U.S. stocks rallied for a third-straight session yesterday as the Greek Parliament approved the latest austerity plan – if Greeks are rioting in the street and burning buildings now, wait until government spending is slashed to the tune of 13% of GDP.

Also behind this latest rally is the expectation that a Brady Bond solution will occur; plenty of people have been talking about this for a couple of weeks now.  This would mean that Greek debt would be exchanged for German debt, thus allowing the banking system to unload the bad Greek debt from their balance sheets.  But I think there’s a major political hurdle to such a plan.  Besides, what happens when the Spitalian debt bomb goes off?  Germany can’t throw more deadbeats on its back and carry them also to financial salvation.

Financials led the rally as the Fed proposed capping the interchange (card-swipe) fee at 21 cents.  While that’s half the current 44 cents, it’s nearly double the 12-cent proposal previously talked about.  Basic material and energy shares were also hot.  Health care and consumer discretionary shares were the laggards.

The CRB Index gained along with stocks as you can’t get one without the other – at least about 90% of the time anyway.  And that’s the problem here.  The level at which key commodity prices reside means that higher stock prices are offset by the cost drubbing consumers endure.   The Fed could get away with this when crude was trading at $70/bbl but that was before QE2, which ends today by the way.

With each iteration of Fed stimulus, you get this blowback effect from the cost side, an acute problem as joblessness remains very high.  Crude is suddenly back to $95/bbl and wholesale gasoline up another 12 cents yesterday, above the $3 mark again (wow, that brilliant plan to release strategic oil reserves worked for a whole three sessions).

Treasury securities took another hit today after the $29 billion auction of seven years didn’t go so well – the demand suddenly isn’t quite as strong (at these low yields) as the primary dealers can’t simply flip this stuff back to the Fed with QE2 no expired.  But just wait for the next round of fear, investors will gladly buy up those Treasurys (yes, correct spelling) at sub-3.00% again – and that fear will set the stage for the next round of QE.

Market Activity for June 29, 2011

Sector Activity for June 29, 2011

Mortgage Apps

The Mortgage Bankers Association’s application index fell again, down 2.7% last week as it was pressured by both purchase and refinancing activity – or lack thereof.

Even though the average contract rate on the 30-year fixed mortgage fell 11 basis points to 4.46% (lowest level since November – the 50-year low of 4.21% was hit last October).  Apps to refinance a mortgage fell 2.6% after the 7.2% slide in the previous week.  Purchase apps fell 3.0% after the 2.8% drop in the previous week.

Pending Home Sales

The National Association of Realtors (NAR) reported that pending home sales (contract signings for existing home purchases) rose 8.2% in May (much better than the 3.0% rise expected) after sliding 11.3.% in April.  These are normally an early indicator for the next month’s official existing-home sales data, which is counted when the contract closes.

However, purchase applications (the data touched on above) were up just 4.7% in May – they are down 5.7% for June.  So there is some disconnect between apps and the NAR’s signings data for May.

And while pending sales appear to forecast that existing home sales bounced in June, after declining for two straight months, the reading isn’t the reliable indicator it usually is.  Contracts aren’t making it to close at the rate they usually do (one reason may be that the appraisals aren’t coming in at the value needed, and surely there are other issues I’m not aware of), so these pending sales aren’t all turning into official sales in the subsequent month.

Further, that disconnect between apps and pending sales may be a function of double counting as that potential buyer quickly signs a new contract on a different home – which would explain why pending sales have printed numbers higher than the apps have .  I believe applications are adjusted for cancelations (those denied), while the pending home sales data is not.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900