SP500 Levels, Refreshed...

Today is hammering home more of the same – without a US Dollar breaking down, US equities cannot breakout.

The US$ Index is +0.81% today and the SP500 is down -2.9%. Importantly, the market backed off a significant immediate term “Trade” momentum line at 873, and backed off hard.

The chart below paints the lines that I think matter. There is a green dotted line of immediate term support for the SP500 at 840.11, but if that breaks, and the US$ continues to strengthen, watch-out below – 804 is the only line of support from there.

Keith R. McCullough
CEO / Chief Investment Officer

US HOUSING – Declining New Home sales – What does it mean? Maybe nothing!

In the month of December, new home sales in the U.S. fell 14.7% to the lowest level on record, according to the Commerce Department. The decline in new-home sales to a seasonally adjusted annual rate of 331,000 was below the 390,000 consensus estimate. Year-over-year the pace of new homes sold in 2008 declined 37.9%; this is the lowest since 1982. The months' supply of homes on the market rose to 12.9 months in December from 12.5 months in November.

The Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction.

Existing home sales data are provided by the National Association of Realtors®. According to NAR, "the majority of transactions are reported when the sales contract is closed." Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.

Given the difference in definition, new home sales usually lead existing home sales regarding changes in the residential sales market by a month or two. For example, an existing home sale in January was probably signed 30 to 45 days earlier which would have been in November or December. This is based on the usual time it takes to obtain and close a mortgage.
Plus with the number of homes sitting in foreclosure, the banks are much more motivated to unload a home at a big discount than a builder is. Naturally, in this environment you would expect to see new home inventory increase, as there is better value in the foreclosed homes. Importantly, foreclosures aren’t in inventory of unsold homes and a growing portion of sales.

It appears that the homebuilders are competition with banks to unload inventory and the banks are winning!

Howard W. Penney
Managing Director


The Prime Minister is starting to recover, the economy is still very sick…

76 Year old Prime Minister Singh left the intensive care ward today as he recovers from open heart surgery performed over the weekend. Doctors expect him to begin doing some work within “two to four” weeks.

This is a difficult juncture for India to be without the Prime Minister as the economy continues to teeter and the response to the attacks in Mumbai last year is still foremost on voters’ minds. The press has seen Mr. Singh’s recuperation as an opening for his INC rival Sonia Gandhi, leader of the most politically powerful family in the nation, to advance her 38 year old son Rahul to the forefront of the party (see chart below).

Wholesale Price inflation saw a slight uptick this week, 5.64% Y/Y vs. 5.6% the prior week, suggesting that the trajectory of disinflation may be starting to flatten. Regardless, the government subsidy level for gasoline and other fuel was cut for the second time in two months, helping to assuage the masses.

We are currently short Indian equities via IFN and continue to believe that the economy there faces profound structural hurdles that cannot be overcome by a populist coalition –no matter who leads it.

Andrew Barber

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The Europeans Are Now Setting Up For Their Manic Panic...

From our friends at Street Account: 1/29/2009 12:09:41 PM BOE's Blanchflower says UK may face worse recession than in 1980's; rates need to be cut further and quickly -- wires

Obamerica: The Honeymoon is Over

If we needed a reminder that partisanship still exists in Washington, we got it yesterday in the House’s vote on the stimulus bill. In the vote, 244 Democrats voted for the bill, 11 Democrats voted against the bill, and 177 Republicans voted against the bill. While the bill passed and is now on to the Senate, the vote was noteworthy in that it was solidly split across party lines.

Ironically, earlier in the week President Obama visited House Republicans in an attempt to sway some votes. Politico provided a summary of the meeting afterwards:
“He promised to make tough spending choices in his first budget blueprint — “everyone will have to take a haircut,” he said. He told them he wouldn’t increase the size of government just to increase the size of government. He even teased House Minority Leader John A. Boehner about his golf swing.”
Other media outlets provided a similar assessment, mainly that the meeting was very cordial and President Obama was earnestly attempting to reach across party lines.

In the aftermath of this meeting, expectations were raised dramatically in terms of President Obama’s ability to garner support for the bill. Some reports suggested that as many as 50 of the more moderate Republicans would vote for the bill. Obviously, these expectations were widely out of touch with reality and imply that despite his resounding electoral victory and high approval ratios, his political capital may have limitations as noted by this inability to even pick off ONE vote.

When President Obama and his advisors consider their inability to rally Republican support on this vote, they may not have to look any further than the assessment from Representative Patrick McHenry, a Republican from North Carolina, who when asked what happened to Obama’s honeymoon responded simply: “Ask Pelosi”. Clearly, President Obama is going to have to do a better job of Captaining his former Democrat colleagues in Congress, who have peeved off their Republican counterparts by failing to reach across party lines in the construction of the stimulus bill.

From an investment perspective, on the margin, this is bullish for the US dollar to the extent that the bill gets reshaped, or renegotiated, in a less Socialist fashion (via more tax cuts primarily) in the Senate where the Republicans yield more power with the ability to filibuster the bill. As you know, Keith has been saying that a stronger US Dollar is bad for stocks and commodities – you are seeing that inverse correlation play out in the market again today.

Daryl G. Jones
Managing Director

Claiming A Win For The Bears...

This week’s initial jobless claims released showed us 588,000 new applicants, 3,000 more than the revised figure for last week and 45,000 above the four week moving average. There is no need to mince words with this print – it was awfully bearish (see chart below).

Importantly, this puts the January Employment report on the table now as having to the potential to be as awful as November’s. One of the main reasons why I was bullish, for the immediate term “Trade”, in December was that weekly claims continued to decline sequentially (on a week over week basis). The end of that trend lines up almost in sync with the recent SP500 top on January 6th. The last 2 weeks of jobless data is what it is – as the math changes, I do.

In a perverse way, breaking the buck will help ease this problem. The biggest part of the country’s issue is that we have invalid corporate executives who are firing people now rather than 6-9 months ago when they proactively should have.

When you don’t have a proactive risk management process, this is what bad corporate execs do – they react to the news, buy back their stock and build capacity at economic tops, and do nothing but cut costs at bottoms. A weaker dollar will make their export business find a bid, and make these underperforming executives look as bad as they should – cutting into the bone right before demand begins to bottom is not what these guys should have their Boards sign off on paying them for.

I remain very cautious on the immediate term “Trade” in this US market – yesterday’s highs sucked a lot of people in at the high end of a straightforward trading range that we have been locking in for the last 6 weeks.

Keith R. McCullough
CEO / Chief Investment Officer

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