22 Feb 2008 Slowing Continues
Search for the bottom in the housing recession continues, leading indicators are falling, the auction market has dried up, Oil breaks $100, Gold is reaching new highs, and the job market is cooling. Unfortunately there is little evidence to support the thesis that we will miss a recession other than the continued strong momentum in Asia and theMiddle Eastmay pull us out of this dive with the help of lower rates and government stimuli.
Mortgage applications in the US dropped by the most in more than four years as the highest mortgage rates in two months weakened demand for home buying and refinancing. The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan fell 23% to 822.8 from 1063.5 a week earlier according to Bloomberg. Refinancing plunged 28%, the most in more than three years, and the purchase index declined 12%. MBA points out that application figures may be overstating activity because the collapse in subprime lending is prompting owners and potential buyers to file multiple applications to ensure financing.
The average rate on a 30-year fixed-rate loan rose to 6.09%, the highest since the week ended Dec. 21st, from 5.72% the prior week. The average rate on a 15-year fixed mortgage increased to 5.55% from 5.18%. The rate on a one-year adjustable-rate mortgage held at 5.72%.
On the positive side, the National Association of Homebuilders said yesterday that its builder sentiment index edged up to 20 this month as companies reported that more prospective buyers were touring new homes. Given the means, it is a buyer’s market.
The index of leadingU.S.economic indicators fell 0.1% in January for the fourth consecutive month signaling more weakness in the next six months. The Conference Board says the measure can be one of the “reasonable criteria for a recession warning.” The last time the leading index fell 2% in six months was in 2001, at the start of the last recession. The index hasn’t fallen four months in a row since 1990.
Another report showed manufacturing in thePhiladelphiaregion contracted to the lowest level since early 2001, as measures of new orders and shipments reflected weak demand. The Federal Reserve Bank of Philadelphia’s general economic index declined to a minus 24 from minus 20.9 in January, the bank said today.Readings less than zero signal contraction.
The credit markets continue to dry shrink. The $342 billion auction-rate bond market has all but evaporated. It is where local governments and states go to raise cash on long-term bonds at lower short-term rates. The problem is, nobody is showing up to buy them and the dealers such as Goldman and Bank of America are no longer stepping in with their capital to maintain the markets. Hundreds of auctions have failed this month raising borrowing costs from the low single digits to as high as 20%. These higher costs are being born by taxpayers. We are glad to be out of our Van Kampen Municipal Trust leveraged bond funds use these markets to finance their preferred shares.
So far the stock market has held up relatively well as compared to the onset periods of historical recessions. From the October 31st market peak the S&P 500 is down just over 13% and the NASDAQ is down 19.5% These declines do not reflect reinvested dividends which would cut the declines by something just under a percent. Recessions are typically preceded by drops of 25-30% in stock prices.
We could see further declines in the market if the banks announce considerably higher write downs than currently projected either from continuing credit quality erosion or earnings shortfalls. Sanford C. Bernstein & Co believes that Goldman Sachs, Lehman Brothers, and Bear Stearns will see profits drop by as much as 40% more than current estimates because of lower investment banking revenue, primarily in the municipal markets.
Oil is rising as speculation grows that demand in Asia and the Middle East will persist through a US slowdown/recession. Imports of crude byJapan, the third-largest oil consumer, rose for a fourth month in January, government data showed yesterday. Demand in India and China is still booming experts say. And renewed tensions in Iraq and Nigeria might disrupt supplies.
The best performing areas in the global markets over the past week wereBrazil, Latin America, theNetherlands, Gold, and the S&P Global Materials Sector.Chinaand Telecommunications were among the worst. We continue to believe that the outstanding sector in the global economy for the year ahead will be technology; from the standpoint of both an earnings and a valuations. Valuation provides a floor if the slowdown/recession is worse than expected and earnings should really kick in if we avoid recession or experience a short one.
Have a good weekend.