Housing data down

Monday, December 31, 2007

ECONOMIC DATA / NEWS

Existing home sales were minimally higher in December, creeping from an annualized rate of 4.98 to 5.00 million.  That doesn’t offset the decline of 80,000 in new home sales.  The housing market has not show true signs of bottoming out yet, but we believe the turnaround could begin as early as Spring of the new year.

The Dow dropped about 50 points from the opening bell.  That puts the index a little above 13,300 right now, but there are technical indicators suggesting that the stock market could be in for a big correction.  In fact, combining these technical factors with the weak economic conditions, which are only expected to worsen, the Dow could be below 13,000 by the end of January.  Furthermore, we believe there is a very good chance that the Dow could drop below 12,000 within the next six months.

Oil look to be one of the major contributors to stock market losses.  Prices are currently straddling $96 per barrel.  Seemingly never-ending conflicts with the Middle East and North Korea create constant concern about supplies.  And supplies have been dropping in the U.S. as it is.  Weather is also an unpredictable variable.  The weak dollar is pushing the value of oil lower too.  Oil and gas prices could be a tipping point when it comes to whether or not the economy goes into a recession.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is up another 9bp.  Prices briefly climbed higher, but they’re having trouble crossing over 101.50.  But, with little support or resistance, the stock market will most likely be the sole determinant in the direction of mortgage bonds today.  If there is additional follow through on today’s rally, it could be an indication that the break out of the upward trend was just a fluke, and that the upward trend is really still intact.  On the other hand, if MBS prices fall before the end of the day, then it will support the previous signal that the upward push is losing momentum.

The 10-year Treasury yield has crossed under the 25-day moving average.  At the moment, it is trading around 4.04%, although it briefly popped back up to 4.06% after the housing data came out this morning.  There is moderate support at 4.00%, but outside of that, the next strong support is the long-term low of 3.80%.  We believe the yield will be this low again within the next six weeks, if not sooner.

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