Stronger then expected housing numbers

Tuesday, November 20, 2007

ECONOMIC DATA / NEWS

Economists thought housing starts hit a new 15-year low in October.  Instead, to everyone’s surprise, they increased from 1.19 million to an annualized rate of 1.23 million.  Despite this improvement, building will probably see more declines, and we expect construction of new homes to stay low for at least the next six to nine months.  However, we still feel confident that favorable mortgage rates, which we believe will drop even lower over the next three to six months, combined with steadily declining home prices will lead a new buying boom.  It won’t be to the extent that we saw a few years ago, nor would we presume it to last as long.  But, there is hope for the beginning of a recovery in the housing market by the middle of next year.  We’ll admit this is a somewhat optimistic forecast, but we feel that a rebound is not as far off as many people think.

Missed earnings by Target and a $2 billion loss by Freddie Mac last quarter could wreak havoc in the stock market this morning.  However, they will be countered by the stronger housing starts, strong earnings from Hewlett-Packard, and a smaller than predicted loss by Barnes & Noble.  Plus, Hewlett-Packard and Target both announced stock buy-backs following their earnings reports, which suggests that they anticipate stronger earnings going forward.  The strong reports are likely to outweigh the negatives.  And, especially with the stock market losing a huge chunk yesterday, we will probably see some bargain hunters this morning.  Again, the lower volume will play a factor in creating bigger swings as well.

And, the subprime defaults have claimed another CEO.  H&R Block CEO Mark Ernst has announced his retirement.  Many CEO’s of banking and financial firms have received strict criticism from shareholders and the public at large as their companies have taken multi-million or even multi-billion dollar losses.  He will probably not be the last to go either, but the good news for stock holders is that the perception is these companies are making moves to correct previous mistakes.  It should strengthen the mortgage markets in the long run.

The minutes from the last Fed meeting will be made public at 2:00 PM ET.  This is a potential market mover, but it is at a lesser level than the Fed rate decision itself.  We feel that the minutes are going to lean toward a rate cut bias, but at the very least they should hint at an undecided position.

TECHNICAL ANALYSIS

We have seen upward price movements consistently lose steam somewhere between 100.91 and 101.00 for the last three and a half weeks.  In fact, over the last three months prices have only closed above 101.00 once, and they were much lower prior to that.  Currently, the FNMA 30-year 6.0% is down 9bp at 100.81, and it has not traded any higher than yesterday’s close of 100.91 today.

The 10-year Treasury yield was flirting with moving lower in very early trading, but it popped up shortly after the stock market opened, as we expected.  If you look at the historical chart of the 10-year Treasury yield, we saw a nearly identical move between mid-August and mid-September to that which we’ve seen between the very end of October to the present.  The yield could climb to at least 4.30% if it does continue with that pattern from September.  Right now, 4.19% is the key resistance level, because it marks the current rate at which the downward trend line resides.  However, that trend line will fall as the days pass, and it will not be far from the yield, which has already risen to 4.11% this morning.

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