Wednesday was a wild trading session where we saw the largest
intraday sell-off in the
(INDEXSP:.INX) E-Mini futures that we have seen in some time.
Intraday price action was driven largely by statements made by
Chairman Bernanke and the release of the Federal Reserve meeting
minutes which saw some monster intraday moves and a large spike in
While the world is focused on when the Federal Reserve is going to
taper their Quantitative Easing program and the impact those
actions will have on financial markets, I wanted to look at another
divergence in the economic data which is supported by market
Instead of trying to determine how or when the Federal Reserve will
taper or end their monetary experiment, I wanted to juxtapose
statements that were made today with the actual facts. Readers can
draw their own conclusions.
Recently, we have been told that the housing market is in the early
stages of recovery. Unfortunately, due to low interest rates,
housing has turned back into a speculative market. Consequently, a
lot of so-called fast money is flowing into housing, which in many
cases is either being purchased for rentals or by foreign investors
as a speculative investment.
At present the housing market is not being driven by capital
formation at the household level, and data indicates that
construction jobs are under pressure and affordability is
reversing. The chart below illustrates what has recently transpired
10-Year Treasury Yield
As can be seen above, the 10-Year Treasury yield has risen
considerably since the beginning of the month of May. Normally when
interest rates are rising and Federal Reserve policy is indicating
that a form of tightening seems likely, we typically see a rush of
mortgage applications and home starts as borrowers try to lock in
lower interest rates. Furthermore, the spring and early summer
months are generally considered a very favorable time to sell
existing homes in the United States.
In light of all of the above mentioned facts paired with our
Federal Reserve chairman stating that housing is starting to
recover, readers would expect that housing starts and mortgage
applications would be jumping higher.
Unfortunately the mortgage application data came out on a day when
the Federal Reserve was controlling the headlines. The mortgage
application data indicated the largest 2-week rate of decline in
mortgage applications since the housing bubble popped.
Furthermore, this is supposed to be a strong seasonal time for real
estate and interest rates are rising as shown above. If readers
look at recent price action in the
SPDR Homebuilders ETF
) it would appear that all is well in the land of housing and
Chairman Bernanke and the Federal Reserve are spot on with their
Until the past few trading sessions, the homebuilders have been in
an obvious bullish run to the upside. The rally that transpired
since the late February 2013 lows tacked on close to 20% gains in
XHB. However, as noted above, the past few trading sessions' price
action appears to have stagnated and we saw new recent lows on
Home Depot is another stock that relies heavily on home
construction and improvement and would likely benefit from both new
home building and existing home purchases which typically require
immediate customization or improvements. The recent price action in
Home Depot is shown below.
Home Depot has had an impressive rally since the beginning of 2013.
HD has tacked on over 20 points on its share price representing a
near 30% move higher year to date. However, exuberance on Tuesday
after earnings were released saw a spike Wednesday morning which
was promptly reversed intraday.
Based on the recent price action in both XHB and Home Depot,
readers would tend to agree with Chairman Bernanke that housing was
recovering and that the recent mortgage application decline was
However, there is one eye-opening concern that does not support
Chairman Bernanke's position about a housing recovery, and
unfortunately points to less demand in the immediate future. While
many investors do not track lumber prices, the chart below
demonstrates the sheer bear market that has befallen lumber futures
As can be seen above, random length lumber futures have gotten
crushed to the downside over the past two months. In early March,
lumber futures were trading up around the 410 price point. At the
close on Wednesday, random length lumber futures closed at 305.20,
a more than 25% drop in price in roughly two months.
How is housing rebounding with lumber prices falling? While Home
Depot sells many products, most major remodeling projects and even
smaller upgrades require the purchase of lumber. Have logging
companies discovered an untapped lumber resource?
I will let readers decide whether to believe the price of lumber
and mortgage application data or a Federal Reserve Chairman who
declared on January 10, 2008, "The Federal Reserve is not currently
forecasting a recession."
For those paying attention, the macroeconomic data is crumbling in
the United States and Europe. The printing press and monstrous
liquidity can only fuel markets for so long. Can Chairman Bernanke
and the Federal Reserve print Cap-Ex spending increases and rising
profitability? I think we all know the answer. In the end, when the
Federal Reserve is printing $85 billion per month to buy US
government debt, perhaps fundamentals are largely irrelevant.
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