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Wednesday, June 29, 2005
Market Recap
The Federal Reserves' two day meeting on interest rates began today and stocks are at a stand still as traders await the outcome to be announced tomorrow at 2:15 EST. All ears will be listening for the statement that will follow the 9th consecutive .25 interest rate hike. Wall Street wants to know if an end to the interest rate hikes is near or if they will continue next quarter. Volume today was anemic as traders took a “wait and see” approach and stepped to the sidelines ahead of the Fed. Even a better than expected Gross Domestic Product number released today could not get stocks moving. There was no follow through at all to yesterday's big gains. However, the NASDAQ showed some strength, holding up well against the DOW today. The DOW lost 31 points, the NASDAQ was down just 1 point and the S&P lost 2 points. We continue to believe, as we have stated before, that a rotation into the tech heavy NASDAQ is underway and has been for 3 weeks now. We have mentioned this before and it seems to be playing out that way with the strength in tech stocks lately. Tomorrow should be interesting after we hear from the Fed. Since the Fed will raise rates tomorrow for the 9th time in a row, I thought it would be appropriate to discuss Housing tonight.
Why Housing Prices Matter to Stocks
The big surprise this year for me has been the economy's resilience to the Fed's continued rate hikes. Even this resiliency is showing signs of weakening. Right now, commodity prices continue to stay stable, but for how much longer? Lending and consumer discretionary spending are still going strong, for now. The only logical conclusion we can come up with for a valid reason for this continued strength, would be housing. Homes have continually had above average appreciation for the last 3 or 4 years in many parts of the country. This creates a "wealth effect”, like the same type we had in 1998 and 1999 during the Internet stock bubble. I am not suggesting that there is a housing bubble or anything like the mania in the late 90's in the stock market. But housing is definitely one of the reasons the economy is holding up while the Fed has raised rates 8 times in the last two years to try and cool things off.
You would think that these 8 rate hikes would have slowed housing down by now but that has not been the case. Mortgage rates have actually declined since the start of the fed hikes two years ago. Although they have nudged up from their lows, they are still below where they were when the Fed started raising rates two years ago. And even with these 8 rate hikes, interest rates still remain below the historical average. Also, short term rates are still below the rate of inflation, and this of course will always discourage people from saving money. This lack of savings has an effect on liquidity. Liquidity becomes excess and has to go somewhere and it has gone into the housing sector. Lenders have become very creative when writing loans over the past year or so. They have created financing programs that include negative amortizations and interest only loans. In these cases, the principle balance increases each month, putting the borrower into even greater debt. It is all a ploy to get people into homes that they otherwise may not be able to afford. This is causing artificial wealth and thus we can conclude that some of the recent gains in housing have to be artificially inflated.
Is it all going to end with a real estate crash? Probably not. At this point there have been no signs of a slowdown. However, because of the creative financing and artificially low interest rates that are stimulating a possible housing “bubble”, it is possible that there could be problems in the future for the economy and the stock market when real estate slows. With that said, housing prices do play a roll in the stock market from the robust spending of the consumer feeling wealthy about the increased value of their homes. They tend to spend more and businesses are benefiting from that right now. Since there is little sign of a slowdown this should bode well for another good quarter of earnings for stocks in the 2nd quarter.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
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Earnings Calendar
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