Market Commentary

Stocks surged for a second day
February 03, 2010

Stocks surged for a second day on the belief that the global economy is recovering and the worst in residential real estate is over.

Regarding the former, the National Association of Realtors said its index of pending home sales increased 1% in December despite miserable weather following a record 16% plunge in November, the result of the perceived ending of the $8,000 home buyer tax credit.  The data is suggesting about a 5.5 million resale rate, about the same pace as September.  Compared to a year earlier, pending home sales rose 11%.

Equities were also reconciling the fact that 81% of companies have exceeded profit expectations, the vast majority is the result of revenue growth not cost cutting.  Fourth quarter earnings have increased by 76%, far exceeding the 62% expected gain.  [Bloomberg]

Many times I have referenced excess bank reserves, amounting to over $1 trillion versus the historical average of $1-$2 billion. [Federal Reserve]  I penned it is not if these funds will be leant but rather when suggesting bank lending might return by mid to late January.  This increase in lending will increase monetary velocity which could potentially unanchor inflationary expectations.

The Federal Reserve Senior Loan Officer survey was released late Monday.  The January survey indicated that “commercial banks generally ceased tightening standards on many loan types but have yet to unwind the considerable tightening that has occurred over the last two years.  The net percentages of banks reporting tighter loan terms continued to trend lower.  Banks reported that loan demand from businesses and households weakened further, on net, over the survey period.”

 As per the institutional trading firm of MKM Partners “this is a much faster pace of improvement (after a larger deterioration) than what was seen during the last two recessions and recovery cycles.    It took six quarter after the 19901-91 recession and nine quarters after the 2001 recession to see negative net fraction of banks tightening business loan terms compared with three quarters this time.”

I ask is bank lending on the edge of recovery?  One survey does not make a trend but at least the direction and the pace of improvement is encouraging.  Regarding the unanchoring of inflation expectations, if inflation is defined as too much money chasing too few goods, such an environment could develop.

However I ask a different question.  What are the odds rates could be held artificially low because of these massive sums chasing too few quality loans, perhaps returning to the “conundrum” of 4 years ago?

What will occur today?  The private ADP and Challenger private employment surveys are released today as is the ISM non manufacturing index.  All data points can impact trading.

Last night the foreign markets were mixed. London was down 0.02%, Paris down 0.02% and Frankfurt down 0.17%.  Japan was up 0.32% and Hang Sang up 2.22%.

The Dow should open nominally lower following the strongest rally in the S & P since October.  The 10-year is off 9/32 to yield 3.68%.  The private ADP employment survey was just released.  Companies cut an estimated 22,000 jobs in January, the smallest number in two years.  The data was moderately stronger than expected suggesting a possible upside surprise in Friday’s BLS report.