With economists divided, the Fed dependent on data, and the economy and inflation telling varying stories, equity markets are sailing a sea full of mines. Last week, we saw how hungry the market was for a catalyst to rise, as it reacted to the Fed policy statement in what we consider an excessive manner. Risks remain, concerns persist. The world is still full of reasons to maintain positions in gold and cash, as well as partaking in beta neutral strategies. The Fed seems confused as to the persistency of inflation, and despite its view for economic growth, the possibility of recession remains too high to ignore. Global markets continue richly valued, and geopolitical concerns surrounding Iran pose serious threat. For these reasons, we think it's too early to go bottom fishing, as you may just snag a mine.
The market looked on the bright side of the Fed's policy statement, and the S&P 500 rose 3.5% on the week. The market was so very pleased that a line was removed from the statement about the possibility of additional firming. Even so, the Fed was clear about its concern regarding both inflation and housing recovery. Our take was that the Fed is more concerned about persistent inflation than the possibility of recession, as it clearly stated, "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." Still, the market was pleased with the Fed's expectation that economic growth should continue, and that inflation should moderate.
The housing sector received mixed signals last week, as a couple suffering subprime lenders found new capital sources, increasing the chances of their survival. The question remains, how viable is the subprime mortgage brokerage business going forward and how many players can it support in the near term. Clearly, regulators and other key sector facilitators will limit liquidity while raising credit standards.
Existing home sales came in favorable for February, rising 3.9% over January's result. Housing starts increased 9%, but permits declined. Further data showed that housing growth likely benefited from decreases in home prices. Wall Street Greek continues to believe the housing sector will not recover this year, as foreclosed upon homes and reduced contribution from subprime borrowers help to keep housing inventory up and prices heading lower. At the same time, we anticipate persistent inflation will keep pressure on rates and borrowers that are left carrying adjustable rate mortgages with increasing payments.
Remember when General Motors (NYSE:GM) presciently sold off a huge portion of its interest in GMAC, just ahead of the subprime slide? Listen up, Morgan Stanley (NYSE:MS) is now seeking to spin-off its Discover Card segment. We can at least speculate that this might portend a spreading of consumer credit problems. We anticipate a credit will tighten, and this great period of more than ample liquidity will end soon enough.
It's ironic that Iran steps up the tension exactly when we label it impotent in the near term. Yes, we who have been warning about the coming trouble with Iran for what seems like a lifetime, may have finally become tired by time. In our daily articles last week, we wrote that oil prices should head lower, despite the week's focus on Iran and the attention it was receiving from the United Nations Security Council. It figures Iran would go and commandeer a British vessel, which was itself inspecting a ship headed for Iran. Oil prices rose, and they should. Remember, the U.K. does not play games when hostages are concerned, or its territory. Remember the Falkland Islands! The longer Iran holds the Brits, the more likely England pushes Israel and the U.S. aside for its own pummeling of the Persian pain in the... So, our bearish call on oil prices is on hold for now. As long as Iran holds those men, the risk of war is intensified. We suspect they will not be held for long, after all, Britain was on its way out before this occurred. It would be downright dumb for Iran to keep the British in play by holding its sailors.
The housing sector will have more to say this week, with the new home sales report on Monday, Lennar's earnings report on Tuesday and February construction spending reported on Friday. Fed Chief Bernanke will have a second opportunity to sooth market concerns, or create an opportunity for it to second guess last week's reaction, when he addresses the Joint Economic Committee this week. As the data pours, the Fed and the market seem to be sailing through a bay of mines. Inflation threatens to the starboard, recession floats to the port, the fallout of housing exuberance chase at the stern, and dead ahead, war and terrorism related to Iranian nuclear development seem unavoidable.
Due to the Tuesday publishing of this week's article, we address the day's news appropriately after the fact. After last week's favorable housing data, Monday brought new home sales far below expectations for a 5.7% increase. In fact, February new home sales declined 3.9% when compared to January's already poor results. Sales were down 18.3% from a year ago, and the median price of a new home declined 0.3% from January. The worst news of all was that the inventory of new homes for sale increased in February, to 546,000, and the supply of unsold homes is at its highest level in 16 years. We view this as clear evidence that the market will worsen before it improves. February's data does not yet incorporate the impacts of the subprime mess, which include tighter lending standards and lower consumer confidence. We expect prices to weaken further and the home builders to continue to face a difficult environment this year.
On Monday, President Bush met with the leaders of the nation's three major automobile companies on the topic of alternative fuels. In the press conference that followed, the three proclaimed their support of the president's plan, which was outlined in this year's State of the Union Address.
In overseas news, Russia's President Putin received China's Hu Jintao. In the joint press conference that followed, the two announced their view that Iran should comply with the demands of the United Nations Security Council. The two are expected to sign significant energy deals. Putin has been on an active energy campaign of late. He just recently agreed to deals with Bulgaria, Greece and Italy for expanded distribution of energy resources to Europe. It sure seems to us as though Russia is positioning itself to be an important energy provider in the event of a Middle Eastern cutoff. We would take a look at Russian energy providers for investors looking for ideas in the energy sector. In other international news, the Bank of Japan released the minutes of its most recent meeting, in which it kept its benchmark rate steady at 0.5%.
Dollar General (NYSE:DG), Phillips-Van Heusen (NYSE:PVH) and Tiffany & Co. (NYSE:TIF) were scheduled to report earnings on Monday. Tiffany reported results ahead of expectations, excluding impairment charges. Kimberly-Clark (NYSE:KMB) held an investors' day Monday, while Boston Scientific (NYSE:BSX) met with analysts at the American College of Cardiology conference.
On Tuesday, March consumer confidence is scheduled for report at 10:00 a.m. Bloomberg's consensus sees confidence at 108.4, compared to 112.5 in February. We believe confidence may have suffered more from recent subprime and global market scares, as recent retail sales figures have not been rich.
Housing takes the spotlight again Tuesday, as the House Financial Services Committee will discuss the topic of protecting home ownership and issues within the subprime mortgage market, as well as the topic of rising foreclosures. The day also provides a timely earnings report from Lennar Corp., one of the nation's more important home builders. The consensus of analysts sees Lennar's Q1 EPS measuring some 73% below the prior year's results. Also reporting earnings on Tuesday, look for reports from McCormick & Co. (NYSE:MKC), Gamestop (NYSE:GME) and HB Fuller (NYSE:FUL).
Last month, the durable goods orders report shook the very foundation of the market, driving serious recessionary concerns, while optimists argued that inventory redux was in play. Wednesday's report for February has analysts anticipating growth of 3.5%, compared to January's troubling drop of 8.7%.
Ben Bernanke has a second opportunity to calm the market Wednesday, as in last week's policy statement, as he addresses the Joint Economic Committee on the economic outlook. His words will be closely followed, and we would anticipate him to provide that same perspective expressed within the statement. In other words, we expect him to have a nil to positive impact on trading Wednesday.
The Senate Finance Committee will hear experts on currency and the U.S. relationship with China. Seems like we can expect recent case crusader, Hillary Clinton, to pick up the gauntlet again for another publicity opportunity.
In light of lending concerns, you may want to pay attention to Wednesday's investor forum held by GMAC and Residential Capital. Alcatel-Lucent (ALU) will also meet with investors, while Paychex Inc. and Sonic Corp. report earnings.
Further revision of Q4 GDP is planned for report Thursday, but no change is expected from the last revision downward to 2.2% growth. Richmond Fed President Jeffrey Lacker will address an evening audience on inflation and unemployment.
Brocade (NASDAQ:BRCD) is scheduled to meet with analysts on Thursday, and earnings reports are expected from Carmax (CMX), A.G. Edwards (AGE), Family Dollar Stores (NYSE:FDO), Solectron Corp. (SLR), Worthington Industries (NYSE:WOR), Stride Rite Corp. (SRR), and The Finish Line (NASDAQ:FINL).
Friday finishes off the week with a mouthful of economic data to swallow. At 8:30 a.m., February personal income and consumption are scheduled for report. Personal income is expected to show a rise of 0.3% for the month, versus an increase of 1.0% in January, according to a Bloomberg survey of economists. The consensus also sees consumption increasing 0.3%, versus a January rise of 0.5%. This news, along with March Michigan Sentiment, should help the market better gauge the health of the all-important consumer. The sentiment reading is seen measuring 88.5, versus 88.8, according to Bloomberg's poll.
The Chicago purchasing managers report for March is due for release at 9:45 a.m., and the consensus sees a reading of 49.5, versus 47.9 in February. In a last battle to conclude the week, housing faces off against Bernanke once again. February construction spending data is planned for release at 10:00 a.m., and the consensus anticipates a decrease of 0.5%, compared to a decrease of 0.8% in January. This report might not accurately reflect the degree of weakness in residential construction, as the realities of weak new home sales may lag before construction drops off further. There are a significant amount of homes completed and still waiting for sale out there. Ben Bernanke will address the Fed Consumer and Community Affairs conference on the topic of financing community development. With recent saviors to subprime lenders arising from the hedge fund and investment bank community, we expect Mr. Bernanke's comments to be favorable to equity trading. The only significant earnings report for Friday appears to be that of Global Payments Inc. (NYSE:GPN)