“Groundhog Day” in the Financial Markets

I don’t know about
you, but I feel like I’m trapped in a real life version of the movie
I “Groundhog Day.” That’s the hilarious early-1990s comedy where Bill
Murray’s character travels to Punxsutawney, Pennsylvania to cover the
February holiday. Unfortunately, he gets stuck there, and has to
re-live that day — over and over again.

Just look at what
happened this week: There was yet another move from the Federal Reserve
to save the markets — this time in the form of a 75-basis point cut in
interest rates. That sparked more bottom-calling from many of the
talking heads on TV. And it fueled another 400+ point rally in the Dow.

I don’t mean to sound cavalier, but has anything really changed? Isn’t this the same movie we’ve seen four or five times since last summer?

First, the credit markets seize up in some way, shape, or form.

Second, stocks start falling.

Third,
the Fed, the Treasury Department, or Congress steps in and announces
another plan to fix the housing and mortgage crisis, or to loosen up
the credit markets.

Those interventions keep preventing the stock market from experiencing a big “flush” — a truly nasty decline that cleans out all the sellers and potentially sets us up for a larger, more lasting rally.

Instead, each new
plan helps spur some buying. We spend a few days or weeks working off
“oversold” market conditions. Then we go right back to square one
again.

This
one-step-forward and two-steps-back momentum looks exactly like what we
saw during the 2000-2002 bear market. And so far, there doesn’t seem to
be much lasting evidence of a reversal.

The Latest on Residential and
Commercial Real Estate

Wall Street’s
largest banks weren’t the only ones treated to a gift this week. The
regulatory body that oversees Fannie Mae and Freddie Mac also loosened
capital requirements for the two firms.

The Office of
Federal Housing Enterprise Oversight will now require they hold surplus
capital of just 20%, down from 30%. It also suggested that threshold
will fall with time.

The goal is to free
up money that Fannie and Freddie can use to buy or guarantee billions
more dollars worth of home mortgages. That, in turn, is designed to
lower the spread between rates on mortgage-backed bonds and U.S.
Treasuries — something that would lower the rates borrowers pay on home
loans.

It’s not such a bad
idea for the mortgage market, as ideas go. But home prices continue to
fall, and housing inventories remain extremely high.

Is there any evidence of a turn yet? Not as far as I can see. Just consider …

  • The
    National Association of Home Builders, which tracks how builders
    perceive sales activity and buyer traffic, said its benchmark index
    remains mired in the muck. The index held at 20 in March, just off its
    record low of 18 in December and far below the year-ago level of 36. 
  • Meanwhile, single-family home starts dropped another 6.7% in February to 707,000 units at an annualized rate. That’s the lowest since January 1991.
  • Building
    permit issuance for both single-family and multi-family property
    dropped to the lowest since 1991. That indicates future construction
    activity will be even weaker.

And what about commercial real estate? There is troubling news trickling out of thatside of the market as well.

Author: Mike –  Money and Markets

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