Market Wrap (4/1) & What's on Tap for Thursday

Today's economic data came in roughly in line with expectations as the National ISM numbers showed a slight improvement over the prior month's 35.8 reading with a 36.3. Employment and new orders improved while production held steady over the prior month. This number still indicates significant contraction, but stocks greeted the release with optimism paring their morning losses to close up 1.6%. The data diverged from the Chicago PMI survey released yesterday, which came in below estimates.

Consistent with my forecast yesterday, pending home sales ticked up 2.1% over February as lower mortgage rates and foreclosure sales prompted buyers to enter the market. The West continues to deteriorate as pending sales fell 13% showing that the the general economy is standing in the way of a more sustained housing recovery. All other regions enjoyed pending home sale increases over the prior month. I am interested to see next month's sales data as we enter the home buying season and mortgage rates remain near record lows. The housing situation is actually worse than the data suggests given the shadow inventory held by lenders. Official statistics report that there are 3.8M existing homes currently on the market, equal to about 9.7 months supply. However, lenders are holding over 600,000 residential properties that are not listed on the multiple listings service.

Vehicle sales, although terrible, came in slightly above expectations adding to the market's gains midday. The year-over-year declines will level out over the next six months as the auto manufacturers begin to compare their figures to weak sales months in 2008. The General Motors CEO stated that vehicle sales are finally bottoming out, but I urge him not to get ahead of himself as consumers continue to deleverage their balance sheets.

As expected, the market continues to ignore the poor economic reports as most of this information has already been "discounted" into the market. After all, the bulls contend that the market is a forward looking mechanism, pricing securities nine months out into the future. If this is truly the case; how was it that the major indices hit their all time highs in October of 2007, less than two months before the official onset of the current recession? The fundamentals do not support a significant market rally from these levels. I will dig deeper into this over the next week, but needless to say, I believe that the market is getting ahead of itself at the moment. However, equities could easily trade up another 10%-15% before turning back down.

Tomorrow is light on the economic front with initial jobless claims due out in the morning with a consensus estimate of 655,000 new filings. Aside from the initial market reaction, this report poses limited downside risk for equities with any better-than-expected figures used as an excuse to rally the markets. The FASB will also vote on the final mark-to-market rule tomorrow, which supported financial shares in today's trading. Banks will apply this rule change retroactively, meaning that it will be applicable for Q1 earnings. What a loss for transparency, and as a non-practicing CPA, I am personally disgusted that this was even considered. Mark to model is best compared to a homeowner valuing their house at twice the market value because they think "that is what it should be worth."