U.S. stocks rebounded from Tuesday’s losses as it was said the day’s economic data offset the fact that EU officials missed yet another self-imposed deadline regarding the latest and greatest debt fix.  Not sure why that story should receive any credence as the new-home sales data was hardly inspiring and while durable goods orders did beat expectations, the inventory data within that report showed activity is probably not lasting.  More on the economic reports below the click.

The more likely impetus behind the bounce was the report that Sarkozy will go begging to the Chinese to buy EFSF debt.  We’ve heard this one before, it ended with China saying no thanks.  But this time the Chinese apparently are more likely to do so as they are more aggressively diversifying away from U.S Treasurys (evident via last week’s latest TIC data) and it will give them bargaining leverage for more IMF voting rights. 

Energy, financials and basic materials led the rally.  Consumer discretionary, tech and utilities underperformed by the most. 

Well, as everyone should have expected, October 26 came and went with no great ground-breaking deal having been agreed upon, but today is a new day, and another chance for markets to get all juiced as the latest EU talks are long on words and extremely short on detail yet again – action isn’t needed, which is the hilarious aspect of this mercurial market.  Continued below…

Market Activity for October 26, 2011

Sector Activity for October 26, 2011

The Market:  A Death by a Thousand Cuts

Pretty late last night word was that the EU would force banks to price the sovereign bonds they hold to market values as of September 30.  I read this and thought, wow the Europeans are actually doing the right thing even if it will involve short-term economic pain.   This would force the banks to raise much more capital as they would finally be coming clean on their balance sheets.  However, it would clear the way for the banks to get things right again. 

Then, I wake up this morning and here a deal has been struck between EU leaders and bank representatives that involves weaker recapitalization requirements and that Greek debt will get a 50% haircut – nothing on forcing banks to price the rest of the sovereign debt on their books to where they trade in the market.  They also said that the EFSF will be boosted three-fold to €1 trillion, but again no details on how they’ll do this – they’ve pushed those specifics off yet again, now we’ll have to wait until November.  We won’t hold our breath. 

What I think I find most disturbing is that EU leaders believe (in fact it seems like they’re working to mandate) that even as a 50% haircut on Greek bonds will be taken, it is not a credit event.  So let me get this right.  Investors will take deep losses on that debt (Greece is forgiven this debt) but that’s not default, according to the EU.  That is, a few people can come together and decide to circumvent a market agreement.  All those investors who bet correctly and bought insurance (CDS) will not be able to collect on that insurance now, according to the EU. 

We’re supposed to get excited about this, actually rejoice on this news?  Quite the contrary in my view.  What we’re watching is policymakers destroy what is left of a market.  It’s a death by a thousand cuts and I’m going to have to assume nasty consequences will ensue at some point.  But for now, all is right with the world again as equity markets surge in early trading.

Mortgage Apps

The Mortgage Bankers Association reported that their applications index bounced 4.9% last week, this followed a 14.9% slide in the previous week.  Purchases rose 6.4% (down 8.8% previous week) and apps to refinance a mortgage increased 4.4% (off by 16.6% prior week).  The average contract rate on the 30-year mortgage held at 4.33% -- the record low of 4.18% was touched in late September. 

Durable Goods Orders

The Commerce Department reported that overall durable goods orders fell 0.8% in September (a bit better than the 1% decline that was expected) after slipping 0.1% in August.  Stripping out the volatile transportation component (commercial aircraft and auto orders fell hard), durable orders rose 1.7% (whipping the 0.4% increase expected), but the prior month was revised down to show a 0.4% decline – that’s the first downward revision to durable goods I can remember in many months. 

The business spending proxy – non-defense durable goods ex-aircraft orders – looked real good as it rose 2.4%, which was needed as the prior three months were weak.

We get the first look at Q3 GDP this morning and durable goods are going to help boost that reading.  Just an FYI though, it is shipments not orders that are used to calculate GDP so the bounce in durable goods order may not help so much as shipments for the quarter reflect week orders from the previous months. And I caution, the durable goods inventory/sales ratio continues higher, which signals durables will not offer much help to GDP over the subsequent few quarters.  

New Home Sales

New-home sales rose 5.7% in September (a 1.7% increase was expected) after four-straight months of decline that brought activity near the all-time low hit in August 2010.  On a seasonally-adjusted annual basis (SAAR), 313,000 new homes sold last month – unadjusted, 25,000 new homes sold, which ties the record low for the month of September.

The months worth of supply of new homes fell to 6.2 from the 6.6 in August – this is the inventory/sales ratio for the market.  This is a level that normally accompanies a somewhat healthy housing market, but this time it is only at this level because new-home construction is extremely low – the absolute level of new homes available for sale remained pegged at the all-time low of 163,000 units. 

The median price of a new home fell 3.1% in September to $204,400 and is down 10.4% from the year-ago period.  This matches the seven-year low initially hit last October and is off by 22% from the 2007 peak.  Builders can’t bring prices down much more, if at all, as the cost of construction has risen on them again over the past couple of years.  As a result, residential construction will remain at very low levels. 

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Have a great day!

Brent Vondera, Senior Analyst