Economic Reports Reinforce: Durable Goods Orders, Mortgage Activity, New Home Sales

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Economic Reports Reinforce Rally

The nascent market rally received some reinforcing economic data today, but after an early surge higher on the news, shares backtracked cautiously. By the close, however, investor sentiment turned encouraging, and a rally saved the day.

(Relative Stocks: BAC, FDX, BA, DIA, SPY, QQQQ, DOG, SDS, QLD, XLF)

Mortgage Activity Surges

Just like we alluded to in our "Week Ahead" copy, mortgage activity responded to lower interests rates, that were in turn driven downward by the Fed's quantitative easing announcement.

For the week ended March 20, 2009, the Mortgage Bankers Associations Market Composite Index (barometer of mortgage application volume) jumped 32.2% on a seasonally adjusted basis when compared to the week just prior. Both components of the composite played positive roles, but as you might expect refinancing activity is much more sensitive to short-term changes in rates. It takes a while to buy a house after all, at least since Countrywide (NYSE: BAC) went under and the devil was sent back to hell...

Mortgage applications for new purchases of homes inched higher just the same, rising 4.2% (seasonally adjusted). Refinancing activity, however, soared on the change in rates, jumping 41.5% week-to-week. Would you expect anything less, considering that contracted 30-year fixed mortgage rates drilled lower to 4.63%, from 4.89% just a week earlier? That's rhetorical Sherlock! The MBA reported the contracted interest rate set a low not seen in decades, and it is just the medicine the real estate market and economy need, not to mention the credit markets.

We're very pleased here with the recent steps the federal government has taken to heal the real estate sector. We expect housing to benefit slowly though, as it faces the headwind of rising unemployment. Still, we expect stabilization and recovery as the government does all it can to make housing as affordable as possible, encourage lending and mitigate foreclosure activity as well.

New Home Sales Rise

While February's new home sales probably didn't benefit as much from government effort as they did from the easy comparable in January, New Home Sales rose just the same. However, if the Detroit Lions win five games next year, we probably will not label that a success, and nor should we get too excited by February's New Home Sales pace of 337K, versus the revised 322K reported in January. We can celebrate a touch in the fact that February's result surpassed the economists' consensus view for 315K. Economists talk to strategists you see, and strategists talk to analysts and portfolio managers. Institutional investor sentiment should therefore find some positive driver in surpassed expectations. Retail investors get excited by the headlines and stock momentum, and thus we see broad rally (dare I say bull market).

Looking more closely at the results, and if you need some sobering up, let me remind you that this February's annual pace of new home sales is still 41.1% below the February 2008 mark. Homebuilder sentiment could not be much worse right now, nor could production be lower, if we go by the last measurements anyway. We're guessing homebuilders have been somewhat aroused by the Fed's latest quantitative idea.

Also sobering, each individual region of the nation saw less sales in February except the South, which carried the month. The closer we look, the less excited we are in fact. The number of homes available for sale dropped further, to 330K, from 340K in January. New Home Sales are now such a minuscule portion of the total that we cannot really take much solace from the impact of less production on existing inventory. Also, the current extremely low rate of sales is not normal, yet is an important component of the inventory equation, so keep that in mind. Nonetheless, the inventory of homes for sale stood at 12.2 months, based on the current sales pace, and compares against 12.9 months in January and 9.7 months last February. Seems inventory may have actually peaked in this segment of the market in January.

Finally, the median price of a new home is now $200,900. While this figure is not directly impacted by foreclosures (obviously, since a home has to be owned to be foreclosed upon), it is indirectly impacted since real estate valuation regularly uses relative comparisons to homes in a given marketplace, which likely includes its share of foreclosures.

Durable Goods Orders Surprises

We got a fantastic surprise from the Durable Goods Orders report for February, closing out three neutral to very positive bits of economic news today. February orders increased 3.4%, compared to a 7.3% drop in January and expectations for a 2.0% decline this month. The simple fact that orders increased was good news enough, considering the previous six months posted declines.

We know what you are thinking, there might have been some freak driver in the defense or transportation component. Well, defense orders did rise significantly, increasing 35.3% in the month, but removing defense still shows an order increase of 1.7%. That's still good news, and better than expected. It's especially noteworthy because defense spending is very likely going to be impacted by Obama Administration plans - thus the strength seen in February is not sustainable. Excluding transportation, new orders still increased 3.9%, which is also good news considering the pain the airline industry is feeling these days. Today, FedEx (NYSE: FDX) was reported questionable on its completion of a Boeing (NYSE: BA) order.

Conclusion

In closing, I would like to express my belief that we may be seeing stabilization materializing in this data. That does not necessarily mean we have reason to celebrate though, as the negative feedback loop still looms threatening. That is, increasing unemployment, tighter lending standards and general fear pose threat to economic recovery. This is why proper fiscal stimulus and other government efforts are so critical to determining the length of this recession. As an investor, you'll very likely miss the market bottom (if you haven't already) if you wait for a turn in employment trends. As I alluded to in an article some prescient moment over the past month, we may have already set "THE" market bottom.

I found today's closing rally enthusing as well, and potentially indicative of a change in investor sentiment. I enjoy the cautious (and also exuberant) language of many economists, strategists, business writers and media, because all those folks were buying like madmen when I was warning on housing and the financial sector. As much as I kind of like stocks now (shhh), I still hold grave concern for our future based on my expectations regarding Iran and other geopolitical trends. And, I see the potential for a fizzle as near as this Friday, but I won't tell you why until tomorrow or Friday morning... so stay tuned.


Please see our disclosures at the Wall Street Greek website and author bio pages found there. (Article interests: AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK, NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: BAC, NYSE: FRE, NYSE: FNM, NYSE: LEN, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: CTX, NYSE: KBH, NYSE: RYL, NYSE: MTH, NYSE: XIN, NYSE: BHS, NYSE: SPF, NYSE: MHO, NYSE: OHB, NYSE: WCI, AMEX: VNQ, Nasdaq: VGSIX, Nasdaq: AVTR.