Dirty Fingernails Rally

After posting its best week of the year, stocks popped out of the gate and stayed strong –closing at the highs of the session. I like that the ‘dirty fingernail’ part of the economy is a part of this mix as the decidedly non-sexy stocks continue to display leadership.

• Rails
• Drillers
• Manufacturing

Talks of a potential merger between United Technologies (UTX) and Honeywell (HON) helped the market avoid a mid-day lull and hold above a critical support point. Industrial America, left in the shadows of the technology revolution still plays an important role. On that note; most of the time, industry consolidation happens from increased anticipation of demand or an extension survival mode; more of the latter than the former, but it would be a net positive for the industry and the stock market.

United Technologies is #9 in Industrial names in America and Honeywell is #34 –I am not sure if the government would have prevented a deal like the GE-HON merger in 2001. The SPDR Select Sector Fund (XLE) is at a pivotal point on charts – makes a major breakout through 60.

On February 11, the Dow Jones Industrial Average was collapsing. The index reversed into the close to finish at a perfect double bottom on a one-year chart.

Then, the market followed up that reversal into last week - its best of 2016. That momentum carried over today as stocks popped out of the gate and stayed strong, closing at the highs of the session.

For the Dow, which closed above its 50-day moving average, the next upside test is 17,100. Home Depot (HD) reported this morning and sets the stage. Take note; it would be unusual for the Dow to keep moving higher without testing its former resistance point as support. So, 16,500 remain important, but it is time to test the rebound during a pullback.

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Free Market’s to Housing Rescue?

Big news: Bank of America (BAC) is creating a program to issue mortgage loans to folks with as little as 3% down without insurance from the Federal Housing Administration (FHA). This is a shot across the bow from an industry that’s ready to fight back against what they see as massive abuses of power. With major fines against Bank of America, JP Morgan, Wells Fargo, and Quicken Loans, they have slowed lending to a crawl. Quicken threatened to stop issuing mortgages altogether.

Bank of America will work with the Self- Help Foundation, which will sell loans to Freddie Mac and share in losses from defaults. It’s a high-risk for the private organizations, but it’s the way markets are supposed to work. I worry about the extent of taxpayer exposure to this via government-owned entities.

What happens is a mass default -2007-2010? Right now, Fannie and Freddie are gutted for almost all the cash they net, making them an amazing piggy bank for the Federal government.

I like the notion that the private sector is stepping up or being allowed to step up after the private mortgage insured (PMI) market share crashed after the market collapse and government intervention.

PMI Share:

• 60% 2000
• 70% 2007
• 15% 2009

The PMI market is looking very intriguing, even though many names are mere shadows of their former selves. That’s what makes them compelling. I am considering pulling the trigger, but we are doing more work and we want to see better mortgage purchase demand.