Maybe it's what traders are eating (or drinking) for lunch, but late afternoons continue to be kind to equities. After struggling through the morning and in the early afternoon, stock proxies stormed higher in the final two hours of the trading session, in what has now become a familiar pattern . The Dow Jones Industrial Average closed up 46 points, or 0.5% to 8919.01 vs. its earlier low of 8756.02. Similarly, the S&P 500 gained 7 points, or 0.8%, to 947.95 vs. its earlier low of 930.42, while the Nasdaq Composite Index rose 11 points, or 0.8%, to 1391.74 after trading as low as 1360.43. The gains came despite another uptick in oil prices amid speculation OPEC will leave its quotas unchanged and belligerent rhetoric from Vice President Dick Cheney. Crude futures rose 2.3% to $29.28 per barrel, while gold went up 0.9% to $311 per ounce on expectations for potential war with Iraq sooner vs. later. As is expected throughout this pre-Labor Day week, trading volumes were muted, with 995 million shares exchanged on the Big Board, down 22.9% from a week ago. Volume of nearly 1.3 billion in over-the-counter trading was down 11% from the prior Monday. Major averages were boosted by names such as General Motors ( GM) and Bank of America ( BAC), the subject of positive comments in Barron's this weekend. Weighing on sentiment early morning were weak same-store sales data from retailers Wal-Mart ( WMT), which closed up 0.4% to $53.40 after trading as low as $52.12, and Federated ( FD), which similarly shook of the initial concerns, closing up 1.1% to $36.46 after trading about a buck lower early on.
Facing the (House) Music
The Commerce Department reported new single-family homes sales rose 6.7% in July to a record annualized rate of 1.02 million vs. the consensus estimate of 975,000. Existing-home sales rose 4.5% to an annual rate of 5.3 million in July, in line with expectations and up from a revised 5.1 million-unit rate in June and in line with the 5.3 million units analysts were forecasting. A decline in the inventory of new homes for sale helped the S&P Homebuilding Index rise 1.9% to 378.22 after having traded as low as 364.99. Still, some observers were focusing on the negatives, including the downward revision to June's new home sales data (to 953,000 from just over 1 million originally) and 3% decline in new home sales prices. Judging from RealMoney.com's Columnist Conversation and emails I've received, the debate over housing's bubble status remains quite keen. Before it was fashionable to do so, I was writing about the housing bubble debate and continue to believe the question isn't whether housing is in a bubble, but at what stage of the bubble it's in. Still, since I first started writing about housing in late January/early February, the S&P Homebuilding Index is up a touch while the S&P 500 is down more than 15%. Clearly, shorting homebuilding stocks has been a painful exercise. James Cramer's point about how it is hard to argue homebuilders are wildly overvalued on a price-to-earnings basis is well taken, even if book value is the measure by which the industry has traditionally been valued. What's been somewhat muddied by accompanying debates about home prices and homebuilding stocks is the real bubble in housing, which is on the consumer credit side of the ledger. Household debt as a percentage of disposable income has risen from 60% in the mid-1960s to mid-1980s to more than 90% currently, according to a recent report by Wachovia Securities. But while consumers have taken on more debt, monthly debt-service payments currently account for 14% of households' disposable income, in line with the previous peak in 1986. That's largely attributable to lower interest rates. "In short, although consumer finances and their ability to service debts are weaker, they are not unmanageable," Wachovia concluded. "Low interest rates, rising home prices and solid income growth should continue to keep the economy out of recession as long as consumer confidence and employment rates remain stable." (Emphasis mine.) Those are big "ifs," and anyone who's comforted by the fact debt payments are "only" at the previous peak -- as Wachovia suggests we should be -- please raise your hand. After I posted that statistic about monthly debt-service payments in the Columnist Conversation, one savvy reader observed that interest rates were much higher in the mid-1980s, meaning the absolute level of debt is much higher today. Is that really a "good" thing? I continue to believe housing's bubble will burst if and when heavily indebted homeowners can't repay loans if unemployment rises and/or the refinancing boom ends. Either (or both) will occur if the economy doesn't start to pick up steam and/or the Federal Reserve is forced to raise interest rates to offset higher oil prices and/or renewed weakness in the dollar, which dipped today despite strength in equities. The Dollar Index fell 0.18 to 107.95. Obviously, that combination of factors has yet to occur and may be avoided, but that remains the risk in housing/related shares.
Still Vexed by the VIX
Earlier today , I mentioned the recent fall in the CBOE Market Volatility Index as not necessarily being a sign of renewed bullishness, as many contend. Today, the VIX fell 1.6% to 32.29 and obviously has produced a dramatic fall since its recent intraday peak of 56.74 on July 24. Deadline time and the aforementioned debate on housing compel me to table that discussion for now, but there's always tomorrow, which as we know "creeps in this petty pace from day to day."