FMX | Connect – www.fmxconnect.com - (Reported 6/09/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
This morning, we got the MBA data on mortgage applications and we remained stunned by the relentless weakening in mortgage demand by the masses. Despite near record-high affordability, people would clearly prefer to rent or to stay doubled-up in their existing residence with the cousins, in-laws and Ma and Pa. Homeownership is clearly no longer up there with other motherhood items like baseball, hot dogs or apple pie.
Mortgage applications for new home purchases slid a further 5.7% during the June 4th week to the lowest level since February 7, 1997 (!). This is also the fifth decline in a row during which the index has literally collapsed 42%, an unprecedented decline. On an annual rate, that is a 99.7% decline so if sustained, say for a year, applications would basically go to something very close to zero. How would the S&P 500 homebuilding stock index look against that backdrop? The fact that we could have experienced such a plunge in a time when mortgage rates tumbled over 20 basis points has to be a disturbing development for those who believe that housing is going to be leading the recovery as it has so often done in the past (maybe why single-family building permits are in the official leading indicators).
NOT YOUR TYPICAL PULLBACK
1. The 50-day moving average peaked on May 13 and has rolled over
2. The 100-day moving average peaked on May 18 and has rolled over
3. By July 10, at the latest, we will probably start to see the 200-day moving average start to roll over
We are back into a bear market, with all deference to yesterday’s recovery (the 1,040 level on the S&P 500 held but not for much longer).
It’s been a painful 30 days for equities with the S&P 500 down about 13-14%. In the past, such a sharp sell-off didn’t usually end well, unfortunately. We dug through the history books, looking at the past 70 years and found that in the 21 instances when the S&P 500 fell 13-14% in 30 days, the market sold-off by an additional 10%, on average. This happened in 18 of the 21 instances that we studied (in other words, 85% of the time when the market was down by 13-14% in 30 days, it continued to slide). Each cycle may be different, but it always pays to tip your hand to the historical record.
Patterns are exactly that. Greed at the March 2000 highs; fear at the October 2002 lows; greed at the October 2007 highs; fear at the March 2009 lows; then greed again at the April 2010 highs …. and now we await the fear factor to re-emerge so we can turn bullish.
CANADIAN HOUSING STARTS: CRACKS IN THE FAÇADE?
After a string of above-expected economic data releases, Canadian housing starts missed the mark. Starts sunk 6.3% MoM, to 189.1k May, well below economists’ (optimistic) estimates for a small increase to 202k from 201.8 in April.
The details of the report were terrible with single-family starts plunging 14%, following the 11% drop in April (this adds to the recent downdraft as single-family starts have fallen in 3 of the past 4 months and are now at their lowest level since September 2009). The more volatile multi-unit starts (ie: condos) were down 6%, the second decline in three months, although levels remain relatively high — watch out below if we start seeing multis roll over. After this report, the BoC’s 3.8% GDP forecast for Q2 may be a tad bit rosy, in our view.
On top of this, we also saw some early resale housing data for May from a few large cities and the news was grim as well (we’ll get more a more comprehensive national picture in a couple weeks). Vancouver (arguable one of the most overvalued cities in Canada) saw sales plummet 10% YoY, Calgary sales plunged 17% and Toronto sales were down 1%.
Perhaps the most troubling common thread in these two reports is the supply situation. Even with the drop in housing starts in May, we estimate that builders continued to add supply, as starts were still running above household formation rates (and have been for about eight months now). In the resale housing market, new listings (a proxy for supply) were up by 36% YoY on average in May. Yes, home prices were up by over 10% on average in May but given the deteriorating supply backdrop, we expect that home prices will deflate in the second half of the year (and beyond).
ANOTHER JOLT?
Just a word on the U.S. employment backdrop. The point has to be made that nine months ago, a payroll report the likes of what we saw last Friday would have triggered a monstrosity of an equity market rally. The fact that it sold off so sharply reflects just how far the market — and sentiment — has moved. The whispered number going into the report was 700k so this was simply a case of expectations getting well ahead of reality. It was a soft report, but not a devastatingly weak piece of economic data.
The problem is really where the labour market, and the economy in general, should be at this stage of the cycle, especially now that the government has so few policy bullets left in the chamber. This is really a very tepid jobs market backdrop — we just saw the JOLTS data (Job Opening Labor Turnover Survey) and it showed a nice 293k rise in job openings in April (on top of a 138,000 increase in March) and at the same time, the number of layoffs fell for the fourth month in a row (-74k). But in a classic signpost of how this is a two-steps-forward, one-step-back market, the number of hirings is not growing — dropping 27k in April and faltering now in two of the past three months.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
-----
About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one page or section in its entirety and must attribute all quotes, ideas or concepts herein. Copyright FMX | Connect, ©2009-2010. All rights reserved.