Keeping You Updated on the Market for the week of Feb 9, 2009

MARKET RECAP
If a retailer wants to stimulate sales, what does he do? He lowers prices. It's a simple, yet powerful, principle of economics that we've been proselytizing over the past two months, and for good reason, it works. To wit: The National Association of Realtors (NAR) reported that its index of pending home sales, which measures contracts signed but not closed, rose 6.3% to 87.7 in December. Year-over-year, the pending-home-sales index was up 17.5% in the West and 1.6% in the South. Even more encouraging, the index's numbers reflect the most favorable combination of home prices, mortgage interest rates, and family income since tracking started in 1970.
Lower mortgage prices have contributed greatly to improving housing affordability. The prime 30-year fixed-rated mortgage has been floating below 6% for the past three months. But the mortgage market's contribution could diminish in the near term. Recent news that the federal government is seeking ways to lower mortgage-rates further sounds like a positive, but could actually be doing more harm than good. Yes, lower rates are a good thing (and we understand the NAR supports intervention to push rates lower), but if people are always anticipating lower rates, they hesitate to act today. Let's not forget that mortgage rates in the 5% range are darn-good rates, and even those can be readily refinanced if the feds succeed in pushing rates down.
While housing prices and mortgages have trended lower, unemployment has trended higher. Jobs, or the lack thereof, is the monkey wrench that could conceivably grind the housing-recovery gears to a halt (operative word being “conceivably”). On that front, there was much media teeth-gnashing and lamenting last week because the unemployment rate rose to 7.6% on 598,000 lost jobs in January.
How did the financial markets react to the “dire” unemployment news? The Dow Jones Industrial Average surged ahead 150 points in the first hour of trading. Like we stated last week, many economists view the recent job cuts as a bottoming of the recession, not an omen of things to come. It appears the stock market shares the same view.
Economic Indicator
Release Date and Time
Consensus Estimate
Analysis
Wholesale Trade (December)
Tues, Feb 10,10:00 am, et
0.6%(Decrease)
Moderately Important. The expected decrease is within the norms of a slowing economy.
Mortgage Applications
Wed, Feb 11,7:00 am, et
None
Important. Despite a recent spike in rates, application activity remains in an upward trend.
International Trade(December)
Wed, Feb 11,8:30 am, et
$37 Billion (Deficit)
Moderately Important. Lower energy prices have pushed the trade deficit to a multi-year low.
Retail Sales(January)
Thurs, Feb 12,8:30 am, et
1.0% (Decrease)
Important. The sales decline has likely been exacerbated by January's poor economic data.
Business Inventories(December)
Thurs, Feb 12,10:00 am, et
0.6% (Decrease)
Moderately Important. Inventories naturally decrease with a decrease in sales.
Consumer Sentiment(February)
Fri, Feb 13,10:00 am, et
52 Index
Important. Sentiment is expected to hit a new low, but will improve as the economic data improve.
A Few Words on Improving Psyche
Last week, The Financial Times ran an op-ed that pretty much confirmed what we've been saying all along: The constant barrage of negative news creates adverse feedback loops that overwhelm the psyche. The most immediate way to thwart these loops and improve psyche is simply turn off the news, or at least throttle back the number of times you read the same account.
Another way to improve psyche is not to get too caught up in the here and now. People tend to absorb news as if it actually happened to them or will happen to them in the near future. Fertile minds tend to conjure numerous scenarios, most of them bad. They also tend to extrapolate today into infinity. Life is not the movie Groundhog Day. Trends do not last forever.
We are not Pollyannas by any means; we understand the economy needs to work out quite a few kinks, not the least of which is the business borrowing environment. (Harley-Davidson was recently forced to borrow at a 15% annual rate, which is absolutely absurd.) That said, we are feeling a little more sanguine every day. After all, what's not to like about a housing market that is showing the best combination of borrowing costs, prices, and affordability in nearly 40 years? Add a little optimism to the mix and we'll be in full-fledged recovery mode before you know it.