 41% of the auction, which isn’t surprising as they’ll be able to flip it back to the Fed – at least for another three weeks.

Market Activity for June 8, 2011

Sector Activity for June 8, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index fell for a second-straight week as purchases remain way too weak for the supply-glut millstone the housing market has hanging on its neck.

Applications to purchase a previously-owned home fell 4.4% last week (down 9% over the past two months) and refinancing activity rose just 1.3% even as the average contract rate on the 30-year mortgage fell another four basis points to 4.54% (down from 5.15% in February, but still above the postwar low of 4.21% hit last October).

Think about it.  We have home prices down more than 30% from the peak and 30-year fixed interest rates at 4.5% (7% is the 20-year average and averaged over 10% during the entire decade of the 1980s, just for a little perspective), yet we can’t find the sales to clear supply.

The reasons are plentiful.  A 9% official unemployment rate, 16% under-employment, 44 million Americans on food stamps, 13.3 million mortgages that are either underwater (10.9 million borrowers) or have less than 5% equity (2.4 million borrowers) and a flood of distressed housing that continues to hit the market.  These factors keep potential sellers trapped in their homes (which is also a problem for the job market) and results in fewer buyers, in addition to the unwillingness to buy as they believe prices will continue to fall.

It’s a nasty trap and only when the market is allowed to find that market-clearing price (prices must decline further) will the market hit bottom and begin to rise again.  And there is money out there, as I’m sure investors are itching to pour cash into this market, just not yet.   And for most of the buyers that will finance a home purchase, it all comes down to jobs.  Until the job picture turns around and payrolls grow at an aggressive and consistent rate (which will take an aggressive growth policy and sound money, policies we’re not yet ready to accept), there is no interest rate that will help.  Nevertheless, the Fed will try as I expect the next round of QE will be an explicit target yield on the 10-year Treasury, ala the 1940s when the Fed pinned what was then a 25-year Treasury at 2.5%, so we’re going to further test that mechanism.

Beige Book

The latest report on economic conditions over the six weeks ended May 27 in each of the Federal Reserve’s 12 districts (known as the Beige Book) stated that economic growth continue to improve, but at a slower pace.  (We get much slower and GDP’s going to print a negative number in the near future.)

Manufacturing activity continued to lead the way, but several districts reported that the rate of acceleration was in decline.

Seven of the 12 districts reported that uncertainties remained high, which was a function of higher commodity prices putting pressure on input costs as most districts cited this as an issue.  Most districts cited improvement in labor market, but the availability of skilled workers remained a problem (this is what I’m talking about when saying underwater mortgages are creating a problem in the labor market – workers are unwilling/unable to move as they’d have to come up with the money to pay the loan off).

Consumer spending picked up modestly in most districts, many citing consumers were focused on necessities and low-priced options.

Real estate markets for single-family homes were either little changed from low levels or continued to weaken across all districts.  Commercial real estate remained weak across the board, but seven districts reported slight improvements.

Loan demand was either unchanged or slightly improved with most districts citing weak demand for credit.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900