Market Commentary

Stocks advanced again
July 27, 2010

Stocks advanced again as June’s new homes sales were stronger than expected thus suggesting the lull following the expiration of the government’s tax credit may not be as great as expected. 

Purchases in June increased to an annual rate of 330,000 rebounding from May’s record low of 267,000.  Consensus expected a 310,000 annual rate.  I must write 330,000 new homes sold is the second lowest number on record, data collected since 1963.

The pivotal inventory to sales ratio fell to 7.6 months from May’s 9.6 months.  Typically an I/S ratio of 4 months is deemed healthy.  There were however only 210,000 new homes available for sale in June, the fewest since 1968.  The nation’s population has risen about 52% since 1968 thus suggesting inventory is at rock bottom.

I ask what are the odds a new home shortage can develop as housing starts has averaged 596,000 since September 2008, considerably lower the 1.5 million units required to meet innate demand.  No inventory and few starts create an environment conducive for a shortage.

Radical thought?  Probably but who thought four months ago prevailing wisdom would evolve to an all but inevitable change in congressional leadership and a strong probability of the extension of some if not all of President Bush’s tax cuts.

I place the odds of a new home shortage in the next 12 months around 25%.

Commenting again about profits, second quarter earnings have been great.  Consensus is now expecting 2010 results to rise by 34% and 17% in 2011, the fastest two year growth since 1995 as per Bloomberg. However because of the intense volatility retail pessimism is now at the greatest level since July 2009.  [Bloomberg]

Who is correct; analysts or the retail investing public?  I will wager the former as corporate cashflow discounted by some interest rate dictates stock valuations.

What will happen today?  Approximately 160 S & P 500 companies will release results in the next four days.  About forty of these announcements will be made today.  More housing data, consumer confidence and a regional manufacturing index is also released.  All can impact the averages.

Last night the foreign markets were up. London was up 0.83%, Paris up 1.12% and Frankfurt up 0.64%.  Japan was down 0.07% and Hang Sang up 0.64%.

The Dow should open moderately higher on the growing belief that bank credit quality is improving hence increasing the probability of greater lending.  The 10-year is off 9/32 to yield 3.30%.