The market has been in a tug-o-war all session long. The carryover from yesterday's (lack thereof) confidence numbers were mitigated by solid earnings reports, but the new homes data knocked the wind off the rally even though it means lower rates for a while. Of course, the notion of lower rates is a double-edge sword that Ben Bernanke has to deal with today. How to exude confidence even while suggesting rates will have to remain low for a long time. The market likes the news, but it's bittersweet to say the very least. At some point we want the Fed to hike rates because the economy is ready to run without training wheels and booster rockets. But, for now, even the training wheels are flat and the booster rockets are running on "empty."

The news out of housing over the last 24 hours is shocking. In fact, economic data in general has gotten sloppy, and the signs add fuel to worry about a double-dip in the economy. It's early to make the determination on this and it is true that recoveries are choppy, but the market reflects the cautious nature of the recovery.

Color on Housing
By: David Urani, Research Analyst

There has been much housing news so far this week, and overall we'd have to say that it has all been disappointing. The Case-Shiller Index report yesterday showed that prices in December were flat to slightly down month to month. It was a sign that even though the nationwide tax credit for new homebuyers was extended and expanded, the demand for housing hit a snag. Home prices were down in most regions across the country, except surprisingly in the hardest hit regions, which has been a trend for the past few months. Those regions in particular are likely benefitting from bargain buying.

However, the latest two data points today show that housing demand has certainly stalled. First, mortgage applications last week declined 8.5% week to week, representing the third week in a row of decreases. The worst part of the release, however, was purchase applications which fell by 3.6% and hit its lowest level since 1997.

This scary piece of information came along with today's new home sales report which showed an 11% decrease month to month in January and hit a new record low of 309,000 sales annually. It was surprisingly bad, especially considering the consensus (and ourselves included) was looking for a modest increase as the tax credit extension came back into effect. The new home sales report also showed more falling prices and a bump higher in supply.

Now that we've gotten the horrendous sales data out of the way, it's time to turn to what all could have gone askew in these releases. The purchase applications is concerning, but we should note that cancellation rates on home sales have been improving, indicating that although there might have been fewer inquiries for new homes, more of them are being converted to sales. Turning to the new home sales data, it is certainly worrisome, but it should be noted off the bat that the report has a 14% margin of error. The number could easily be revised higher next month, although it will still surely still show a decline. Secondly, seasonal adjustments are very hard to get a finger on. On a non-seasonally adjusted basis new home sales decreased by 3,000 month to month, which is not as much of an end-of-the world figure as the headline result may suggest.

In the end, it's hard to see any of this data in a positive light. One factor I am considering is the idea that perhaps the initial November tax credit deadline caused a pull-forward of a large amount of home demand. In essence, it's possible that most of the people who were planning on buying a new home did so before the first tax credit deadline, and the extension may only be running on fumes. Still though, we have to wonder what will happen when the deadline expires again in April. Many believe there will be a significant drop-off in sales but at this point, considering the consistent drop in demand that began in November, I am inclined to think that maybe we have already squeezed out most of the extra demand with the initial tax credit. Another extension may not be much of a help unless we make it bigger and better, but that would just be reckless.

Therefore, we suspect that housing demand will stay subdued for several months (in the low-to-mid 300,000 range), with the exception of a bump higher in April as buyers finalize sales before the last deadline (assuming it's not extended again). In order for sales to truly make a large-scale comeback, we are going to need employment to return, and so far it appears we are still a ways off from that happening. Meanwhile, there are still many hurdles in the way in terms of foreclosures and pricing, including the Obama mortgage modification plan that may simply be delaying a large amount of foreclosures that are going to enter the pipeline in the coming months. Therefore, prices are likely to fluctuate, but be somewhat flat over the next several months as sales and foreclosures mostly balance each other out on the supply side.

More on Toyota
By: David Silver, Research Analyst

Transportation Secretary Ray LaHood is back in front of Congress for the second straight day, and he put on a better performance yesterday than he was this morning. Mr. LaHood tried to deflect some of the questions with humor; I respect the move as many of the questions have been eerily similar. Also, why is there no one in the chamber? There is such outrage over this problem with Toyota (TM), and yet there are only five congressmen (or women) in their chairs. Later today, when Mr. Toyoda is testifying, I can guarantee that most of those seats will be filled because these congressmen will need their sound bites. After seeing yesterday's testimonies, Ms. Smith's story tore at the heart strings and it really is amazing she was able to sit there and tell her story. To anyone that has lost control of their car momentarily on a sheet of ice or snow, she lost control of her car going about 80 mph and didn't have control of it for approximately 5-6 minutes. She tried everything (standing on the brakes, emergency brakes, turning the engine off), but nothing worked. It was a difficult story to listen to, and it will be interesting to see how many representatives refer to that story later today.

Mr. LaHood at his last testimony (about a month ago) said that Toyota's weren't safe to drive; he later recanted that statement saying that people misunderstood what he was trying to say. He reiterated that statement this morning saying that Toyota owners needed to get their vehicles in to be fixed as soon as possible. Toyota is fixing about 50,000 vehicles per day, and many dealerships are staying open 24 hours a day to try to help with the influx of cars. Oddly, there hasn't been the backlash against Toyota that many had feared. Yes, there are some outspoken people, but they probably wouldn't buy Toyotas anyway. I have spoken to a few Toyota dealerships around the New York City, New Jersey, and Philadelphia areas and most are seeing people that still love their cars. They are actually becoming even bigger fans of Toyota because of the steps the local dealerships are taking.

Akio Toyoda, President of Toyota (and grandson of the founder), will be a punching bag for Congress, but it will be up to him to put on a solid performance if Toyota is to have any hopes of rebounding quickly. Many think that all of Japan's export economy rests on Mr. Toyoda's shoulders this afternoon. If he is shown to be an inept leader, than there are fears that the negative cloud could spread to all of Japan's exports, ranging from Honda to Sony. I expect Mr. Toyoda to hold his own during the testimony, and while he may leave with a black eye, he (and Toyota) will still be standing tall.