Despite a couple of recent sell-offs, including yesterday, a look at Friday's tape action suggests that the rally is definitely not over, not until acted on by more fundamental factors. The onset of May, for example.
It was an instructive day, the Friday of last week. Markets initially sold off on new home sales data, which was of the same not-going-anywhere nature as the report on existing home sales a couple of days earlier. In a neat demonstration of how supply and demand matter to oil, prices plunged on the new home sales report - presumably all of those new homes were expected to use heating oil.
However, a worrisome news flash from Iran suddenly and conveniently reversed the price of oil, in turn reversing energy stocks, thereby inviting back the same equity traders who have been showing up nearly every day between approximately 10:30AM and noon to work the tape higher. It isn't mutual funds, which continue to see bond fund inflows at the expense of equity funds (investors buying last year's performance); it's trading money.
Doubtless much of it is black box, and doubtless much of it is also programmed to profit from high-frequency trading, which tends to put extra spin on moves. What's clear, however, is that the height and length of the rally isn't enough to discourage the group from its daily trade (though the end of the quarterly window dressing period may leave us dragging for a few days). When a momentum market has become as much about itself as this one is, it's usually the case.
That the news on housing was lukewarm wasn't new; that it undermined the bursting economy thesis wasn't considered grave enough to matter or overturn the trend, or upset the need to dress up quarter-end portfolio holdings. Nor did the continued evidence of European economic deterioration or Chinese slowdown matter. In fact, we can quite expect that the latter will produce a rally of its own down the road, as traders are already beginning to look forward to the rallies that should ensue upon the inevitable easing announcements.
Europe is entering a deeper recession, but so long as the sovereign debt collection man isn't at the door, it's just too far away to worry about. The promise of April looms, the best month of the year for the stock market. Perhaps we'll be allowed to start worrying about things in May.
The press continues to labor mightily in service of the New Economy. It was rather amusing to see an appearance by perma-skeptic Dave Rosenberg on Bloomberg television, where the young newsreaders - overwhelmingly in the camp of isn't-this-economy-exciting - glowered as sulkily at him as if he were the new headmaster come to enforce curfew rules from the last century. Hopelessly out of step.
And though home prices may continue to fall, the effusive Econoday website enthused that "home prices improved during January" because one, the seasonally adjusted rate was unchanged; and two, the unadjusted rate had the smallest decline since September. Ergo, the report was "fortunately on the positive side." You can't make this stuff up.
New home sales aren't quite taking off yet, despite the positive news. Estimates of the January run rate were taken down to 318,000 units (annualized), while the February estimate came in at 313,000. Both do represent improvement year-over-year, but new home sales are subject to significant revision, especially when the absolute numbers are as relatively small as they are at this time of year. The revisions could go either way, though, as KB Homes (NYSE:KBH) unsettled the market Friday with its revenue and backlog shortfall, but Lennar (NYSE:LEN) posted improving results on Tuesday (and the stock has now doubled in six months).
The FHFA home-price index, which uses Fannie & Freddie mortgage data, showed no change in January after revising December back down sharply to a 0.1% gain. Zwillow, the online real estate service, is forecasting a 1%-2% drop this year in prices, while Case-Shiller's drop was (-0.8%), unadjusted.
The $64,000 question, of course, is whether the homebuilding recovery is real this time, or just another bump combined with the usual "hope trade" in builders - about to come to its usual springtime end. It's a hard one to answer, because both KBH and Lennar cited rising rental costs as a buying stimulus, with tight lending standards as a deterrent. Yet banks releasing more of their inventory means more competition for both rentals and newbuildings.
The rental market has tightened because of tight home financing, people getting kicked out of homes into rentals, and a lack of new construction. However, apartment construction is up sharply, and both the banks and the GSEs (Fannie-Freddie) are contemplating easing rental restrictions. It's unlikely that increases in short sales and foreclosure by banks are going to encourage them to loosen lending standards this year.
Despite the various calls that this is 1995 again for the markets, it looks more like 2007-style craziness to us. Personal income and spending trends are running at half the levels of the 1990s. A datum in vogue is that home sales are the best in five years, but that was true a year ago as well - until much later, when the data were revised substantially downward. Pending home sales posted a surprising drop for February on Monday, and mortgage-purchase applications are still at very low levels, Absent divine intervention, the negative equity problem is years away from resolving itself.
Another popular tidbit is that weekly jobless claims are the lowest in four years. That is nearly true, as last week did indeed report the lowest number since May of 2008. However, a reason Mr. Bernanke is worrying about jobs is that the size of the insured labor force - that is, eligible to file for claims - is approximately eight million smaller than it was in May 2008.
The rate of actual claimants - that is, the percentage of the eligible workforce collecting actual claims, is 3.2%. That's half again as large as the rate in May of 2008, and well above the decade average (don't even talk about the 1990s). The moving 13-week average of new claimants as a percentage of covered workers -i.e., the sack rate - is about the same as it was in March of 2002, when we were in a recession - and had an additional three million bodies in the covered work force.
It's not a boom, but it is goofy. Goldman Sachs (NYSE:GS) says one week that this is an historic time to buy equities because of the improving economy - "our global projections show that the next decade is likely to be a peak period for global growth" - while arguing the case for gold the next week on the grounds that the Fed is going to have to ease in light of the weak economy.
The essential thing, it would seem, is to be buying. To be fair to Goldman, they are by no means alone, as we have noted a sharp increase in "mark-to-market" research in the last month. As stock prices have ballooned past targets set in January, analysts have been busily discovering new intangible reasons why prices should go even higher, mostly centered on the notion that confidence is higher. Along with the number of confidence men.
But not, alas, the numbers for manufacturing. The Dallas and Richmond districts both reported sharply lower growth rates for March, with the new order index falling in half in Richmond and going to zero in Dallas. That echoes slowing numbers from New York and in particular Philadelphia, as well as the disappointing durable goods rebound in February posted yesterday.
It all lends credence to a theme that we and the Fed have been worrying about, namely that we had some excitement for a few months around inventory reaccumulation, but now the episode is ending. That doesn't mean recession, but it does suggest more of the same 2% growth in GDP and spending that we had in 2010 and 2011. We might not even get so far in disposable real income growth, below 2% in each of the last two years.
It's going to be hard to get to 1550 on the S&P with numbers like that, even if we can get Chairman Bernanke to ignite more spaceshot rallies with complaints that the job market is too weak. In case you're wondering, no we don't think that Bernanke was deliberately trying to game stocks higher on Monday. More likely, the Fed really doesn't want rates to start backing up before the economy can get any real traction, particularly in housing. And maybe he was looking at the employment data without wearing rose-colored glasses. They do that sometimes, you know. How very un-Wall Street.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.