U.S. stock indices defied a bevy of troubling realities for most of yesterday’s session before succumbing in the final hour as most closed lower.  The Dow Industrial Average bucked the trend as it was able to manage a slight gain thanks to shares of IBM.  However, the Dow Transportation Average took a 1.50% hit, which is not a good sign for Dow theorists who carefully watch for when these two indices diverge – although there are so many variations of this theory, it’s difficult to lend much credence to the view. 

Utilities extended their lead as the best-performing sector year-to-date, with health care and telecoms also outperforming the broad market.  Basic material, industrial and energy shares led the losses.

The scene in Europe didn’t get any better as the Greeks have come through with nothing since stating 36 hours ago that they were close to following through on EU/ECB/IMF (the troika) demands. 

In addition, the largest PIIGS economy – Italy – has seen its CDS (insurance against default) rise to a new record.  S&P cut Italy’s credit rating on Monday night as they finally acknowledge that neither economic growth nor their budget picture will improve over the next couple of years – the EU is praying that Italy doesn’t go Greek, to paraphrase Bret Stephens.  What’s more, a gauge of German investor confidence fell to the lowest level since December 2008.   And then, the IMF went ahead and further reduced growth forecasts for the EU, U.S. and the world – although people should have factored in long ago that their forecasts are worthless.  So not so good over there, or anywhere else for that matter. 

The FOMC closes its two-day meeting this afternoon and since that meeting was extended to two sessions back in August (originally meant to be a one-day meeting) traders have expected the Committee to roll out the next round of stimulus.   What everyone expects is that Operation Twist we’ve talked about for some time now (extending the duration of the balance sheet by selling short-dated bonds and buying longer-dated issues) and possibly eliminating the interest paid on excess reserves at the Fed so to encourage banks to lend more.  Of course, there must be demand for those loans, which is something the Fed has zero control over in an already debt-laden environment.  

Market Activity for September 20, 2011

Sector Activity for September 20, 2011

Housing Starts

Builders broke ground on 571,000 units at a seasonally-adjusted annual rate in August (590K was expected), down 5.0% from July number, which was revised lower by 3K.

So housing starts remain floored, as they should with the glut of supply out there.  Consider that 3.7 million existing homes that are officially available for sale, four million mortgages that are seriously delinquent and 3.5 million mortgages that have been modified for which there’s close to a 50% re-default rate.  So at roughly five million existing homes selling annually, that brings the months’ worth of supply of existing homes to nearly two years worth.  There is no surprise that new-home building remains at record lows. 

And factoring in these supply realities, there are still people out there that believe the current level of home prices present a great opportunity.  The data simply doesn’t suggest such an opportunity has yet arrived. 

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Have a great day!

Brent Vondera, Senior Analyst