IMPRESSIVE ACTION WHEN LOOKING AT THE DATA
By Charles Payne, CEO & Principal Analyst
3/24/2010 1:38:20 PM Eastern Time
It's one thing for the market to move higher after a big news event like the passage of healthcare reform, which generated a sigh-of-relief-it-could-have been-worse rally, but today's action is much more impressive. The market has fought off a couple waves of weakness sparked by legitimately bad news. Mortgage applications, durable goods, new home sales, and petroleum inventories were disappointing; in some cases, very disappointing. The picture that continues to emerge is one of a sluggish economy that may have hit bottom but still has a chalk outline... it's not moving. The market is off a bit but should be off much more. In fact, I kind of wouldn't mind if it were off more but then again I've always liked bouts of weakness and market dips.
Durable goods can be a volatile economic data point so I wouldn't fret that it was slightly below expectations, although the results don't point to a big enough shift in confidence to alter the economy.
New Home Sales and Mortgage Applications
By: David Urani, Research Analyst
The new home sales report out this morning was certainly disappointing, hitting an annual rate of 308,000 homes which is a new record low. Of course, anytime we see a record low, we have to view it negatively, but we have to say that it was not too particularly surprising, as the consensus was for a run rate of only 315,000 homes; there was also likely a negative impact from bad weather which can be reflected in the better performance in the West versus other regions. Regionally, annually adjusted sales rates were down 20.0% in the Northeast, 18.0% in the Midwest, 4.6% in the South, and up a whopping 20.8% in the West. Pricing did show a rise month to month, although that could be a function of a higher proportion of homes sold in the West.
It has become eerily apparent that home buying demand is simply well in the gutter as home sales are at record lows despite there still being a nationwide tax credit on home purchases. That being said, it is natural that new home sales would be fairing worse than those of existing homes considering new homes have to compete against inexpensive foreclosure sales; although existing home sales are also on a decline, they are still well above the low set in January 2009.
In the next couple of months, we expect new home sales numbers to go higher as a result of improvements in the weather as well as last-minute buying before the tax credit runs out on April 30. However, we will be viewing such sales increases as temporary and will be cautious looking into the environment after the tax credit goes away (although another extension of the credit is not out of the question). Even with the tax credit in place, however, sales are in the doldrums and there may yet be more headwinds soon as the Fed ends its purchases of mortgage securities which is likely to send mortgage rates higher.
On another note, Treasury Secretary Geithner noted yesterday in a meeting about the fate of Fannie Mae and Freddie Mac that the government has a "key role" to play in the future of the housing market. One thing's for sure, the mortgage market as it stands will no longer be the same once the fate of Fannie and Freddie is decided. Could Geithner's comments, and a ruling body that we now know is fiercely liberal, foreshadow a full nationalization of Fannie and Freddie? Could the housing market be the next healthcare?
Petroleum Inventories
By: Conley Turner, Research Analyst
The build in crude oil inventories as reported by the U.S. Energy Information Administration points to the fact that the demand for the commodity is just not picking up in tandem with the much heralded growth in the economy. Crude oil inventories rose by 7.245 million barrels in the past week. This compares with the consensus expectation of a 1.67 million barrel increase.
This report showcases the fact that the current price of oil is disconnected to most fundamental underpinnings of supply and demand. In fact, the rise in oil over the past few months has more to do with a positive correlation developed at the height of the selloff with the rise in the broader equity markets. Also impacting the commodity's price today is the rising value of the U.S. dollar versus a basket of other currencies, including the euro. Concerns about Greece's debt situation and a downgrade of Portugal's debt by Fitch are both having an adverse impact on the value of the euro. The price of oil is for the most part inversely correlated with the value of the dollar.
Is there any Gallop Left in Polo Shares?
By: Brian Sozzi, Research Analyst
Since our last institutional note disseminated February 2, Polo Ralph Lauren (RL) shares have appreciated to the tune of 9.2%, outperforming the 6.8% advance for the S&P 500 Index. Not too shabby a performance we reckon considering the modest concerns that emanated from the 3Q10 earnings conference call. In particular, Ralph Lauren's increasing investment to build out its infrastructure in Southeast Asia (China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand) after assuming control of its license on January 1, 2010 (paid $200 million for license), led to worries that upfront spending would diminish EPS upside in coming quarters.
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Final Note
The market is consolidating gains and acts like it wants to move higher, but we have the luxury of being patient.