“He that can have Patience, can have what he will.” – Benjamin Franklin, Poor Richard’s Almanack
Despite last week’s massive sell-off of one percent (there would be an investigation but for the fact that it’s typical action for late March), a look at Friday’s tape action suggests that the rally is definitely not over, not until acted on by more fundamental factors. The onset of May, for example.
It was an instructive Friday. Markets initially sold off on new home sales data, which was of the same not-going-anywhere nature as the report on existing home sales a couple of days earlier. In a neat demonstration of how supply and demand matter to oil, prices plunged on the new home sales report – presumably all of those new homes were expected to use heating oil.
However, a worrisome news flash from Iran suddenly and conveniently reversed the price of oil, in turn reversing energy stocks, hereby inviting back the same equity traders who have been showing up nearly every day between approximately 10:30AM and noon to work the tape higher. It isn’t mutual funds, which continue to see bond fund inflows at the expense of equity funds (investors buying last year’s performance); it’s trading money.
Doubtless much of it is black box, and doubtless much of it is also programmed to profit from HFT trading, which tends to put extra spin on moves. What’s clear, however, is that the height and length of the rally isn’t enough to discourage the group from its daily trade. When a momentum market has become as much about itself as this one is, it’s usually the case.
That the news on housing was lukewarm wasn’t new; that it undermined the bursting economy thesis wasn’t considered grave enough to matter or overturn the trend. Nor was the continued evidence of European economic deterioration or Chinese slowdown. In fact, we can quite expect that the latter will produce a rally of its own, as traders are already beginning to look forward to the rallies that might ensue upon potential easing announcements.
There isn’t much more to say that we’ve already been saying on the subject. The market is ahead of itself, but that alone isn’t enough to derail a momentum rally. Europe is entering a deeper recession, but they’re so far away. More importantly, next week offers a very powerful fundamental for bulls: the promise of April, the best month of the year for the stock market. I imagine we’ll be allowed to start worrying about things in May.
The last week of March is rarely a big mover, so a bit of backing and filling would be quite typical. The economic calendar is busy, with more reports on housing and manufacturing, and if all of the manufacturing reports were to line up strongly in one direction, especially durable goods, that could lead the market higher.
There hasn’t really been any indication that such an event is in store, but a strong durable goods report Wednesday and a tenth-point upward revision to fourth-quarter GDP Thursday could produce a rally. Weakness in either would obviously lead the other way, yet we wouldn’t expect too much: this market is following its script, and will need a major external event to produce a rewrite.
The Economic Beat
The February existing home sales report released on Monday was dressed up quite nicely. It was slightly below consensus, a miss small enough that we consider it meaningless, but what got the most attention was the upward revision to January and the fact, duly trumpeted by the realtor’s association and repeated on radio the rest of the day, that year-on-year sales were up over eight percent! That sure sounds good.
In the end, it may indeed turn out to be so, but take this glowing appraisal with a very large grain of salt. One year ago this month, the January (2011) data were also revised upward, to a 5.4 million sales rate. Many months later, that rate was revised again – to about 4.54 million. The first January 2012 revision is actually 16% below the first January 2011 revision, and the initial February 2012 run rate of 4.59 million is 6% below the initial February 2011 estimate of 4.88 million.
Well, maybe the association has dramatically improved its early estimates, but we’re going to wait and see. In other respects – median home prices, percentage of distressed sales (around a third), cash sales (ditto), January and February of 2012 are virtually indistinguishable from their 2011 counterparts, and all of this despite the favorable weather.
For that matter, we looked at the unadjusted housing start numbers, and while permits are certainly up compared to last year, construction isn’t, which may explain why the homebuilder sentiment index didn’t move last month. Warm weather may have pulled some sales forward (in apparel as well), but it’s too early to tell, because the first two months of the year are small in real numbers and the housing totals we get are heavily adjusted.
New home sales aren’t taking off either. Estimates of the January (2012) run rate were taken down to 318,000 units annualized, while the February estimate came in at 313,000. Both do represent some improvement year-over-year, but new home sales are subject to significant revision, especially when the absolute numbers are as relatively small as they are at this time of year. The revisions could go either way, but the KB Homes (KBH) earnings report on Friday did unsettle the market with its revenue and backlog shortfall. The company blamed financing issues, but we don’t think that financing is going to get easier for the industry as a whole this year.
The FHFA home-price index, which uses Fannie & Freddie mortgage data, showed no change in January after revising December back down sharply to a 0.1% gain. Zwillow, the online real estate service, is forecasting a 1%-2% drop this year in prices. Case-Shiller is expected to report another drop in repeat home-sale prices next week. The usual “hope trade” in builders may soon come to its usual springtime end.
In the meantime, though, the Fed twist policy (which flattens the yield curve), increase in building permits, stock market rally and moderation in jobless claims boosted the February leading indicators to a gain of 0.7%. The improvement in short rates is disappearing this month with the disappointment over the non-announcement of more quantitative easing, and all of the categories – permits, claims and the stock market – have benefited from seasonal factors that could disappear by May – if not sooner.
The calendar picks up again next week. There are several regional manufacturing surveys, from Dallas (Monday), Richmond (Tuesday), Kansas City (Thursday) and most importantly, Chicago on Friday. In the midst of all of this will come the always-volatile durable goods report on Wednesday; the market is looking for a rebound from the January decline.
Pending home sales are due out on Monday with a very low consensus estimate of 1.0%, which for a warm March is about as suspiciously low a number as can be imagined. We’ll be quite surprised if this “estimate” isn’t beaten, but it must be said that the number has overshot actual home sales by a wide margin for a long time. That probably won’t bother the market or the press.
Besides durable goods, the other marquee reports ought to be the Conference Board consumer confidence number on Tuesday (given the stock market, it really ought to be up), possibly the next fourth-quarter GDP revision on Thursday and personal income and spending for February on Friday. The last report seems to be the most important to us, but if the Chicago PMI and Michigan consumer sentiment numbers that come out later that morning are positive, then we’d look for a rally. Whether any of the data will matter enough to shake the market out of its predestined path is unlikely.