With the Dow hitting a new all time high on Wednesday, we find it mostly a non-event for the world due to that index going off on its own. Yes, the Russell 2000, RUT, has been a willing participant but the indexes we follow in the NASDAQ are not.
Our position has been that the Dow would spike to a new high sometime early in 2007 and that eventuality may have occurred a little soon but there could be more to go. As you know, the NASDAQ indexes have not managed to break above their November highs so we feel that there is a slight drag on the market as a whole.
Wednesday’s news was about housing. New home sales were up in November to the tune of 3.4% with expectations of up 1.6%. The news was interpreted by the markets as a large sign that the housing “slump” is nearing its end. As we see it, the housing slump is no slump at all based on the way things are reported. Of course, the total new homes sold last month was 15% less than a year ago but, looking at the past decade, this “slump” only gets us back to where housing was five years ago.
At any rate, the bond market did not like the number at all and fell to close on the low for the day down about 0.75% in price (raising yields a bit). This is in stark contrast to the pop in the Dow of over 100 points. These two markets have been friends for a long time and to see them trade apart like this is not a good thing. But, it’s only one day so maybe the news isn’t all bad.
In regard to the new home sales, we found an interesting article in the online WSJ which we thought we would copy in its entirety:
November's new sales numbers are encouraging. …. Unfortunately, the estimates are also tainted, and difficult to interpret. The main problem is that cancellations are muddying the sales and inventory numbers. The Census Bureau counts a house as sold when the contract is signed. If a buyer has second thoughts and cancels the initial contract, however, Census does not readjust the numbers. As a result, sales are overstated and inventories understated for the month the house is initially sold. And when the house is eventually sold, sales are understated and inventories overstated. Lacking data on cancellations, it is impossible to tell if November's estimates should be higher or lower. -- Patrick Newport, Global Insight
This note starts to get at the difficulties of reading much into some of the statistics that we see on housing. In this case, the new home sales are supposed to act as a leading indicator because the sale of the home is recorded at the point of sale. This reporting is unlike the existing housing sales which only record the sale at the time of closing. So, there is more accuracy with existing home sales but the new home sales are the ones the market wants to look at due to their earlier measurement.
Just a few more words about the “new high” in the Dow: We know that the power in this index derives from the “safety” of the companies in this index and the need to window dress some large portfolios for year end. This rally is just part of a larger topping process that is going on right now. The NASDAQ indexes are lagging while the financials and some others are rallying. This dichotomy will not last too long. We are planning for a wild first week of January and want to deploy most of the rest of our funds at that time.
Dow Industrials: 12,510.57 +102.94
RYCWX: 35.05 (new low)