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Seeking Alpha

Wednesday, February 27, 2008

Pre-Market: Stagflation Slap in the Face


(Stocks in article: NYSE: HOV, NYSE: TOL, AMEX: SPY, AMEX: DIA, Nasdaq: QQQQ, Nasdaq: GOOG, NYSE: DY, NYSE: TOL, NYSE: DWA, NYSE: NT, Nasdaq: SBLK, NYSE: SPN, NYSE: BYD, Nasdaq: DLTR, NYSE: IHP, NYSE: NBL, NYSE: OC, Nasdaq: CHTR, NYSE: FNM, Nasdaq: MSFT)

With bond insurer resolution in progress, the market has enjoyed a short relief rally over the past two days, but that looks to get a stagflation slap in the face in the near future. Oil prices closed at a new record high of $100.88 per barrel on the New York Mercantile Exchange Tuesday and traded higher overnight in overseas activity. Gold also looks clearly headed to break the $1,000 per ounce mark, as it rose to an all-time high in Asian trading this morning. Gold for immediate delivery was trading above $963 an ounce last we checked.

It's clear Ben Bernanke faces an especially difficult term as Fed Chairman. In the next chapter of this horror flick of his, inflation risk should temper the enthusiasm that eventually fuels the rally that precedes economic recovery. And if it doesn't, then the first 50 point rate hike by the Fed Chief outta scare the bejeavers out of it. Keep that in mind when your early cyclicals are up 20% and your profits are still on the table. Ben addresses the House Financial Services Committee today up on the hill, and the newspaper reading Congressmen are very likely to ask him about stagflation and inflation, two subjects the stock market would rather ignore for now.

Economic & Other Analysis:

January's Durable Goods Orders were reported today at 8:30 a.m. Bloomberg's consensus was looking for a 3.5% decrease month-to-month. December's orders surprised on the high side, rising 5.2%. That's a good question (I thought I heard you ask why). It's likely that ordering tightened up ahead of December as recession expectations intensified, and this may have left purchasers short supply too far ahead of the onset of recession. In this world of just-in-time inventory management, ordering trends are likely to shift on a dime when compared to long ago periods when bulky inventories needed to be worked down and built up. Orders came in down 5.3%, short of expected. Dow futures immediately turned lower on the news.

At 7:00 a.m., the Mortgage Bankers' Association's report of mortgage activity offered what we forecast last night. Long rates have risen remarkably, and the yield curve is steepening. Mortgage activity has been surprisingly intense in months past, aided by Fed cuts, but housing still stinks and now rates are not supportive any longer. Get the picture yet? Bad news was clearly in store on this front, in our opinion. The actual report offered execution on our prediction, as mortgage applications dropped off a cliff, down 19.2% from the prior week. Mortgage refinance activity fell 30.4%. Voila!

New Home Sales were reported for the month of January at 10:00 a.m. Bloomberg's consensus of economists forecast the annual pace slipping ever so slightly to 600K. The actual pace of 588K offered yet another let down, just when some hopeful pundits had been calling for springtime rebound, and I'm talking about Sam Zell.
Perhaps stealing the show, Toll Brothers (NYSE: TOL) reported earnings on Wednesday morning. Thomson Financial has gauged consensus expectations for a loss of $0.50 in the company's fiscal first quarter. TOL actually produced a loss of $0.61 on writedowns and lagging sales.

Robert Toll has proven a better barometer than most industry CEOs, as he's been absolutely morbid through most of the company's conference calls over the past year. In contrast, we remember the Hovnanians (NYSE: HOV) of the world predicting recovery as prematurely as last winter. Robert did not let down those who prefer the dark side, saying the company has seen few "glimmers of hope." On a personal aside, The Greek met Toll at the company's headquarters in the Philadelphia area about nine years ago, and the company has been our favorite industry participant for over a decade now due to its unique operating strategy and market niche.

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