U.S. stocks erased early gains of nearly 2% during another choppy trading day, but the broad market did manage to close fractionally higher after sinking below the cut line on two occasions.  The market continues to retest that 1120 level on the S&P 500, and to this point doesn’t seem to want to plunge below that level on a closing basis (it dipped below that market intraday on August 9 and 10 – it will probably take additional weak data to break that line.

Telecoms, tech and industrials were yesterday’s best-performing groups.  Financials continue to feel the pressure as it was by far the worst-performing sector.  Energy, utility and basic material shares also closed lower.

The market may have gotten a little carried away with its expectations of what Bernanke will say at Friday’s Jackson Hole affair.  U.S. stock index futures were up pretty big pre-market, but traders faded the open and by 11:00 CT the S&P 500 had dipped to negative territory.

Coming in yesterday morning there was plenty of chatter the Fed Chairman would signal the next round of market-goosing QE was on its way via his annual speech from Jackson Hole – just as was the case last year at this time.  However, as the day progressed (or I should say regressed) it became apparent that traders began to switch their assumption, maybe Bernanke will only touch on some options in his speech, holding off on full-blown action until recession is evident – and they may not have to wait that long if ISM (scheduled for release next week) prints deep enough in sub-50 territory, a reading of 45 will send a clear signal technical recession has returned.

This is a funny market though and today is a new day as traders are back on the Bernanke-will-save-us expectation as St. Louis Fed Bank President Bullard dangled that QE carrot in front of everyone in a speech last night.  U.S. futures are up strong, we’ll see if we can hold the gains this time.

On the European scene, the ECB has successfully quelled the sell-off in Spanish and Italian government bonds that hit its crescendo in early August.  What the ECB is doing is what we’ve seen central banks from Britain and the U.S. do for a couple of years now: Buy bonds.

Trichet and Co. have aggressively entered the market and Spitalian bond yields have rallied back to 5% from the perilous 6% (a rate seen as the point of no return for these anemic economies) hit three weeks back.  The problem is the central bank cannot continue to buy bonds for a long period of time without causes even greater disruptions in other parts of the economy, at which point the yields may soar in spring-loaded fashion – rates that will eventually proper-smash these economies if miraculously strong levels of growth do not emerge.

Market Activity for August 22, 2011

Sector Activity for August 22, 2011

CFNAI

The Chicago Fed’s National Activity Index for July came in at a much better-than-expected -0.06 (expected to print -0.48) and the June reading was revised up to -0.38 from the previously reported -0.46.  These results have the more important three-month average at just -0.29, really miles away from the -0.70 needed for this index to signal the economy has fallen back into recession.

So unlike last week’s Philly Fed, which surely indicates recession is very likely (particularly since the actual GDP figures of the past two quarters have been too close to negative territory), this index improved to a point that takes that risk off the table for now.   This index has a good track record going back to 1970.

And maybe lost among most people is the indicator level on the three-month reading that signal where inflation is going.  It takes a +0.70 after two years of economic recovery to signal that inflation will accelerate in a sustained manner.  This is surely something Bernanke is watching and since the figure has remained in negative territory for four months now, he is probably willing to ignore the actual inflation readings (which remains above the Fed’s stated “comfort zone”) and may just be willing to get pretty aggressive in his speech on Friday.   I’m not sure he’s going big bang just yet, but we’ll find out in a couple of days.

Mortgage Delinquencies

During the second quarter, mortgage delinquencies rose 12 basis points to 8.44% relative to the first quarter, but did fall 141 basis point from the year ago period when it was 9.85% -- this National Delinquency Survey has loans that are at least 30 days late, excluding those already in the foreclosure process, at 4.38 million.

The number of home loans seriously delinquent (90 days or more delinquent plus those in foreclosure) was down 25 basis points to 7.85% from the 8.10% in the first quarter.  This measure fell 126 basis points from 9.11% in Q2 2010.  Assuming this survey is accurate, the total number of mortgages that are 90 days late or already in foreclosure stands at 4.08 million.

In terms of loan breakdown, roughly 5.60% of prime loans were seriously delinquent (SD) last quarter; 26.15% of sub-prime loans were SD; and 7.88% of FHA loans were SD.  All of these rates improved on quarterly and yearly bases.

The percentage of loans that entered the foreclosure process fell 12 basis points to 0.96% from the 1.08% recorded in the first quarter.  This is 15 basis points below the 1.11% that entered the foreclosure process in Q2 2010.  This figure is a sketchy as the foreclosure process has been delayed, hitting a wall late last year as the robo-signing investigation and trials got underway.   Even though the delinquency rates are lower on a year-over-year basis, there is a pipeline out there that must eventually flood onto the market as the process has been delayed.

The total amount of homes in foreclosure process stands at 4.43% or 2.2 million loans – this is the shadow inventory, which assuming all delinquent loans are cured and never make it to foreclosure (ridiculous assumption, but I’m just saying), will alone significantly boost current official supply figures.

Put delinquency and foreclosure rates together and 12.87% of the mortgage market (6.7 million loans) are either late or in foreclosure.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900