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Stocks Down But Not Out - By WSS Research Team

Quite remarkably, equity markets are currently recovering lost ground after starting off the trading session sharply lower on news that Asian markets had fallen, with the Nikkei stock index plunging 7.3 percent, its worst single-day loss since March 2011.

More than likely, the confusion that was created yesterday by our Fed here at home probably contributed to the selloff in Japan, but at the moment the main cause is being attributed to a decline in a Chinese manufacturing gauge. The flash HSBC Purchasing Managers' Index (PMI) for May fell to 49.6 from 50.4 in April, slipping under the 50-point level that divides expansion from contraction for the first time in seven months. The news served to intensify fears that China's economic recovery has stalled and that a sharper cool-down may be imminent.

As we have mentioned, the Fed yesterday created confusion for investors who initially interpreted Ben Bernanke's words as meaning no tapering of monetary policy until the next couple of meetings, only to be thrown off by the Fed minutes that mentioned the willingness to reduce the current purchase program as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth. This sent equity markets lower yesterday and prevented the Dow Jones Industrial Average from closing at a second record closing price for the week.

However, despite the Japan worries and the Fed's nebulous message, equity markets have received some support from economic data points that came in better than expected. On the housing front, according to the U.S. Census Bureau, new home sales during April increased year-over-year by 29.0 percent and increased month-over-month by 2.3 percent to 454,000 (annualized), landing higher than the Street's consensus estimate of 425,000; more on this below.

On the Jobs front, according to the Department of Labor, initial claims during the week ended May 18 totaled 340,000, decreasing from the 363,000 revised figure reported for the prior week and landing below the Street's estimate of 348,000. After the sharp rise in initial jobless claims in the prior week, today's result certainly brought a small sigh of relief. The initial claims' four-week moving average was 339,500, decreasing from the prior week's average of 340,000, below the 350,000 level which economists say is consistent with moderate labor market growth of about 150,000 net new jobs a month.

At the moment the Dow is still attempting to reenter into winning territory, but given the mixed feelings circulating Wall Street at the moment, particularly about the Fed tapering its monetary easing execution, we expect stock markets to experience significant volatility for the rest of the session.

Home Sales Still Climbing Steadily
By David Urani

New home sales for April came in at a 454k annual rate, which was an increase of 2.3% month over month (26.8% year over year), and above the 425k consensus. Clearly the Street wasn't expecting much out of this result although I'm not sure why; nevertheless the significant beat over expectations has been enough to lift the sector, and it helped to give the market a modest spark as well. Regionally the results were actually mixed, with declines in the Northeast and Midwest being offset by gains in the South and West.
Supply did increase slightly on a nominal level, but the higher rate of sales meant months' supply remained flat at 4.1 which continues to be quite low; that's been a major catalyst for the rising demand for new home construction. By all means the spring selling season appears to be progressing well and the housing recovery, while not as rapid as it was several months ago, is still improving steadily.

Taking a quick look at prices, the Census' figures on these can be quite volatile and I'm more inclined to look at a longer-term trend than one month of results, but the median and average prices increased 14.9% and 8.3%, respectively to new multi-year highs.

And on a related note it's my view that the housing market is, and has been, on a healthy and natural track of recovery. Obviously the Fed has been hell-bent on juicing it further with its obscene campaign of mortgage purchases and low interest rate policy. Yet, the Fed is by no means needed to fuel this housing rally as plain supply, demand and prices are the main drivers here.

If anything, the Fed needs to get out of the way sooner rather than later to prevent the housing market from bubbling up too quickly. Perhaps this is one of the things the Fed now realizes, which hopefully can give them more impetus to wind down QE.