Stocks are rallying but we have another major collapse unfolding.

Homebuilder Confidence Collapsing
October 18 (King World News) –
Peter Boockvar:  The NAHB home builder index for October plunged further to 38. That’s down from 46 in September and 5 pts below expectations with 50 the breakeven between expansion and contraction.

The Present situation dropped 9 pts to under 50 at 45 while the Future outlook component was down by 11 pts m/o/m to 35. Prospective Buyers Traffic is now down to just 25 from 31 last month. It was last above 50 in May. 

With this index now down for 10 straight months and at the lowest since August 2012, we are clear on why. The NAHB stated:

“High mortgage rates approaching 7% have significantly weakened demand, particularly for first time and first generation prospective home buyers. This situation is unhealthy and unsustainable.”

They added:

“This will be the first year since 2011 to see a decline for single family starts. And given expectations for ongoing elevated interest rates due to actions by the Fed, 2023 is forecasted to see additional single family building declines as the housing contraction continues.”

As a result, we’ll see a further drop in the homeownership rate “as higher interest rates and ongoing construction costs continue to price out a large number of prospective buyers.” Nothing more to add other than to say again, the only question is to what extent do home prices fall from here because the supply of existing homes will still remain tight as many stay in their 3%ish type mortgages.

Treasury Market Losing More Buyers
In the BoA conference call yesterday, Brian Moynihan said this on deposits, “As monetary policy tightens on deposits, we see clients with excess liquidity looking for yield, with that being the global banking movements you can see moving from noninterest bearing to interest bearing accounts, or in our wealth manager business, where we saw clients shift out of brokerage suites into preferred deposits or other investment products, like treasuries, that we offer.” The CFO said on a y/o/y basis “The noninterest bearing deposits are down 3%, while the interest bearing are up 4%. So, overall, we grew our deposits” but he did say they fell less than 1% q/o/q.

One thing I forgot to mention also yesterday but have stated before, if/when banks lose deposits, the US Treasury market is also losing them as buyers. On the direction of rates on savings/checking accounts, “Do we expect deposit rates to increase? Yes, of course. And we will remain both disciplined and competitive, and that is built into our asset sensitivity.”…

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As we dig deeper into the earnings picture in the coming month plus, I am pretty confident that the earnings beat will still be around 70% and many will say how great everything turned out but this is the game every quarter where expectations fall enough going in that the bar is easy to beat. The big picture still remains the same in that earnings growth ex energy is slowing. 

Germany Extends Life Of 3 Nuclear Plants
On the heels of the story yesterday that Germany is extending the life of its 3 remaining nuclear plants (powering about 12% of its energy needs) past the end of the year and into Q1 2023, German power prices one yr forward are down 5% today after dropping by almost 3% yesterday. At 389 euros per megawatt, that is the lowest since early August.

When physics, chemistry, warmth, money and business don’t matter, you get this comment from the head of the Green Party parliamentary group, “There is no objective reason for this” with regards to keeping these nuclear plants open thru the winter. This, even though nuclear is the cleanest and most reliable base load power and we remain bullish and long uranium. 

Dutch Energy Prices Retreat
The Dutch TTF natural gas price is lower too, down by almost 5% to the lowest since June, after yesterday’s 12% drop and by 23% over the past week and just maybe the Europeans can make it thru the winter ok, albeit still expensively.

The sentiment is so dour on Europe and the euro that if they can, there is an opportunity here in stocks and the currency there. On the other hand, European bonds still remain highly unattractive and are weaker today with yields higher.

Economic Outlook For Germany Has Deteriorated Significantly
The October German ZEW investor expectations index rose to a still deeply negative -59.2 from -61.9 and that was better than the feared further decline to -66.5. The Current Situation though deteriorated again to -72.2 from -60.5, the lowest since August 2020. ZEW said simply, “Despite the slight rise in expectations, the economic outlook for Germany has thus deteriorated significantly.”

UK Dirt Cheap
The FT has a story today titled “BoE set to further delay sales of government bonds until markets calm” and soon after a spokesperson for the BoE said “This morning’s FT report that the BoE has decided to delay MPC gilt sales (QT) is inaccurate.” The plan of the BoE is to shrink their balance sheet by 80b pounds over the next 12 months from those maturing combined with sales. Their balance sheet totals about 950b pounds. The 10 yr gilt yield is up 5 bps after falling by 36 bps yesterday. The pound is lower by .7% after yesterday’s 1.7% rally. Again, UK stocks and the pound are dirt cheap.

Keeping An Eye On The US Dollar
Art Cashin, Head of Floor Operations at UBS:
  As I just told Carl Quintanilla and Morgan Brennan on CNBC’s Squawk on the Street, there is some hope that this bear market bounce can have some legs to it, maybe even lasting a couple of weeks as hoped for and projected by the astute Katie Stockton and, if I understand correctly, also Mike Wilson, who has had a hot hand this year.

You remember two weeks ago, we had a very hot Monday/Tuesday, but that wound up fading.  As I told the Squawk on the Street team, I think a key reversal may have happened last Thursday when we had what looked like a washout reversal.  Now, because of the potential for black swans, particularly in London and then later in Japan, those rallies did not wind up with a long shelf life, but we hope that this one can happen.  That will make today and tomorrow kind of critical.  They don’t have to close at the top, but they do have to close with respectability.  We are going to keep watching the dollar.  It has weakened somewhat from the recent strength.  Some of that strength was attributable to fear of a black swan.  The dollar is the ultimate reserve currency and people hunker down in the currency if they think things are going to come apart somewhere around the world.

So, the softness in the dollar is certainly a bit of a good sign.  Certainly not an all clear, but a decent sign.  The other thing we will keep watching is yields. 

So, let’s see if the markets fade after Europe closes around 11:30 EDT.  We will hope that they can hold the bulk of the rally and, in fact, maybe even build on it over the next day or two rather than have it erased within three days as almost every rally we have seen this year 

Let’s cross our fingers and see where we go.

Stay safe and alert.


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