U.S. stocks sold off for a fifth session in six on Monday, but a rally in the final two hours erased roughly one-third of the morning losses.  Unfortunately, the price of oil, which had backtracked to $95.50/bbl, rebounded too to close at $97.50/bbl – and with stock-index futures up just a touch this morning, crude is back above $98/bbl as I type. 

Frankly, I think we should view yesterday’s 1.9% decline in stocks (as measured by the S&P 500) as a victory because the latest two-year auction showed a much greater run for safety.  The Treasury auctioned $35 billion of two-year paper and the bid-to-cover hit 4.07 (four bids for every $ offered) -- the highest since BTC records began in 1993.  And all this demand occurred at prices that result in a 0.28% yield.  The mentality:  Find a place that just gives me my money back. 

I don’t want to belabor the European subject this morning as we’ve spent much time discussing the debt problems in both the U.S. and Europe, along with the fact that policymakers implement strategies that do nothing but delay the inevitable as they cross their fingers and hope buying times does the trick. 

So straight to the point: European sovereign debt sits there waiting for the market to hammer rates higher again (the damage has been temporarily halted by an ECB that’s more aggressively begun to buy this paper – exception being Spanish bonds) and the EU banking implosion that will resume once these bonds trade lower again. 

So the market to watch for now is Spain as it is relatively free of central bank manipulation – and it continues to get clocked as a result.    That is, Draghi has yet to take his spending spree to Madrid.  And it’s not just the long-end of that curve that continues to watch rates go higher, but the three-month bill has doubled in a month’s time to 5.11%.  Draghi will very likely send his printing press to Spain, buying up as many Conquistador sovereigns as needed to offset the private-market selling.  But he hasn’t yet, so the continued back up in these yields shows what would be occurring in Italy (and surely France too) – it’s still one of the view places where the market is (for now) allowed to somewhat freely set prices.

On top of this, we have a U.S. Congress that’s unwilling to make the correct budgetary choices (and just three months removed from the debt-ceiling fiasco that led to a credit-rating downgrade for Uncle Sam).  Thus, we’ll go through the whole process yet again as Bianco Research says the debt ceiling of $15.19 trillion is expected to be reached again by year end. 

Market Activity for November 21, 2011

Sector Activity for November 21, 2011

CFNAI

The Chicago Fed’s National Activity Index (CFNAI) – a measure consisting of 85 indicators, meant to gauge the pace of economic activity and inflation trends – fell for a sixth month in seven for October. 

The headline reading came in at -0.13, following the -0.20 for September.  These negative monthly readings suggest that the economy is running below potential.  Of course we already know this, which is why the three-month average reading is more important to watch.  This figure gives us a number to watch in determining where the economy is going. 

On this front, the figure continues to hold above a level that suggests additional weakness has set in.  However, the figure can also change quickly and since we’re in negative territory already there isn’t much room for error. 

So, based on what we’re concerned with (falling back into recession) the three-month reading remains nicely above the -0.70 figure that is supposed to suggest that another recession has begun.  That number came in at -0.27 for the three months ended October, but is the lowest reading we’ve seen in four months.  The closest we’ve gotten to the -0.70 number is the -0.54 hit in June and it does appear we’ll make another run for it over the next few months. 

Existing Home Sales

The National Association of Realtors (NAR) reported that previously-owned home sales rose 1.4% in October to 4.97 million units at a seasonally-adjusted annual rate (SAAR).  This beat expectations, as the consensus estimated sales would decline 2.2%, but it was off of a downwardly revised 3.2% decline for September.  

The best part of the housing market is that the official homes available for sale figure continued to decline, down another 2.2% in October to 3.33 million units.  This includes condos and co-ops; strictly on the the single-family units, the number is down to 2.863 million. 

As the chart above illustrates, this figure needs to keep coming lower (and the unofficial number, which includes mortgages that are 90+ days late, will hit the market, nearly doubling the number) but at least it is coming lower. 

Relative to the pace of sales, there were 8.0 months worth of existing homes on the market in October.  A number of 6.5 is commensurate with a healthy market, and remember that the shadow inventory brings this figure to at least 12 months and is probably closer to 16 months worth.

The median price of a home fell 2% in October and is down 4.7% year-over-year.  This is the ugliest side of the housing market as it puts more mortgages underwater – simply a result of insufficient money down when the loan was made.  Remember back in June and July when prices began to rise again -- hitting $175,600 -- we cautioned against getting excited that the bottom had been put in, that we would revisit the nine-year low hit in February.  And here we are just 4% above that number as the median price has slid to $162,500 (that February low was $156,100). 

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Have a great day!

Brent Vondera, Senior Analyst