Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

Signs of Blow-Off Top in Home Sales

The Commerce Department said durable goods orders for April rose 1.9% following forecasts for a gain of 1.3%. The headline number looks good, but the market has been more focused on durable goods orders less transportation items. Expectations called for a gain of 1% but ex-transportation, orders actually declined 0.2%. The early headlines had stocks down and bonds higher due to the weak economic data but check this Bloomberg take on the impact to the dollar. “The dollar extended its gains against the euro after a government report showed U.S. durable goods orders last month rebounded from a March drop, adding to confidence in the U.S. economy.” The durable goods report took on a different spin depending on whether you were looking at stocks, bonds or the dollar. As it turns out, the dollar and Treasuries have both done an about face and are now headed lower. I’ll check back later to see where they close for the day.

The mixed durable goods numbers put a bid in both Treasuries and the dollar, but after watching the dust settle from the initial report, they both rolled over and turned negative. I’m speculating the currency traders shifted their focus to the core weakness in the ex-transportation data and subsequently sold the dollar, but it looks like Treasuries are now reacting more to the report of booming new home sales which depict a rapidly expanding economy. Bond prices are now moving lower, pushing interest rates higher.

New home sales were reported with a record high sales rate of 1.316 million units annually for the month of April. Remember yesterday existing home sales were also reported at the record pace of 7.18 million units annually. Housing prices are still ON FIRE!!! The Commerce Department said new home sales surged 37.2% in the Northeast and 2.8% in the West, while sales in the South fell 5.3% and dropped in the Midwest by 0.5%. The median sales price of new homes rose 3.8% to $230,800 nationally. It looks to me like we are in the blow-off stage for residential real estate. The next paragraph tells you exactly what is making all of this possible.

The Mortgage Bankers Association said its application index increased 4.3% with the re-finance index posting a gain of 6.4% and the purchase index higher by 2.8%. The 30-year fixed rate fell 10 basis points to 5.63% (one year ago the 30-year fixed rate was 6.26%) but check this…the one-year ARMS rate moved 10 basis points higher from 4.11% to 4.21%. There goes more of that blasted “conundrum” thing!!! We have short-term rates moving higher with longer-term rates moving lower. I believe the American homeowner/consumer will get one more chance at fixing their mortgage rate at these 40-year lows before interest rates head higher in earnest.

The Feds know that Americans have taken on huge mortgages because they can “afford” the monthly payments. The big problem comes when we know that at least a third of all the mortgages outstanding have variable rates that will inevitably adjust higher making the payments much less affordable. The Feds are going to “encourage” homeowners to get a fixed rate mortgage by flattening the yield curve (deliberate conundrum) and with a few new laws. I understand they are making it more difficult for people to claim bankruptcy and just walk away from their unpaid credit card debts. Additionally, I hear there is legislation on the table that says future debt consolidation loans will only be done with variable rate loans after a specified date. The idea is that everyone will jump on a fixed rate loan to consolidate debts, but any future debt will be exposed to a rising interest rate environment. I’ll have to do more research on the proposed legislation to see what the authorities are doing to stop Americans from going deeper and deeper into debt.

Crude oil and gasoline prices moved higher today with a surprise decline in crude oil inventories. Expectations called for a gain of one million barrels, but the Energy Department said stocks fell by 1.6 million barrels. July crude closed $1.58 higher at $51.25 a barrel and June unleaded gasoline added 2.6 cents to close at $1.453 a gallon. The summer driving season officially begins next week, so we’ll see how well the refineries are able to keep up with the rising demand.

Treasuries and Stocks

The Treasury market was weird again today. Bond prices began the morning higher on the weak durable goods numbers, and then turned negative. At one point the five and 30-year maturities were positive while the 10-year note was in the red. I heard scattered reports about some problems with futures contracts on the 10-year note. Evidently, sellers of the 10-year paper are in a position where they need to deliver the 10-year notes, but they don’t have enough to satisfy the outstanding contracts. Frankly, I don’t understand all the shenanigans in the Treasury market…right now it seems to be a tug-o-war between inflation concerns and a slowing economy mixed with hedge fund problems on the wrong side of the trade. In my opinion, we will get both inflation and a slower economy…along with slowly rising interest rates. The only other noteworthy item in the bond market today was the auction of $22 billion of two-year notes by the U.S. Treasury. It’s strange to see this much volatility in Treasuries on an auction day.

I’ve been asked to comment more on the general health of the broad stock market. In the past few months I haven’t had much to say about stocks because I just don’t like the valuations. We have historically high price to earnings ratios and historically low dividend yields that are more indicative of market tops, not a base to send stock prices higher. I also look at the geopolitical tensions around the globe and know the dollar and U.S. bond markets are much more important than the stock market as overall indicators for the health of the U.S. economy. Bond prices need to remain elevated to hold interest rates down. If the bond market breaks significantly lower, it will take stocks and real estate right down with it. I have not been focused much on the overall stock market because I still believe there are better opportunities to invest and trade in commodities. In today’s trading, the Dow Industrials lost 45 points to 10,457, the NASDAQ Composite fell 11 points to 2,050 and the S&P 500 shed four points to close at 1,190. I like the resource stocks, but for the broad stock market I believe the risks outweigh the potential reward.

I already touched on oil, but another item I really like is natural gas. The fundamentals are quite bullish with North American production declining at 2% a year and demand growing by 2% per year. The difference in lagging supply has to be made up with imports of liquefied natural gas, but we don’t have enough terminals in the U.S. to receive LNG. There are three terminals on the East Coast and two in the South, but none on the West Coast. California needs more natural gas, but there is already a great deal of resistance to build a proposed facility in Long Beach and off the coastline of Ventura, CA. Warren Buffett just increased his exposure to supplying energy to the Western States. (Bloomberg) “MidAmerican Energy Holdings Co., a unit of Warren Buffett’s Berkshire Hathaway Inc., agreed to buy PacifiCorp for $5.1 billion, doubling its base of utility customers and gaining low-cost power plants in the western U.S.” Buffet’s MidAmerican Energy already owns the pipeline that delivers natural gas from Wyoming to California. The man is thinking ahead as he vertically integrates his energy supply for the western states. It will be at least three or four years before California will get through all the red tape to build a facility to receive LNG.

Gold and silver should be set to move higher. The Treasuries quarterly refunding is out of the way and today was option expiry day for June gold call options. With June gold closing at $419.00 today, the 3,500 June $420 calls expired worthless. The commitment of traders has turned more favorable in gold with the commercials covering shorts and the specs getting even shorter. I expect gold to get with the program and stop acting as an anchor to my silver positions. Silver supply is in deficit to demand, the COT’s are bullish with commercials increasing their long exposure, trendline support is holding while silver works to break through the downtrend resistance that has held since December. With any weakness in the dollar tomorrow, silver and gold should fly. The dollar has been ramped higher in anticipation of a revaluation for the Chinese yuan, but based on all the political rhetoric from China, I believe we are still many months from seeing anything happen…they will continue to drag their feet as long as they can continue increasing their market share for manufactured goods.

Let’s hear a big cheer for new home sales in the U.S. and the booming economies of the developing nations abroad. American consumers are still buying houses and all the new fun stuff to turn that new house into a cozy home for nesting. People in developing nations want all the creature comforts we have here in the USA. Increasing demands for raw materials at home and overseas will ensure the commodity bull market is here to stay for quite a few years to come.

Have a Great Evening!

Mike Hartman

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us