Market Commentary

In my view yesterdays release of real sector data was solidly decent.
February 18, 2010

In my view yesterday’s release of real sector data was solidly decent.  December’s housing starts were 591K, slightly higher than the 580K consensus view.   Moreover December’s data was revised higher as the drop in single family sector was revised to 3% from 7%.

Regarding building permits, permits gave back roughly half of their 11% December spike, dropping 5% to an annual rate of 612K.  Single family permits however held on to their 8% December gain, edging up 2k in January to a 16 month high.  This is the third consecutive monthly rise

The single family permit data suggests a February start rate of around 600K but severe winter will probably keep starts below this level.  If starts do achieve this level, housing starts would be at the greatest level since November 2008.

I believe this data solidly suggests the worst in housing is over.  Moreover and as written many times, the organic demand for housing is around 1.5 million units per year.  During the last 18 months an average of 604,000 units has been started.

While much has been written about the shadow inventory, the number of new homes available for sale today is only 232,000, the lowest absolute number since the 1971 inception of this data point.  Since 1971 the population has increased about 35%.   Homeowner affordability is at multiyear highs.

I am not suggesting a return to yesteryear, only insinuating the data should slowly progress back to the mean.

Industrial production and Capacity Utilization rates were also slightly higher than the consensus view offering further evidence the manufacturing sector continues to recover impressively.  In my view this data suggests capital spending should again increase by double digits this quarter following fourth quarter’s impressive 13% gain, the greatest increase since 2006.

This should not be a shocking possibility given that capital spending decisions are cash flow not interest rate sensitive.  As noted a gazillion times, profits are exceeding expectations rising around 75%, the first increase following a record nine consecutive quarters of decline.

Commenting briefly about the January FOMC minutes, the Central Bank for the first time stated the economy is in “recovery” unanimously agreeing that Fed assets’ and banks’ excess cash will need to shrink “substantially over time.”

Today is data filled day as the PPI, Philadelphia Fed, Initial Jobless Claims and the Index of Leading Economic Indicators (LEI) are released.  The LEI—a former tier I indicator designed to measure economic activity in three to six months—is expected to rise for the tenth consecutive month.  Consensus is estimating a 0.5% gain which is lower than the nine month average of 0.9%, the current streak is the longest in at least six years.

Markets yesterday were mixed.  Bonds posted moderate declines and equities moderate increases because of the data.

Last night the foreign markets were up.  London was up 0.52%, Paris up 0.25% and Frankfurt up 0.30%.  Japan was up 0.28%and Hang Sang down 0.54%.

The Dow should open up nominally lower even as several top tier companies today exceeded profit expectations..   The 10-year is up 2/32 to yiled 2.72%.