Stocks swirled early this week within a pleasantly narrow range for once. It was exactly what you would expect on following expiration week and before a holiday — a lot of drift and light volume.
Leaders have been homebuilders and big banks on news that a drop in 30-year fixed-rate mortgages of half a percent had spurred a flurry of activity by borrowers with good credit scores. Of course, most of those people were trying to refinance, not buy new homes, but let’s take the good news where we can, as even refinancing puts real money in pockets that can be used for the holidays.
The excitement in MEW-land (that’s "mortgage equity withdrawal" if you aren’t an econ geek) was tempered a bit by word that the S&P/Case-Shiller Index showed home prices posted a 16.6% decline from a year earlier in the third quarter — considerably worse than the 15.1% drop in Q2. The downside: The lower rates only are offered to people who need money the least (wealthy homeowners with good credit scores) and don’t do much for the 11.8 million people whose house is worth less than they paid.
Still, investors were willing to take any little spark of good news and turn it into a bonfire. The beleaguered public homebuilder stocks went berserk on the news, with Lennar (LEN) rising 50% to $7.25 (it was $3.42 on Friday), and Hovnanian (HOV) rising 20% to $2.40 (it was $1.70 on Friday).
Meanwhile, bank investors also figured that they might as well share in the joy, since they originate a lot of these loans, so JP Morgan (JPM) jumped 8% to get all the way back to its low of July and early November, at $29.77 (it also provides a 6.7% dividend) and Warren Buffett favorite SunTrust Banks (STI) jumped 4.5% to $29.63 (it provides a 9.6% dividend).
Breaking Out the Weapons Kit
I know you want to know more about what actually happened, so here it is. We have talked about the fact that policy makers are throwing every knife, gun, cruise missile, nunchuk, candlestick and evil eye at the credit crisis now as they’ve shifted into war mode. In the spirit of the return of Jack Bauer and "24" to TV this week, we’ll call that the "weapons kit."
So, Tuesday they opened up your checkbook to buy $100 billion in debt from Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Then they decided to buy up to $500 billion in mortgage bonds backed by the agencies.
The Fed also offered $200 billion to encourage lending for asset backed securities in a new program with the exciting name of Term Asset-Backed Securities Loan Facility, or TALF. Those are securities backed by student loans, auto loans, small business loans, and credit card debt.
It’s becoming clear that this is the type of activity that investors actually wanted to see. Remember how investors got excited about the original plan to buy $700 billion worth of troubled assets from banks (the TARP program), and threw a fit in early November when Treasury Secretary Hank Paulson basically said, "never mind, we’re not going to buy assets?”
Well, now Paulson appears to have changed his mind again for the third or fourth time, and is now doing what he said he would do in the first place. Although we’ve taken a very twisty road to get here, and the outgoing TreasSec has lost his credibility in the meantime, let’s just say we’re happy to be here now. I still think the market is headed lower eventually, but for a little while at least this plan of attack just might work.
Buying all that debt slashes the amount that Fannie and Freddie have to pay in yield, so there were just smiles all around. The news sent our solitary ETF positioin, the iShares MBS Fixed-Rate Fond Fund (MBB) to a new all time high, up 1.3% to $103.84. It’s a little weird that this ETF has crushed all stocks since I recommended it in early October, rising 2.5%, but that’s the market in which we now live.
Utility Players
Now whenever you hear the term "lower rates," your mind should automatically flash on the utilities because they are famously rate sensitive. And lo and behold, those providers of electricity, heat and telephones had a marvelous day too.
In fact, the utilities as a group have been practically an oasis of calm since mid-October. Although they did go down a bunch in July, September and October, utilities have definitely stabilized to win my "Consolidators of the Month" award by actually forming what looks like a real, honest to goodness base — a real rarity in these jumpy days.
In fact, now that we have a good distance from the top of the bull market and a pretty good stretch of bear market to examine as well, it’s rather interesting to observe that the Dow Jones Utilities Average did the best of all the major Dow Jones indexes in the 2003-2007 bull market and now have also done the least badly in the 2008 bear market. The DJ Transports have fared poorly in the bear market, but not nearly as badly as the DJ Industrials.
Even though a few individual utilities have done poorly, as a group they’ve weathered the recent storms quite well.
Jon Markman is editor of Trader’s Advantage and a regular contributor to InvestorPlace.com. To get this type of actionable insight from Jon and other InvestorPlace Media experts go to www.InvestorPlace.com today!
