Mortgage Applications for Home Purchases dropped 27.1% last week. The SEC creates new “circuit breaker” rules. Financial Regulations are on the horizon. The Minutes from the April 27-28 FOMC Meeting are a non-event. A Risk Aversion Scorecard.
The demand for mortgages to purchase a home fell 27.1% last week, which is a direct result of the expiration of the home buyer tax credits on April 30th. The reading for the Purchase Index is at the lowest level since May 1997. The Refinance Index jumped 14.5% as homeowners seek to take advantage of the 4.94% 30-Year fixed rate mortgage. The spread between the mortgage rate and the US Treasury 10-Year yield has widened to the 150 to 160 basis point range. Remember my “Mortgage Mulligan”? That rate would be set at 100 basis points over the 10-Year, which would be a benefit for all US homeowners with a mortgage.
Under new SEC rules designed to prevent another “flash crash” of May 6, 2010 US stock exchanges would halt briefly to avoid the “lack of liquidity” plunges. Beginning in mid-June, if any S&P 500 stock rises or falls by 10% or more within a five-minute period the stock will be halted for five minutes. The time window will be from 9:45 AM to 3:35 PM. This reform will apply to all US exchanges. The trial period for this “circuit breaker” rule ends on December 10th.
Financial Regulations are on the horizon - The resulting reforms will be short of what is needed including a non-ban of speculative or proprietary trading be commercial banks. In my opinion that ban was an important component that is necessary to end the concept of “too big to fail”. As FinReg gets watered down, my response is why bother!
I am interested in the details on resolving the “too big to fail” issue and what to do with the non-exchange traded derivative contracts? Senator Dodd is copping out on the derivative issue by suggesting a two-year delay in the implementation forcing banks to spin off their derivative businesses. To me controlling CDOs and Credit Default Swaps should be a cornerstone to FinReg. Without the “Volcker Rule” or full transparency on derivatives we risk another financial meltdown.
The Minutes from the April 27-28 FOMC Meeting are a non-event - The April 27-28 FOMC meeting occurred one and two days following the Dow’s 52-week high of 11,258. Since then we had the end of the homeowner tax credits, the “flash crash” on May 6th, the constant bashing of the euro and related problems including the German ban on naked shorting of key bank stocks, and uncertainties relative to financial regulations. US Treasury yields remain lower, gold traded to a new all time high and has since faded, crude oil traded below $68 per barrel, and the stock market technicals have turned negative on daily and weekly charts. I would say that if the FOMC meeting were held today some of the concerns may have resulted in different meeting comments.
The Key Points from the Fed Minutes – Cautious Comments does not justify improved outlook
· The Federal Reserve will not be aggressive in unwinding the agency and mortgages bought through March 31, but will redeem maturities without replacement
· It is unlikely that consumer spending will be a major factor in driving economic growth. So 80% of the economy will be a drag?
· Recovery in housing appears to have stalled. I totally agree and that’s bad news for Main Street.
· Recovery could lose traction without substantial job creation. I believe this will be the case.
· Some members of the FOMC are concerned that the crisis in Europe could hurt US Financial Markets. That has been part of my reason to be bearish on US stocks.
· Comments by the FOMC did not merit upping GDP 2010 range to 3.2% to 3.7%, and did not merit lowering unemployment to 9.1% to 9.5% particularly with the rate rising to 9.9% in April.
· Core PCE inflation being lowered 0.9% to 1.2% does not make sense either. Every American on Main Street knows that the Cost of Living is on the rise.
Risk Aversion Watch
The yield on the 10-Year is below my quarterly pivot at 3.467, which signals “flight to quality” demand.
Comex Gold is in correction mode and tested my semiannual pivot at $1186.5. This morning gold traded below this key pivot.
Nymex Crude Oil traded below $68 per barrel on Wednesday, and rebounded above $73 this morning partially due to a roll. Oil is extremely oversold with Memorial Day and Hurricane Season around the corner.
The Euro dipped to 1.2147 on Wednesday then rebounded to just below my quarterly pivot at 1.2450 as the currency remains extremely oversold.
The Dow decoupled from the euro trading down and on both sides of my annual pivot at 10,379. A weekly close below 10,379 would be another fortification of the bear market.
The S&P 500 tested its 200-day simple moving average at 1102, which was violated at the “flash crash” low of May 6th. SPX closed exactly where it started 2010.
The NASDAQ is above my semiannual and annual pivots at 2258 and 2250.
The Dow Transports returned to my annual pivot at 4324.
The Russell 2000 moved below my semiannual pivot at 673.50.
The SOX unraveled below my semiannual pivot at 358.89.
Disclosure: No positions
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