U.S. stocks fired higher Monday, holding on to enough of the early-session gains to recoup a quarter of the past month’s losses, as European leaders began talking about the next solution to their debt crisis.  It was also reported that 80% of bond managers expect Bernanke to embark on QE3 by the spring.  (I’m sure we can count on the latter.  In terms of the former, I was guessing it had a shelf life of about 24 hours –although with stock-index futures higher this morning, it looks like it’s got a little more preservation.)

Risk was definitely on as evidenced by the yesterday’s leading sectors.  Basic material, energy and tech led the rally.  The traditional areas of safety such as utilities and consumer staples were the session’s laggards, up about half that of the broad market.

Even with yesterday’s enthusiasm, there was still talk of a eurozone collapse, which would result in either the expulsion or voluntary exit of the problem countries (largely the Southern European governments) from the zone.  So what would a “new” zone look like?   Pretty much as we surmised last week, a former Dutch politician predicted it would involve only the Northern countries.  When we discussed the subject a few days back, I had mentioned some fiscally-prudent Eastern government would remain in the zone too.  In any event, get ready for the “Neuro.”

And on that QE3 thing, with 80% of bond managers expecting it to take place in a few months (according to a JP Morgan survey) could it have much forward effect on the mortgage-backed assets the Fed is most interested in targeting?   It’s probably already been priced since these managers have certainly positioned to that expectation.  Thus, the only way to force mortgage rates yet lower (as will be the Fed’s ultimate goal this go aorund) is to buy more bonds than the market currently expects.  I think they will do so, whether it arrives via QE3 or QE4 it doesn’t matter – I expect the 30-year fixed mortgage to get pushed down to 3.75% and wouldn’t rule out 3.50% for a spell.

Market Activity for November 28, 2011

Sector Activity for November 28, 2011

New Home Sales

New-home sales rose just 1.3% in October to 307,000 units at a seasonally-adjusted annual rate (SAAR), which was shy of the 315K expected and off of a downwardly revised figure for September.  On a non-adjusted basis, 25,000 new homes sold during the month.

The absolute number of new homes available for sale held at the all-time low of 162,000 hit in the previous months…

…and relative to the pace of sales the supply figure slipped for a third-straight month to 6.3 months worth – that’s just a touch above the 6.2 long-term average.

The median price of a new home fell 0.5% to $212,300 in October, but is 4.0% above the level hit a year ago when a six-year low of $204,200 was put in.

So even with interest rates pegged at/near record lows and new-home prices down 20% from the peak (existing homes off by 30%), sales remain just 10% above the 48-year low (records began in 1963) hit in August 2010.   The reason being, the existing home market simply has too much supply, a glut of previously-owned homes due to a very high foreclosure rate.  Those distressed properties are offering price points with which the new home market cannot compete and it has led to the “distressing” gap between existing and new-home sales.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900