Big Inventory Build Out There ....

After yesterday's durable goods report, I looked at overall business inventories from the St. Louis Fed. There's a lot of stuff in the system.



This inventory build may be one reason durable goods orders have dropped 4 of the last 5 months (from the WSJ)

"It's looking like capital expenditures aren't going to be able to offset housing and autos with respect to investment," says Joseph Brusuelas, chief U.S. economist for IDEAglobal, an economic-consulting firm in New York.

Economists monitor new orders for nondefense capital goods excluding aircraft because it gives a clearer picture of how businesses view future economic conditions. In addition to reporting a decline for February, the government also revised January's number to a decline of 7.4% from last month's estimate of a 6.0% decline.

Food for thought...

Markets Looking A Bit Weaker

At the end of last week there was a lot of bullishness to the hourly and daily charts. The market trended up until mid-Wednesday, popped big-time after the FOMC announcement and followed with two days of consolidation.

That trend is reversing itself this week. I added the Fiboinacci fans to get an idea of where the pullbacks stood in relation to Fib analysis. We're at or near the 50% retracement level for all three averages. We're also approaching moving averages. A cross below would add another point to the bearish argument.

Notice a few points about these charts.

1.) The markets have not rallied above resistance.

2.) The SPYs and QQQQs have an increase in volume as prices decline.

3.) A fairly standard bear market pattern has the market making lower lows and lower highs.

Bernanke on Housing

From his Congressional Statement:

The principal source of the slowdown in economic growth that began last spring has been the substantial correction in the housing market. Following an extended boom in housing, the demand for homes began to weaken in mid-2005. By the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. Homebuilders responded to the fall in demand by sharply curtailing construction. Even so, the inventory of unsold homes has risen to levels well above recent historical norms. Because of the decline in housing demand, the pace of house-price appreciation has slowed markedly, with some markets experiencing outright price declines.

The near-term prospects for the housing market remain uncertain. Sales of new and existing homes were about flat, on balance, during the second half of last year. So far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low. However, sales of new homes have fallen, and continuing declines in starts have not yet led to meaningful reductions in the inventory of homes for sale. Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.

Translation:

1.) Housing is the main reason why US GDP growth dropped about 2% points over the last three quarters.

2.) There are a ton of homes on the market.

3.) If demand levels remain at these levels and don't fall any further, it's going to take a long time to clear available inventory.

Therefore:

4.) Housing will remain a drag on the economy for longer than we would like.

And on top of that, inflation isn't behaving. Right now it really sucks being head of the Federal Reserve.

The Markets Today

Here are today's daily charts of the SPY, QQQQ and IWN. These charts have a bearish bias for the following reasons:

1.) The SPY and the QQQQ all sold-off at the end. The SPY's selling volume was higher than previous bars and the QQQQs had a volume spike at the end.

2.) The indexes tried to rally from the post-Ben sell-off, but couldn't keep the momentum going.

Gas Prices Are Still Rising

From This Week in Petroleum:

Retail Gasoline Prices Up, Diesel Falls Slightly
Gasoline prices were up for the seventh consecutive week, increasing 1.8 cents to 257.7 cents per gallon as of March 19, 2007. Prices are now 7.3 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 2.0 cents to 255.3 cents per gallon, while Midwest prices rose 0.3 cent to 249.0 cents per gallon. Prices for the Gulf Coast were up 1.6 cents to 241.8 cents per gallon. The largest regional increase was in the Rocky Mountains, where prices increased 9.0 cents to 250.2 cents per gallon. West Coast prices were up 2.6 cents to 294.6 cents per gallon, with the average price for regular grade in California up 1.0 cent to 307.8 cents per gallon, 44.3 cents per gallon above last year’s price.

The rate of increase has slowed. But, prices are still increasing and they are still higher than this time last year. In addition, the price increases are across the nation, indicating a local situation isn't skewing the numbers.

Bernanke's Opening Statement, pt. I Inflation

Here is the link to his complete testimony

Let me now turn to the inflation situation. Overall consumer price inflation has come down since last year, primarily as a result of the deceleration of consumers� energy costs. The consumer price index (CPI) increased 2.4 percent over the twelve months ending in February, down from 3.6 percent a year earlier. Core inflation slowed modestly in the second half of last year, but recent readings have been somewhat elevated and the level of core inflation remains uncomfortably high. For example, core CPI inflation over the twelve months ending in February was 2.7 percent, up from 2.1 percent a year earlier. Another measure of core inflation that we monitor closely, based on the price index for personal consumption expenditures excluding food and energy, shows a similar pattern.

Translation: Inflation came down for awhile. But it's increased over the last few months, and we don't like that too much. It makes our job a whole lot harder.

Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year�s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook.

Translation: We've been saying inflation would moderate for awhile and it hasn't.

Also -- Ben might want to take a look at this chart of gas prices, which indicates they're higher now than this time last year.



I also think it's interesting he did not mention anything about agricultural prices, which have been increasing for the last few years and have started to increase over the last 3 months in the PPI and CPI report.

Although core inflation seems likely to moderate gradually over time, the risks to this forecast are to the upside. In particular, upward pressure on inflation could materialize if final demand were to exceed the underlying productive capacity of the economy for a sustained period. The rate of resource utilization is high, as can be seen most clearly in the tightness of the labor market. Indeed, anecdotal reports suggest that businesses are having difficulty recruiting well-qualified workers in a range of occupations. Measures of labor compensation, though still growing at a moderate pace, have shown some signs of acceleration over the past year, likely in part the result of tight labor market conditions.

Translation: We still think inflation is more likely to increase than decrease. So much for my statement at the beginning that "we expect inflation pressures to moderate".

Short version: The Fed is still focused on raising rates if inflation increases.

Durable Goods Orders Disapppoint

From Bloomberg:

U.S. durable-goods orders excluding transportation unexpectedly fell for a second month in February, jeopardizing the Federal Reserve's forecast for a recovery in investment.

The 0.1 percent drop followed a 4.0 percent slide a month earlier, the Commerce Department said in Washington today. None of the 35 economists surveyed by Bloomberg News predicted the decline. Orders for all durable goods -- those made to last several years -- rose 2.5 percent, less than analysts anticipated.

Companies are reluctant to buy new machinery and equipment until inventories are reduced, suggesting the economy may slow further, economists said.

``This raises a major warning flag for the economy,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto. ``It casts some serious doubt on what had been a leader for the economy in the last year or two.''

First, the Year-over-year percent change in new orders was -.27%. Ex-transportation, the YOY change was +.68%. These numbers are not seasonally adjusted. Here's where the problem lies (also a link to the Census report):

Inventories of manufactured durable goods in February, up twelve consecutive months, increased $0.5 billion or 0.2 percent to $298.0 billion. This followed a 0.4 percent January increase.

12 straight months of inventory builds indicates 1.) there isn't a need for new orders -- and may not be for awhile, and 2.) the sell side of inventories is slowing.

A Look At Homebuilders

After yesterday's announcement of a Federal investigation into Beazer Homes, a look at the homebuilders stocks seems like a good idea.

Here's the yearly chart. Like the rest of the market, this sector rallied starting in September of last year. However, in late February the sector broke the upward trend line and fell below the 10, 20 and 50 day SMA. The index lost about 10%. It is currently consolidating its losses in a bear market wedge pattern.



Here's a look at the 6 month chart, which betters shows the clear upward trend break.



On the three month chart notice a few things.

1.) There are actually two downtrends in place. While recent action has broken the latest, steeper trend, the secondary trend is still firmly in place.

2.) The last 4 bars of downward price action have been on increasing volume. This may indicate selling pressure is increasing.

3.) We're near a low price, meaning a move and close below say $32.75 would be a bearish signal.

Could Be an Interesting Day

1.) We have ongoing tensions between Iran and Britain, which are driving up oil prices.

2.) Bernanke testifies on Capital Hill. To get a better idea of what this testimony is really about Read this article from Barry Ritholtz at the Big Picture

3.) We have durable goods data coming out. Pay particular attention to the year-over-year number. Here are the charts for total orders YOY and total orders ex-transportation YOY.







4.) Federal Authorities announced a probe of Beazer Homes. Watch XHB -- the homebuilders ETF. I'll post a chart later.

2006 Subprime Bonds May be Worst Performing Ever

From Bloomberg:

Subprime mortgage-backed securities from 2006 may be the ``worst-performing in recent history,'' with delinquencies on the underlying debt ``consistently higher'' than in the prior five years, Standard & Poor's said,.

About 13 percent of mortgages made last year to people who have poor or bad credit are delinquent, S&P analysts Michael Stock and Scott Mason said in a report yesterday, with 6.65 percent of the total classified as ``seriously delinquent,'' or more than 90 days late. Losses on bonds backed by the loans will be between 5.25 percent and 7.75 percent, compared with 5.5 percent in 2000, S&P forecasted.

About $540 billion of bonds backed by subprime mortgages made in 2006 are outstanding, making up more than a third of all securities derived from such home loans, according to New York- based Bear Stearns Cos.

This article makes it appear there is a big divergence in performance between 2006 bonds and all other subprime bonds. If that is the case, than we have an isolated year where we have large problems. That doesn't make it any easier to deal with, but it does at lease limit the damage.

Money Managers Say Housing Biggest Risk to Markets This Year

From the WSJ:

Many managers fear that a housing slowdown could crimp consumer spending, a major driver of economic growth, according to Russell Investment Group's quarterly Investment Manager Outlook survey set to be released today. As stocks moved sharply lower in late February and early March, managers became increasingly bearish on market sectors sensitive to an economic downturn, such as basic materials and financial services.

The survey, conducted from Feb. 26 to March 5, overlapped with a stock-market slide. The Standard & Poor's 500-stock index fell 3.5% on Feb. 27 and dropped nearly 6% from Feb. 21 through March 5.

Of those managers responding after the downturn, 20% said a softening real-estate market is the biggest risk to U.S. stocks' performance over the next year, compared with 8% before the selloff. And as stocks dropped, managers became substantially more bullish on U.S. Treasury bonds, a traditional haven in times of market volatility. Of the managers responding after the downturn, 30% were bullish on Treasurys, compared with 10% of those before the downturn.

Managers cited increasing inflation as the greatest risk to U.S. stocks' performance, with many managers concerned that the economy's growth may be too strong.

Consumer spending is responsible for about 70% of US growth. Therefore, anything that effects it is important. This is a graph I put up yesterday, but it seems very pertinent to this story. It shows the year-over-year change in retail sales in red with the scale on the right and the actual sales numbers in black with the scale on the left.

Fed's Investigating Beazer Home on Fraud

From Business Week:

Atlanta-based Beazer, the nation's sixth-largest residential homebuilder, rode high during the heyday of the housing boom—profiting from both selling the homes it constructed and often financing the buyers as well through a wholly owned mortgage arm. It's common in the industry, but Beazer may have pushed the bounds: The North Carolina field offices of the Federal Bureau of Investigation, the Internal Revenue Service, and the Justice Dept. have recently opened a joint investigation into the company over such matters.

The Inspector General of Housing and Urban Development is also part of the group since a large percentage of Beazer's loans were made to low-income borrowers and insured by the federal government through the Government National Mortgage Assn., according to people familiar with the investigation.

Investigators, however, are not limiting their probe to possible mortgage fraud. "There's all sorts of potential fraud issues here," FBI spokesman Ken Lucas told BusinessWeek. "We're looking at all types of [potential] fraud associated with Beazer—corporate, mortgage, investments." Beazer did not comment by press time.

This is the worst possible news for the new home industry at this time. Yesterday, the Census Bureau reported a 3.9% drop in new home sales. Subprime mortgage lenders are already tightening their credit standards, and over 40 have with gone out of business, declared bankruptcy or sold their assets.

Now we learn the FBI, Justice Department and the IRS are investigating the 6th largest homebuilder in the country for "all types of potential fraud." This has the potential to cast a shadow over all homebuilders and mortgage lenders at a time when they least need negative publicity.

The Markets Today

All of the markets have a downward bias today. They all opened lower and zig-zagged a bit. However, pay particular attention to the SPYs and QQQQs end of the day action. They both sold-off on heavy volume. This is never a good sign because it indicates traders saw something that led them to want to get out of the market. The QQQQs ended the day at their low point.





Looking at the daily chart, notice none of the averages has closed above the drawn resistance lines from the sell-off a few weeks ago. Something is keeping the markets from advancing above these points. However, the price action for the last few days could be considered a standard pull-back during a rally. In other words, the fact the markets haven't sold-off is also important. This qualifies as a "we'll have to wait and see" how it all shakes out.

How Confident Are Consumers?

Here is a chart of the Year-over-year change in retail sales. The figures aren't adjusted for inflation, but are adjusted for seasonal factors.

How Confident is Business?

Business is ordering less and less new "stuff". Here is a chart of new orders, seasonally adjusted. The black line is total orders. The red line is the percentage change from year ago levels.



Transportation orders can really skew these numbers, so let's take them out of the graph. The same color scheme applies:

Oil Refineries Are Breaking Down With More Frequency

From the LA Times:

Refineries across the country are breaking down with unusual frequency this year, boosting prices at the pump and endangering workers and communities.

The rash of oil plant problems may not be a coincidence. The breakdowns stem from the hard use of aging equipment, a shortage of trained workers, corporate cost-cutting and ownership changes, refinery experts say.

In the first six weeks of 2007, there were 43 incidents involving pipeline leaks, chemical releases, plant breakdowns and fires, more than has been typical, Kim Nibarger, a safety expert for the United Steelworkers Union, told Congress during a hearing last week on refinery safety.

If it continues, this will only add upward pressures on gas prices.

Lennar Earnings Drop

From Bloomberg:

Lennar Corp., the largest U.S. homebuilder by revenue, said earnings plummeted 73 percent in the fiscal first-quarter as demand waned in the worst housing slump in more than a decade.

Net income for the three months ended Feb. 28 declined to $68.6 million, or 43 cents a share, from $258.1 million, or $1.58, a year earlier, the Miami-based company said today in a statement. Lennar said it will likely miss its 2007 profit forecast as the normally stronger spring selling season had not materialized.

``Given the state of the market, we do not expect to achieve our previously stated 2007 profit goal,'' Chief Executive Officer Stuart Miller said in the statement. ``We are not comfortable providing a new earnings goal at this time.''

Pay particular attention to what the CEO said:

``The housing market continues to demonstrate overall weakness,'' Miller said in today's statement. ``While some markets are performing better than others, the typically stronger spring selling season has not yet materialized. These soft market conditions have been exacerbated by the well-publicized problems in the subprime lending market.''

When industry insiders stop spinning and start using words like "weakness" and "the typical stronger spring selling season has not materialized", you know two things.

1.) It's an accurate statement. CEOs as paid to make positive public statements to support the company and the industry.

2.) Things are pretty damn bad to force that level of straight talk.

Gasoline Futures Hit 7-Month High

From IBD:

April gasoline rose 6.94 cents to $2.0677 a gallon, its highest since Aug. A BP refinery in Indiana is running below pace after a small fire there, reports say. That's the latest in a slew of refinery woes. Crude rose 63 cents to $62.91, a 3-month high amid rising tensions with Iran, OPEC's No. 2 producer. Retail gas prices are up 42 cents in the last 7 weeks to $2.655 a gallon.

Here's a daily chart of gasoline prices.



While that chart looks like prices are out of control, notice in the chart below the seasonality of gas prices. Gas prices this year (denoted as #2) are more or less following the same pattern as last year (denoted as #1). Gas prices typically spike in the summer.

New Home Inventory in Perspective

This graph is from Interest rate roundup a great blog that everybody should read. Not only does it make me miss a Bloomberg terminal, it also shows just how out-of-whack the current inventory level is with historical norms.

I resized the chart. It goes back to 1963.

Is the Oil Weekly Chart Forming an Upside-Down Head and Shoulders Pattern?

If it is, then the last 4-6 months have been a consolidation, and a move above the neckline would indicate a possible bull run --- just in time for the summer driving season.

Food for thought....

Oil Prices Set Yearly High

From Yahoo News:

Oil prices settled Monday at their highest level so far this year on tensions between Iran and the West following Tehran's detention of British naval personnel. Gasoline futures prices climbed above $2 a gallon to their highest level since last September as a new driving season nears.

Oil traders worried that an escalation in the conflict could cut Persian Gulf oil exports.

On the New York Mercantile Exchange, light, sweet crude for May delivery rose 63 cents to settle at $62.91 a barrel, the highest settlement for the front-month contract since Dec. 20. Earlier, the contract rose as high as $63.30 a barrel.

Oh to be a Central Banker now that inflationary pressures are increasing during an economic slowdown....

Markets Stage an Impressive Rally

The charts say it all. The SPYs, QQQQs and IWNs all tanked after the new home sales reports. But all three staged an impressive recovery throughout the rest of the day. All three have what is called a "bump and run" formation, meaning all three markets had an upward sloping trend line which acted as support for the entire rally.

In addition, the SPYs and QQQQs all closed at/near their daily highs on a good volume spike.

This was a solid bull-based performance for the averages. In conjunction with last week's performance, it looks like the bulls are in charge -- at least for now.

More on New Home Sales

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Welcome to the Left Coaster Readers

From Bloomberg:

The supply of unsold homes climbed to the highest in 16 years, the Commerce Department said in Washington today. Purchases dropped 3.9 percent to an annual pace of 848,000 last month. Economists had forecast they would rise to a 985,000 rate, based on the median forecast in a Bloomberg News survey.

.....

``As ugly as these numbers are, they don't reflect the tightening of lending standards, which means sales are going to get worse,'' said Christopher Low, chief economist at FTN Financial in New York. ``The longer it takes for housing to recover, the more the risk it could spill over to other parts of the economy.''

From CBS:

Inventories of unsold homes rose 1.5% to 546,000, representing an 8.1-month supply, the largest inventory in relation to sales since January 1991, at the tail end of a recession. The inventory is up 27% in the past 12 months.

Inventories are probably understated, however, because they don't include homes thrown back on the market due to buyer cancellations

Record backlogs

The number of completed but unsold homes rose to a record 179,000 in February from 177,000, up 43% from a year earlier.

"There is an enormous backlog of unsold new homes that have to be worked off before builders will start building spec homes," wrote Ray Stone, chief economist for Stone & McCarthy Research, in a research note.

Let's review the points made above.

1.) Sales are at the lowest level in 7 years

2.) Inventories are the highest they've been in 16 years -- at the tale end of a recession.

3.) Inventories are probably higher because of cancellations.

4.) Tighter lending standards -- which have been recently implemented -- aren't included in these numbers.,

5.) The number of completed and unsold homes is at a record.

None of this news points to a bottom in housing. We're not even close.

New Home Sales Drop 3.9%

Welcome to Atrios Readers.

For more information -- and some great graphs -- see Calculated Risk

First -- this report has an incredibly large confidence interval. That simply means the actual number could be plus or minus 17.4.

The information is from the Census Bureau

Sales are down 18.3% from February of last year.

There is now an 8.1 month supply of available inventory. That's a ton of homes.

The total raw inventory level has increased from 538,000 in February 2006 to 546,000 in February 2007. Remember we saw housing starts increase 9% in February. That means we've got more inventory coming onto the market. My guess is the homebuilders were expecting demand to pick-up a bit this year. These recent starts could mean the market may build an unwanted inventory glut.

The Northest and Midwest saw big drops -- 27% and 20%, respectively. The weather will be blamed for some of this. The West saw a 24.6% increase. That number doesn't make sense. I am guessing we'll see a revision of that number or the January number sometime soon.

Also remember that lending standards have tightened over the last few months. That means there will be fewer buyers going forward.

Also -- the median price increased from 243,200 to 250,000. It doesn't make sense for prices to increase in a decreasing sales market.

The bottom line is this report stinks for the housing market.

Dollar Update

The weekly dollar chart still shows the dollar is in a bearish pattern of lower lows and lower highs. Also note

1.) The trend line is still decidedly downward and the dollar index is nowhere near breaking the trend.

2.) The 20/50/200 SMAs are all decidedly bearish as well.

It's going to take a big, fundamental change for this chart to move into bullish territory.

Foreclosures Still Increasing

From Bloomberg:

U.S. homeowners are falling behind on their payments 33 percent faster than they did last year, according to a report by California-based RealtyTrac, which researches data on Americans entering the foreclosure process.

In February, foreclosure proceedings -- from default notices for late payment to auctions and repossessions -- rose 12 percent from a year earlier, affecting 130,786 properties, or one in every 884 U.S. households, RealtyTrac said.

Falling or little-changed home prices are making it difficult for homeowners to sell or get new mortgages on homes they bought or refinanced with adjustable-rate mortgages.

It's important to note that we're still in an economic expansion, albeit a slower one. That means if we hit a recession, we're in for some scarier numbers.

OPEC Production Cuts Reduce Output By 1 Million Barrels/Day

From Bloomberg:

Saudi Arabia is shipping less oil to customers. OPEC by February reduced daily output by 1 million barrels. Global inventories this year fell the most in a decade.

Credit Ali al-Naimi, oil minister of Saudi Arabia, the world's largest exporter, who told OPEC members that production cuts would stop a six-month decline in oil. Crude this year rebounded 26 percent from a 20-month low to $62.81 a barrel.

``We are happy with the level of compliance,'' Mohamed al- Hamli, president of the Organization of Petroleum Exporting Countries, said in an interview in Bangkok on March 22.

Oil has bounced around between roughly $57 - $62/barrel for the last few months. OPEC's production cuts should help to provide a floor for prices going forward.

The decline in inventories is also providing a floor for oil prices.

This is not good news for the Federal Reserve who are caught between stubbornly persistent inflationary pressures (in part caused by commodity prices) and slower growth.

A Quick Review of Last Week

From IBD:

The Nasdaq ramped up 3.2% for the week. That was the tech-laden composite's best return since a 3.2% surge during the week ended Sept. 15 of last year.

The S&P 500 bounced 3.5% for the week. The Dow leapt 3.1%, while the S&P 600 vaulted 4.1%

Here's a link to the charts.

Agricultural Prices Still At Dangerous Levels

Here is a chart of agricultural futures. Remember that in both CPI and PPI, agricultural prices have been spiking for the last three months. In conjunction with oil prices, these price increases may be large enough to keep the Federal Reserve on hold for an interest rate cut unless the economy really tanks.

Oil Prices Making a Comeback

Here is a daily chart of oil prices:



Last week's price action is circled. Notice the big jump in prices after the Iranians captured 15 British sailors. Oil's sensitivity to geopolitical issues will continue to be a huge Achilles heal.

The Week Ahead

New home sales come out on Monday. Pay particular attention to the inventory levels -- especially the raw numbers. The total available inventory increased 2.68% from January 2006 - 2007, from 522,000 to 536,000. It's going to be awhile before the big drop in new home construction starts to decrease this inventory.

Bernanke speaks on Wednesday and Friday. Pay very close attention to what he says about inflation. His speeches are available online at the Federal Reserve site.

The final 4th quarter GDP number comes out on Thursday. So long as the number doesn't jump around this won't be that important.

We also get durable goods and NAPM numbers on Wednesday and Friday, respectively.

Saturday = Day Off

Going to a local art festival with my girlfriend. She's the only person who can get me away from the markets.

Back sometime tomorrow.

The Market's Last Week

Let's take a look at the charts to see what happened last week

The SPYS had a nice upward bias through mid-Wednesday. They spiked after the Fed announcement then consolidated for the rest of the week.



The QQQQs rose a a bit until mid-Tuesday when they consolidated their gains. Then they spiked after the Fed announcement and consolidated for the rest of the week.



The IWNs rallied from Tuesday morning until the Fed announcement, then rallied hard on the rate announcement. Like the other two averages, they consolidated gains for the rest of the week.



All three charts are solid charts going forward -- all three have strong upward momentum.

Looking at all three charts from the daily perspective, all three closed the week out below important resistance levels. If the markets want to continue higher they will have to cross and cloase above these levels.

Existing Home Sales Increase Most in three Years

From Bloomberg:

Sales of previously owned homes in the U.S. unexpectedly rose in February at the fastest pace in three years, a sign the housing market is still recovering even as lending standards tighten.

Purchases increased 3.9 percent last month to an annual rate of 6.69 million, from 6.44 million in January, the National Association of Realtors said today in Washington. Sales were down 3.6 percent from a year earlier.

The report, together with a gain in February housing starts reported this week, bolsters the view that housing will gradually stop being a drag on economic growth. Falling prices and low borrowing costs are supporting demand, easing concern that defaults on subprime mortgages will worsen the glut of homes, economists said.

Steady interest rates were a reason for the increase:

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.16 percent in the last week, down from an average of 6.29 percent in February. The 30-year fixed was 6.22 percent in January, and 6.25 percent in February 2006.

OK -- now the bad news:

The national median existing-home price2 for all housing types was $212,800 in February, down 1.3 percent from February 2006 when the median was $215,700. The median is a typical market price where half of the homes sold for more and half sold for less.

...

Total housing inventory levels rose 5.9 percent at the end of February to 3.75 million existing homes available for sale, which represents a 6.7-month supply at the current sales pace compared with a 6.6-month supply in January. Raw inventories peaked last July at 3.86 million, and supplies topped at 7.4 months in October.

To sum up, sales increased because prices are dropping. But inventory levels are still increasing. Also note that from a raw, total numbers perspective, the total number of existing homes on the market has only dropped 2.84% since July of last year. That means sales haven't really made a huge dent in the inventory on the market. While the market is never "cleared", it should come down a bit more than it has.

Going forward prices will probably have to drop more to clear the market.

How Widespread are Subprime Problems?

Pretty far. From the WSJ (subscription required):

Far from being limited to the subprime market, the data show these risky loan features have become widespread. According to Credit Suisse, the number of no or low documentation loans -- so-called "liar loans" -- has increased to 49% last year from 18% of purchase loans in 2001, a nearly three-fold increase. The investment bank also found that borrowers put up less than a 5% down payment in 46% of all home purchases last year. Inside Mortgage Finance estimates that nontraditional mortgages -- mostly interest-only and pay-option ARMs that allow the borrower to defer paying back principal or even increase the loan balance each month -- which barely existed five years ago, grew to close to a third of all mortgages last year.

The Alt-A market, a middle ground between subprime and prime, has increased seven-fold since 2001 and accounted for 20% of home-purchase loans last year. Fully 81% of Alt-A loans last year were no or low documentation loans, according to First American Loan Performance. Why have borrowers employed this kind of risky financing? Because it was the only way many of them could afford a home in some of the hottest housing markets, where prices more than doubled in five years.

Oil Prices Jump

From IBD:

Near-month oil futures shot up on fuel supply fear a day after gov't data showed another big drop in gasoline and heating oil stockpiles. The Fed's near-neutral bias Wed. raised hopes for stronger U.S. growth and energy demand. April RBOB gasoline rose 2.26 cents to $1.9575 a gallon, near Tues.' 7-month high. High gas prices could hit ailing U.S. consumers.

There's more:

Nationwide prices rose 1.8 cents last week to $2.577 a gallon. That's 7 cents higher than a year ago. U.S. gas prices have surged more than 36 cents in the past six weeks.

Demand was up while supplies of both gasoline and crude oil remained below year-ago levels.

Refineries are at capacity and gasoline imports are down. Gas futures are at their highest since August — suggesting retail prices have further to go.

"You put it all together and it's just very bullish for gasoline prices," said Phil Flynn, an energy analyst at Alaron Trading. "Don't expect these problems to go away."

Here's why.

Oil inventories are lower now than they were at this time last year:



And gas inventories are dropping fast and hard:



As a result, gas prices are increasing:



This is why the daily oil chart spiked yesterday:



From a longer term perspective, oil prices appear to be consolidating in a triangle pattern:



I bet the Federal Reserve is not happy about this development....

Some of these charts are from the Department of Energy's This Week in Petroleum

Countrywide Executives Dumping Stock

From the Street:

Insiders at Countrywide, the nation's largest mortgage lender, have sold $314 million worth of shares in the company just since August. That's according to regulatory filings tracked by Interactive Data Corporation.

The sales include a staggering $94.5 million by chief executive Angelo Mozilo, and $17.5 million by mortgage division chief David Sambol.

That gives me a tremendous feeling of confidence.

Countrywide Financial: 2006 Defaults Could Set a Record

From CNBC:

"We believe that declining home prices and other factors ... may produce foreclosures numbers on 2006 originations approaching or exceeding those on loans originated in 2000," Samuels said in remarks.

Just what the housing market needed to hear....

Gas Prices Are Still Rising

From This Week in Petroleum:

Gasoline prices were up for the seventh consecutive week, increasing 1.8 cents to 257.7 cents per gallon as of March 19, 2007. Prices are now 7.3 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 2.0 cents to 255.3 cents per gallon, while Midwest prices rose 0.3 cent to 249.0 cents per gallon. Prices for the Gulf Coast were up 1.6 cents to 241.8 cents per gallon. The largest regional increase was in the Rocky Mountains, where prices increased 9.0 cents to 250.2 cents per gallon. West Coast prices were up 2.6 cents to 294.6 cents per gallon, with the average price for regular grade in California up 1.0 cent to 307.8 cents per gallon, 44.3 cents per gallon above last year’s price.

Last year we had $3/gallon prices in some areas of the country. This price level caused a great deal of concern. While some people may be thinking the economy can withstand that level of a price shock now because we did last summer, there are some really important differences. The economy has continued at a slow pace of growth. Now consumers have seen the housing market flounder for the better part of the last year. In short, we have seen stagnant growth for a lot longer now. This might have a larger depressing effect on consumer sentiment.

The Fed is Caught Between A Rock and A Hard Place

From the AP:

"The Fed is caught right now. The inflation numbers are looking worse, but on the other hand, the economy is looking softer," said David Wyss, chief economist at Standard & Poor's in New York.

Wyss said he believed the Fed was using the statement to edge closer to cutting rates if necessary to bolster economic growth, but he said investors should not expect any change at the Fed's next meeting on May 9.

David Jones, chief economist at DMJ Advisors, a private consulting firm, said he believed the Fed would remain on hold probably until September.

"The Fed is facing a standoff. The economy is slowing and inflation is getting worse," Jones said. "They have got to let the dust settle on this very mixed picture before they do anything."

Wyss said the Fed could cut rates as many as three times although he said some of those reductions might not come until next year.

Jones said he believed the Fed might be content to just cut rates once in the second half of this year if the economy is showing signs of rebounding at that time.

Let's look at the overall numbers.

GDP growth has been "below full potential". It grew at a pace of 2%, 2.6% and 2.2% in the second - fourth quarter of 2006, respectively. Housing has the big reason as it decreased 11%, 19% and 19% in the same quarters.

At the same time, inflation has increased. Here's a year-over-year chart of core CPI:



Yesterday the markets were just thrilled about the possibility of a rate cut. But they forgot about inflation. Assuming all things remain the same, the Fed won't be lowering rates anytime soon.

Right now it sucks to be a Central Banker.

More On Yesterday's Markets

Yesterday the markets rallied after the Fed issued its policy statement. The overall averages were up on strong volume which is a bullish event. Let's look at a few of the largest market sectors to see where the real action was.

The financials did very well, mirroring the market's move with a strong bar on big volume.



Consumer Discretionary also rose on solid volume




While technology rose, notice the volume wasn't anywhere near as strong.



And while the energy sector had decent volume, it wasn't anything like the level in the financials are consumer discretionary ETFs.



Food for thought.

Inflation Picture -- It's Not That Good

This chart is from the blog The Mess That Greenspan Made. When looking at it, remember the Fed's inflation target is 1% - 2%.