True bulls were a lonely bunch by the end of Tuesday's stock market session. Sellers increasingly took control in the face of mounting pressures on the
to raise rates amid fresh evidence that the housing market remains red-hot, even as consumers are feeling bluer.
After all the doom and gloom about the economic slowdown in recent weeks, the market rallied early Tuesday on news that new-home sales unexpectedly surged 12.2% in March. Presumably, a red-hot housing market means there's still some fun to be had in real estate and for homebuilders -- at least until the bubble bursts.
But the proposition that ever-rising home values will continue to provide broad-based support for the economy sounds more and more dodgy -- especially on the same day as the Conference Board's consumer confidence figures fell for a third month in a row.
Closing at its session lows, the
Dow Jones Industrial Average
fell 91.34 points, or 0.89%, to 10,151.13 and has now been unable to post consecutive session gains since April 6 and April 7. The
fell 10.36, or 0.89%, to 1151.74. The
fell 23.34 points, or 1.20%, to 1927.44.
Market internals showed there was more selling determination on Tuesday than there was in Monday's buying spree. Volume of 1.9 billion on the
compared with 1.7 billion on Monday. On the Nasdaq, 1.7 billion issues traded compared with Monday's 1.4 billion. Decliners topped advancers by more than two to one in both exchanges.
Tuesday brought a mixed batch of earnings, with positive results from
while Dow component
An important miss came from
, whose disappointing first-quarter results weighed on shares of Dow component
, which fell 3%.
Still, earnings overall so far have been coming in above expectations. But according to Peter Bookvar at Miller Tabak, that's old news for a market now hungry for clearer indications for profits over the coming quarters.
And not even lower oil prices -- crude fell 37 cents to $54.20 in Nymex trading -- provided any relief. Instead it provided an excuse to take profits in the energy sector, which was boosted Monday by a mega-merger and ahead of blowout results from the oil majors.
ended unchanged and
fell 1.78% despite posting huge year-on-year gains.
House of Cards
Instead, it seems that the market's hopes for a sustainable April rally are once again being dashed as attention returns to economic fundamentals ahead of next week's meeting of the Federal Open Market Committee and the April employment report.
Economic indicators Tuesday did nothing to quell underlying market fears that the Fed will continue to raise rates even in the face of an economic recovery that's already showing signs of fatigue.
Bond pits were the first to react to the housing data as sellers of the benchmark 10-year Treasury note sent its yield up to 4.28%. The afternoon session saw improvement for fixed income as investors fled equities. But the benchmark note still ended down 4/32, its yield rising to 4.26% as traders reassessed the possibility that the Fed will have to hike rates either more aggressively or for longer than previously thought.
After three years of ever-rising gains in housing prices, it seems many economists have grown weary of crying wolf about a housing bubble. Yet a few came out Monday, after the spike seen in existing-home sales, and also on Tuesday, with the new-home sales figure.
Stephen Roach, Morgan Stanley's global chief economist, issued a note Monday saying that the Fed may have to raise the fed funds rate to as high as 5.5% to deal with a housing bubble and the widening deficit in the current account.
Roach does not say by when (presumably not until next year) the Fed would have to move into this restrictive mode. But he does warn that many of the Fed's speakers recent sanguine speeches about housing and the current account deficit are continuing to fuel excess speculation.
"Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without taking the entire 'house of cards' down. The longer the Fed waits, the more perilous the exit strategy," Roach writes.
Return of the Conundrum
Ethan Harris, senior economist at Lehman Brothers, shares some of Roach's concerns, although his view for the U.S. economic and profit outlook remains sanguine.
He notes that long-term rates, as measured by the 10-year bond yield, have come back down close to their mid-February levels, when Fed Chairman Alan Greenspan called these stubbornly low rates a "conundrum."
"Asian central banks are lending us the money to buy (the goods of Asian economies), and that's keeping low interest rates here and fueling the housing bubble," he says. "The result is that we still have reasonable growth here but it's maintained by two unsustainable processes."
Perhaps the market has been sensing something already in recent weeks. The Philadelphia Stock Exchange housing sector index, after rising nearly 40% since October 2004, has been falling steadily since its March 5 high of 518.20. It's now down nearly 9% from that high.
While some of the homebuilders, such as
advanced Tuesday, the housing index ended down 0.35% after initially spiking 2% on the housing data.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send