Morning Call

0 CommentsWednesday • September 30, 2009 • by alwaters

A multitude of words is no proof of a prudent mind.”

Thales

Morning Call
September 30, 2009

Is the Worst Over for the Housing Market?

Many seem convinced that the worst is behind us in the housing market and whether or not this is true may have more to do with your perspective. In terms of home prices, we suggested more than a year ago that the market would have to fall by about 30% before we would consider a bottom. According to Case-Shiller, from the peak in mid-2006, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. So we are willing to think that prices may have bottomed, but is that all o ne would consider in assessing the health of the housing market? Whatever the current value of a given home, what is important is whether the mortgage holder is capable of making their payments. So many homeowners are still in trouble when it comes to keeping their homes. So many mortgages are still delinquent, and more importantly, the so-called “cure rate” on delinquent loans also gives reason for concern. This is a measure of those who get behind, but are able to recover after being delinquent by 60 days or more. This number has gone from 66% in 2005 to only 5% in the past quarter. This suggests that things may be going from bad to worse for many homeowners. Another factor is the glut of inventory of homes and the resultant time it takes to go from delinquency to liquidation. The current price level, therefore, may fall further because any market price is fictional unless there is a fair supply of buyers at that price.

What to Buy: GOLD

It’s all about gold once again. We called the drop below $990 as a buying opportunity and we still subscribe to that theory at $1000. Many of the mining companies made solid moves yesterday ahead of today’s jump in the spot price. With that move this morning, we believe that many more will jump on the gold band wagon and the mining stocks will enjoy another strong day. Kinross Gold (KGC) is among the better choices today; even after a 5% gain yesterday. Jaguar Mining (JAG) underperformed the sector yesterday and, as such, may do some catching up today as well.

Market Outlook

Once again we are trading moderate losses on the Dow yesterday with a moderate upside expected at the opening bell this morning. Afterhours trading, however, shows little volume behind any price moves. Most financial stocks are essentially flat, while the only momentum appears to be among some of the tech stocks. Consumer Staples and Consumer Discretionary stocks were among the leaders yesterday, while the energy index fell by more than 2%. Stocks in Asia were little changed overnight; the Nikkei stayed slightly positive while the Hang Seng fell just below even. Sector performance in Asia was very mixed and Japan Airlines came out as one of the winners with a 5.5% upside on the trading day. In Europe this morning, stocks are close to flat at the mid-point of the trading session. Sector performance is mixed here as well with RBS and several tech stocks up by 2% or more.

Commodities are stronger this morning, with most agricultural commodities continuing their uptrend and energy and metals recouping yesterday’s losses. Oil has recovered from its recent slide and has tacked on more than a Dollar; pushing close to the $68 mark this morning. Gold has also made a nice bounce off its lows, with an $8 gain to break above $1000 once again. Industrial metals have also moved higher by 2-3% this morning. The Dollar is, of course, lower against all of the major currencies once again.

On the economic calendar today we will have Mortgage Applications, Final Q2 GDP numbers, the ADP Jobs Report, and the Purchasing Manager Barometer. The earnings calendar is relatively light with Actuant Corporation, Diamond Foods, and Lawson Software among the few scheduled.

The market, at the very least, is trying to price in a more modest view of the economy in the year ahead. The S&P 500’s 57 percent rebound from its 12-year low on March 9 pushed valuations to 20.2 times the reported earnings of its companies last week, the highest level since 2004. “U.S. GDP probably contracted at a 1.2 percent annual rate from April to June, the smallest drop in a year, according to the median of 78 forecasts,” according to a Bloomberg News survey. So, while the expectations are that the economy is turning a corner, valuations have, perhaps gotten a little ahead of themselves. This, too, is based on the assumption that the worst is behind us. Several factors, however, threaten this optimistic view. We may yet see another major failure in the financial sector. CIT, for one, is working feverishly on a debt exchange and general restructuring that may not keep the company out of bankruptcy. With 95 bank failure so far this year, the FDIC insurance fund is running dry and the insurer is hoping to collect a three year prepayment from the banks in order to stay solvent. Another small but relevant factor is the fact that Consumer Confidence slipped slightly according to yesterday’s report. All of this is too much to ignore and may signal some rough roads ahead.

Posted in: Morning Call: Daily Analysis of the Global Markets and Economy

Tagged with: bonds, economy, gold, oil, stocks