I was stunned to hear a few pundits proclaim yesterday’s rally was due to the 10AM announced
real estate contract signings. That ignores 1) the data; b) its source; and iii) the actual futures trading in advance of the actual data release.
Let’s put aside for the moment the source of the data — the National
Association of Realtors (NAR) — and delve into the data itself:
The Pending Home Sales Index, based on contracts signed in February, stood at 109.3 – down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Earlier, mild weather caused the index to spike at 113.3 in December."
So from January to February, real estate contract signings to
buy existing homes appear to have increased 0.7%. This is measured by the NAR’s "index of signed purchase
agreements." Year-over-year, the contract
signings dropped 8.5%, hardly an encouraging data point, but that small fact didn’t seem to slow down the woefully misinformed pundits one bit. The monthly data was an improvement from January, which suffered a month-to-month drop of 4.2%.
So what does this small monthly gain mean? Let’s go to the NAR release:
"An index of 100 is equal to the average level of contract activity
during 2001, the first year to be examined and the first of five
consecutive record years for existing-home sales. There is a closer
relationship between annual changes in the index and actual market
performance than with month-to-month comparisons. As the relatively
new index matures and seasonal adjustment factors are refined, the
month-to-month comparisons will become more meaningful over time." (emphasis added)
Bloomberg notes that “The existing-home sales report is
based on a sample of about 40 percent of transactions in the multiple listing
service used by real estate agents, while the pending-sales index [the one we are presently discussing] covers about
20 percent.” That’s right — this 0.7% monthly gain is extrapolated from one out of five contracts. And as the NAR notes themselves, the year-over-year changes is much closer to reality than the month-to-month measure.
So back to our punditry: What does this data — a major negative, according to its source — have to do with yesterday’s rally?
Most likely nothing.
The inimitable Bill King points out that if any of the T-Heads bothered checking the overnight futures activity, they would have seen very clearly that the markets were being bought up way prior to the 10 am news release:
"A cursory look at a SPM chart reveals that the rally started just before Europe opened in the
wee hours of Tuesday. Yes, that is the window when people tend to commence gaming of the SPMs.The second wave of the rally commenced about 7AM ET. The third wave of the rally started just before the 10AM ET release of the Pending Home Sales number."
The following chart is courtesy of King, who points out all the fun was had long before the 10 am release
SPMM tick chart – Arrow is release time of Pending Home Sales number.
(Time is CT in above chart).
Bill adds:
"After the early rally, stocks traded sideways, amid excruciating ennui, for the balance of the session.
The rally, due to lack of later follow through and vigor, appears to be the handiwork of someone, or more, that exploited this week’s high absenteeism and lack of enthusiasm.
Ain’t high finance grand?"
Grand, indeed . . .
>
Sources:
Pending Home Sales Show Effects of Weather, Possible Subprime Impact
NATIONAL ASSOCIATION of REALTORS
WASHINGTON, April 03, 2007
http://www.realtor.org/press_room/news_releases/2007/
phs_feb07_show_effects_of_weather.html
U.S. Economy: Pending Sales of Existing Homes Unexpectedly Gain
Shobhana Chandra
Bloomberg, April 3 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a92Hv.ybHGE4&
Yesterday’s rally was on perceived good news on the Iran front.
—
It only took Eclectic 10 words.
~~~
BR: (I don’t disagree)
Eclectic doesn’t need to be able to count… only to edit.
“…appears to be the handiwork of someone…”
1. There is strong evidence of currency interventions by Japan MoF (after their statements on Monday)
2. Spike in M2 (The Fed is out of control, printing more and more money like crazy for two weeks now)
3. Overnight (Monday to Tuesday) futures manipulations
4. Bush “had a telephone conversation” with “President’s Working Group for Manipulating Financial Markets” on Monday. (The high-level group is made up of the Federal Reserve chairperson, Treasury secretary, chairman of the Securities and Exchange Commission and chairman of the Commodity Futures Trading Commission.) Apparently, he wanted to discus some issues before the G-7 meeting next week
5. Media talking heads (Bloomberg in particular) repeat every 15 minutes: “BlackRock Inc., Fisher Investments Inc. and Schroders Plc say stocks are inexpensive relative to bonds.”
6. Etc…
mr. ritholtz
your plain spoken straight forward explanation of the nar pending home sales says it all.manipulated figures that represent 20% worth of un-hatched chickens.why is this figure even reported? the market will correct/crash shortly. when it does housing,debt,over consumption,government will get the blame.i believe it will be in large part because the rest of the world walked away from our pitiful,ridiculous economy and took their money with them. jmo cbr hbb.
Traders remind me many times of Dory, you know, the fish that suffers short-term memory loss in Finding Nemo.
You throw a new number at them and it’s like the completely forget about any relevant data that came before the latest one.
Humans tend to overweight more recent data than overall trend or longer term data
Its a cognitive problem your species has . . .
What traders do is just about what was described. They see a potential setup and act. Here, a weak upmarket and quiet trading with a pending-sales number coming out that might well be better-than-expected, given low expectations for housing. So, as noted, the “third wave of the rally started just before” the PHS release. Someone wanted to yank the futures around to influence and magnify the reaction. Others in the market are free to disagree and fade the move — look at the so-far-failed attempt to yank index futures up this morning.
Disagreement makes markets.
On pending sales, they weren’t all that terrible, and if you squint you can see a bottom in the data. It’s bottom-is-here calls that gave you the setup to short homebuilders in early February. Don’t knock ’em.
Excellent piece, Barry!
“…appears to be the handiwork of someone…”
1. There is strong evidence of currency interventions by Japan MoF (after their statements on Monday)
2. Spike in M2 (The Fed is out of control, printing more and more money like crazy for two weeks now)
3. Overnight (Monday to Tuesday) futures manipulations
…and now that we’ve had the “pump” we can progress to part 2;
Since the FED obviously needs some help gettin the 10 yr T moving in the “right” direction, we can now lay that big, stinking, rotten Easter Egg on Friday while the marts are closed.
Its a cognitive problem your species has . . .
“your” species, not “our” species? Is there something you aren’t telling us? Barry Ritholtz, investor from Mars? :)
Why not just relocate Wallstreet to Las Vegas and be done with it. Same game just different uniforms and much more table credit available. It even has a mob influence(GS).
Totally agree with TJOFPA as the timing of the releases on friday did not escape me either. Market Closed??? let’s put ou tall the “bad” stuff then, then when we come back on Monday no one will remember since we can’t remember from one day to the next we now have a whole three days to forget about it.
Pretty shameful to think people would’nt notice that…..
Ciao
MS
THe gaming of the SPM’s has gone on for quite a long time. It’s really a great tool, if you want to create the illusion of warm fuzzy feelings that basically spread throughout the entire market once it opens. Monday evening I saw the DJ futires up 14 and said to myself…here comes another 100pt day…for what? You could pick one of two reasons “offered” up the Iran/British thing which I think is total BS since the escalation of those same “tensions” did nothoing to the market but let’s ad in the NAR release too since we can point to that as well.
M2 out of control…M3? ha….let’s not go there as that will just make myself a target for the people who refuse to look at things for what they are instead what they appear to be.
Uncle Ben at it again…….but hey it’s just to back “other” transactions…….
Those “other” transactions were pretty damn apparent in the SP futures on monday evening and at other times dutring the day as King’s chart points out.
Ciao
MS
Since smart people like James Picerno are watching M2, I decided to plot it since 1959 as percentage of GDP (PNG chart, with cash/M2 as liquidity preference thrown in, too). While it is up lately, financial depth remains well shy of historical levels.
Why worry about it just now?
HF’s and Wall Street are going to do whatever they can to goose the markets higher. The data really doesn’t matter, all that matters is that if stuff never goes down then all the accounting fraud and mortage fraud will never come to light. Not to mention that the US and the rest of the world refuses to deal with the rising costs of goods. Housing is in a flat out recession, but there is till plenty of excess credit to speculate and pump up asset prices with. Gold is approaching 700 dollars! And private equity non sense is in full force
The recent rallies looked clearly “suspect”. And the insistance of the news on pointless -inane- positives was….amazing- I got mad and emailed Bloomberg reporter: I am sure pointless too, but I felt better! What is clear is that there has been a lot of intra day churning: market goes up in low volume (ex: the Dow on tuesday went up in the am only on 1/3 volume and the rest of the day 2/3 volume is churning with virtually no price movement)
my conclusion: rally manufactured to enable “hidden” selling (up/down volume <1) ...ahead of the obvious dump
What Pending Home Sales numbers really tell me
In 2006 Feb had the highest monthly sales (US season. adj.)
– the increase from Jan to feb was 1.9%
– the increase from Jan to Feb in 2007 is 0.7% (today’s data)
average sales in 2006 were about 10% below 2005
So far:
– Jan 07 is 7.5% below the 2006 average as well as jan 06
– Feb 07 is 8.5% below the 2006 average and 8,5% below feb 06
Also, there was an increase in contracts signed in Dec 2006, and since sales finalize 1-2 months later you have to wonder whether this higher number resulted in the increase (month to month) in existing homes sales reported last month
So it appears there is no evidence indicating anything more than another 7.5 (Jan) to 8.5% (Feb) decrease in home prices this year considering Jan and Feb that were the strongest months last year. The increase Feb/Jan occurred last year as well (is it always the case?) although the numbers decreased for the rest of the year after that.
Jumping up and down over the 0.7% increase above makes no sense whatsoever