I am sure you saw the housing numbers today, they were through the roof, no pun intended, and the talking heads were perplexed why the market did not like them. Again, it comes down to looking beyond the headline numbers which, surprisingly enough, traders are starting to do. All the action is in the lower priced homes or starter homes and almost all of the financing is being done through the FHA, and the USDA, see my previous post about that odd couple.
Essentially, the low or no money down mortgages are back and being financed by you and I through our tax dollars, I am a giving guy, but this is a bit ridiculous. I absolutely love the idea of a 3.5% down payment with a 31% debt to income ratio, a slightly weaker credit score than the normal and the ability to use that tax credit for the down payment it just makes sense because it’s not like we have ever seen this story blow up before. I hope that we see the FHA start loaning out even more than the value of the house, maybe 120% LTV so the new owner can furnish or renovate the property that would be great! Oh, wait they are doing that, fantastic.
Is there any question that the FHA will more than likely have to bailed out again to the tune of $54B according to some whistle blowers? Guess who dismisses the same folks who gave their stamp of approval on Freddie and Fannie, so I guess we have nothing to worry about. Essentially, without all of this government intervention we would have little activity in the housing sector and the proof of this is right in front of us, just look at the action in the $250K plus market, it is dead.
The average price of a home dropped, MoM, from $177K in August to $174K in September, but YoY it looks grim with a 9% drop from $191K to $177K with sales booming prices are dropping, that would make my economics professor scratch his head doubting his supply demand charts. Foreclosures are keeping the prices down, but with housing supplies drying up by 7% and total inventory dropping to 3.63M there is no reason for prices to be declining, right? There is a major problem and it is called the shadow inventory that banks are holding on to and the people know it is there. That is why prices are remaining low plus you have builders who have been recklessly pouring concrete trying to pretend they have buyers which have been adding to supply, not good.
Add fraud on top of the tax credit and we get a real mess on our hands and a perfect reason to let the market work itself out. Isn’t it bad enough that the banks received hundreds of billions and trillions in bailouts and cheap money, but now the taxpayers are being cheated by, well, other taxpayers? Chris Dodd, in an effort to save his Senate seat, is attempting to extend the tax credit to June 30, 2010 and expand the tax credit to all Americans for an additional expense of $16.7B. I guess we will have cash for socks in the near future, who knows, but when you have spent a trillion dollars to create no jobs what is another $16.7B in another failed policy?
As long as the government keeps interfering the longer the pain will continue and there are serious problems in housing as Whitney Tilson keeps pointing out, correctly so I might add. As the Wells Fargo earnings showed, there are major problems in the housing numbers, please see my notes on those earnings. We got option ARM’s, jumbo’s and a host of other real estate issues all about to explode on the scene which will drive prices lower, not higher. Let the market work because the lower the process go the better of the buyer will be and suckering them in at higher levels does no one any good except maybe the banks, but I guess when the banks finance your elections you need to keep them happy.
Japan opened up significantly higher today, up 320 points, which is sure to boost US stocks in the AM, barring anything happening overnight. The reason for the rise in the Nikkei was because of existing US home sales increase on Friday and higher commodity prices, copper in specific. While the tail does not wag the dog, it can influence its initial opening as optimism is contagious.
The irony is that the housing sales data was not that great when looked at against supply and the shadow supply that the banks are holding. The fact that most of the other economic data is also rather disheartening which, frankly, should not be having the effect on the markets that it is having. The rally has reached a point of being utterly ludicrous. Do not confuse my pessimism as being upset that I am missing out on returns as I have done very well this year, but my pessimism is because there simply is no reason for the rally to continue.
Unemployment, real estate, both residential and commercial, is still a mess and other economic indicators are still very negative. Even if the indicators did turn decisively positive the market has already priced in 4% GDP growth which is not going to happen unless you know of a different set of economic numbers that I haven’t seen or heard of. I have said for some time that 3Q09 GDP will probably be good, but good as in a 1-2% growth rate. Keep in mind that most are expecting 2Q09 GDP to be adjusted down to -1.4% later this week.
I happen to think that we will get a negative initial claims report this week and the revision on 2Q09 GDP will come in worse than expected. If that happens then we are indeed in for a strong dose of reality with the stock market. The largest part of my 25% equities is Asian holdings, so I am glad the markets are going up, but I see little reason for those markets to be reacting so positive to our barely OK data. Their economies are definitely sounder than ours right now and posting positive growth, which is good, but I am worried that even those markets are getting overextended now.
The irrational exuberance shall continue into the early part of the week, but one must remember that the longer we remain overbought the worst the decline will be. By the time unemployment claims, the GDP revision and consumer spending are released I expect we will see some volatility. Just look at the leadership in the markets right now, AIG and Citi Group, two zombie companies, are a huge percentage of daily volume and helping push the markets higher.
One of the few things really helping the market is the fact that banks are not loaning shares to be shorted, but other than that there is nothing compelling to make me buy stocks. As I said before, I might miss a few points, but when the next black swan event happens I am more than insolated. An investor should be guarded if they are contemplating adding new capital to this market. There is also nothing wrong with taking profits, no one ever got hurt by selling a winning position. Good luck and think defensively in the near-term.
At every turn we keep hearing that unemployment is “less bad” which is probably not exactly comforting for the 500K+ a week that are filing initial unemployment claims. We also keep hearing this nonsense about a “jobless” recovery which is an oxymoron to say the least. Our economy is driven by consumption and when you have large tranches of unemployed combined with lower incomes and dwindling savings consumption is going to take a significant hit.
There is simply no way that I can foresee a jobless recovery and, from my perspective, we have not seen top line growth of revenue from corporations. Even same store sales were terrible with ultra-low expectations. Regardless, the growing silent employment numbers are those who are seeking extended and emergency unemployment claims.
While the media is pointing out the growing ranks of the unemployed by telling you about the 9.5%, soon to be 9.6-9.7%, they are not giving you the full view of the plight of the unemployed. Once your initial unemployment benefits go away you are now eligible, if your state has a high unemployment rate, extended benefits and thanks to the stimulus, which I am sincere about, you can obtain emergency unemployment benefits.
Each of these areas of the unemployment sector has grown pretty substantially and show little sign of cooling in the near-term. Below you can see just how bad these claims have increased over the last 7 months. This is telling us that people are not finding a job which is just plain scary and I hope the best for them at this time.
It is highly unlikely that this number will turn around anytime soon, unless they find a new way to calculate the numbers. Until these numbers come down we are in for some tough times ahead and it will have an impact on GDP. Although, government spending and jobs will likely boost some aspects of GDP it is simply an artificial boost to the numbers and, in my opinion, one should discount the government’s intervention in GDP growth.
The government is hiring people for the sake of hiring people which means they will be less productive than in other areas of the economy. I view this as a malinvestment and an investment that the taxpayers will ultimately be paying for. The government might as well just give the money away since an unproductive job robs the economy of assets it could otherwise use in another productive manner. This is simply welfare for the working.
Either way, the problem is growing even with “less bad” data and we need to start reevaluating Keynesian economic theory as it was disproven years ago with stagflation and start moving in a more productive manner. If we do not then it is highly likely that we will see a repeat of the 1970’s at best or we could repeat the 1930’s at the worst. Either way our current path is not working and is doing much more damage than good, just look at the dollar for evidence of the damage.
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