A Super Bowl Skew To Mortgage Activity

| About: Financial Select (XLF)

Casual followers of the regular economic data flow might have been befuddled this week when reviewing the Weekly Applications Survey from the Mortgage Bankers Association. The report showed that applications tied to the purchase of a home dropped dramatically. Our regular review of economic data has us on target, we think, as to why. The reason was super, but not significant.

The Mortgage Bankers Association's Market Composite Index only fell by 1.0% in the week ending February 10, 2012 when compared against the preceding week. Refinance activity was up 0.8% for that relative period, but the mortgage applications tied to the purchase of a home fell 8.4%. Believe it or not though, the weekly decline was probably the result of the Super Bowl, which was on February 5, 2012. The iconic cultural event of the United States is as significant to Americans as any holiday, and it affects economic activity and data in a meaningful way.

We've seen over months past that three-day holiday weekends tend to skew this data point significantly. We've reported why we think this occurs, and why other data points may likewise find imperfect adjustments tied to three-day weekends. It's because, we suggest, that while the holiday itself is adjusted for in economic data, the day preceding the long weekend and the slug of a work day following it are not adjusted for in any way. Yet, as we who live in the real world know, and as we can only hope economists locked to their numbers might someday understand, those two days are not normal business days at all. It's because on the day preceding the holiday weekend, we're all busy preparing for it, and on the day after its conclusion, we're all still recovering from its resultant exhaustion. Business activity is invariably affected.

The same must go for the Super Bowl, at least for the day preceding the event, for the day of the event and the day after. Americans are busy cleaning their homes, buying supplies and preparing dips and all sorts of specialties for the big Super Bowl party they will throw or attend. And on Monday, those of us who partook perhaps a bit more than others in the beverage department, will suffer through a slug of an inefficient day. I would suggest that very few Americans are going to apply for a mortgage on that Monday, and neither will they be seeking one on the Friday or Saturday preceding the event. This must be your reason for the 8.4% decline in Purchase Activity in the period ending February 10, perfectly inclusive of the February 5th Super Bowl and the affected days around it. Likewise, I expect next week's data will show a sharp gain in weekly purchase activity.

What is far more importantly seen in this week's data is that the Purchase Index was 7.6% short of the mark it set during the same week last year. That comparison is clearly inconsistent with the profits accumulating in the shares of homebuilders in aggregate, and we discussed in a recent article why we think investors should reconsider their stakes in homebuilders today. The shares of the SPDR Series Trust SPDR Homebuilders (NYSE: XHB) are up 60% since the industry's October 3, 2011 trough. Many individual homebuilders have seen far greater rises, with the shares of PulteGroup (NYSE: PHM), for instance, up 150% in that same span.

We expect very few, if any, understood why the mortgage data was so skewed this last week. It's hard to pinpoint one reason to a stock's movement, but the shares of major mortgage writers, Bank of America (NYSE: BAC) and JPMorgan (NYSE: JPM) exaggerated the decline of the SPDR S&P 500 (NYSE: SPY) Wednesday, the day of the data release. While the SPY was off 0.5%, BofA and JPMorgan fell 2.5% and 1.4%, respectively. The SPDR Select Sector Fund - Financials (NYSE: XLF) was off a lesser 0.6%. Of course, these declines may have had more to do with the U.S. Federal Reserve and Greece than the mortgage data point, especially given the relatively high betas of each of these three securities.

In any event, Super Bowl fans and real estate market mavens can probably look toward a commensurate movement in the Purchase Index next week, just in the opposite direction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.