What's Underpinning This Market?

From my perspective, the news from the housing and mortgage market isn't good. February new home sales declined 2.2% versus the consensus 2% increase, while the supply of homes for sale continues to increase. The MBA refinance index, according to Ned Davis Research, fell 7.1%, its fifth decline in six weeks. Correlating this data point with what's going on in markets I can observe, it seems as if the "Sold" signs and closings are on entry level homes, because of the first time buyer tax credit. Those who can refinance appear to have already done so. The sales in the middle and upper end appear to be below even the reduced local assessed values, never mind what the seller bought the home for. This is to be expected, but not indicative of a robust market recovery.

Meanwhile, companies I talk to are still dealing with challenges in getting top line sales going on a consistent basis. I was reading a report on Hewlett-Packard, a bellwether stock that is owned in dividend-paying mutual funds, quality growth funds, and value funds. They did a great job when the crisis began by cutting staffing, reducing compensation (in which everyone shared the pain), and by doing unheard of things like substituting video conferencing for routine business travel. Driven by their new CFO, it worked like a charm, both financially and culturally. However, reading their performance by business group, it's fairly lackluster. It seems to me that a disproportionate share of their income still comes from consumables, and that's not healthy. That may be why their relative P/E lags their competitors. Great company, great products, but its performance will be driven by earnings going forward and not by higher valuations. The same seems broadly true for this market.

Where is the engine for our continuing economic, as opposed to stock market, recovery? I'll let you know when I find it, and if you find it first, let me know.