As we finally mailed our checks to Uncle Sam and shed the stress of tax season, Wednesday brought a considerable slew of data to U.S. traders' desks. The Consumer Price Index (CPI) reported slight deflationary price pressure while the level of production in the U.S. dropped further than analysts’ estimates during the month of March. An 11% drop in mortgage applications during the first week of April paired with a positive outlook from the Housing Market Index sent mixed signals. The housing report prompted some to write-off poor mortgage applications due to Easter plans yet the expected positive uptick in sales holds little weight, coming from industry leaders who didn't forecast the current housing depression.
The U.S. equity market bounced around its opening levels prior to the release of the Federal Reserve's Beige Book report at 2 pm, which inspired the S&P 500 to rise 1.25% by the closing bell. The Beige book measures economic activity in all parts of the economy two weeks ahead of the Federal Reserve FOMC (Federal Open Market Committee) meeting. The street applauded the report as "less bad news", citing retail sales worsening at a lesser pace, lower prices and increased traffic of buyers for homes.
Newspaper headlines will praise the report as "optimistic" due to equities closing higher, yet the report was truly dismal. Lower loan issuance, increased defaults in every category and rapidly declining home prices are evidence of increased pressure on mortgage holders. The decline in retail sales slowed and allowed well managed companies with slashed inventories to beat earnings estimates, but auto sales worsened. Wage stabilization was the result of companies picking to pay top earners while laying-off others. Some dared to applaud lower prices as a "sign of the bottom", yet economists ignore benefits from short term price savings, recognizing the phenomena as an omen of tightening credit markets and the unwillingness of consumers to buy goods.
Buying momentum from March 9th to date has created a frenzy similar to that found at most market pivot points, where those who have missed a drastic change in market value are fearful they will be worse off by not following the trend. Headlines in early March cited the worst data in a declining equity market, while April headlines are spinning data in a positive light to correspond with the rise in stocks. Investors are eager to interpret any evidence at their disposal as a "positive economic shift" to support the hope of future gains.
The data reveals that indicators presently forecast declines in credit availability and increases in mortgage defaults that will stymie economic growth and warn against "hoggish" buying at these levels. For more aggressive appetites, SCC and SKF have great potential to provide generous returns.
Positive results from the JP Morgan (NYSE:JPM) conference call Thursday morning will need to be considerably optimistic to further sharp gains already discounted in the stock price. JPM's upside potential is particularly limited due to a 23.8 P/E that will trend higher if earnings fail to grow extensively over the course of 2009.
Market movers will emphasize results of Thursday's economic data including; Jobless Claims, Housing Starts and the Philadelphia Fed Survey.
Disclosure: Long SCC, Long SKF