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The rally yesterday has now taken the S&P’s 23.5% higher from the bear market low of 666 (which happened to be just 1 point above the 61.8% retracement of the entire bull market that began in Aug ’82). The 50% retracement in the S&P’s is 839 and is a definite point of reference here. Upon further review of the PPIP, the question of properly pricing the assets will remain the main sticking point as even Bernanke’s B52 in many circumstances will be able to fly between the bids and the offers. Jamie Dimon for example won’t be giving stuff away. This program is also another huge gov’t intrusion into the financial markets on top of everything else and as we further socialize finance, we further misallocate capital as we distort the risk and reward. It’s also only dealing with the symptoms of the current problem. But, I hope I’m wrong and I hope this works. The 5 yr CDS in the major banking institutions yesterday fell between 10 and 20 bps.

via NYT

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Source:
U.S. Expands Plan to Buy Banks’ Troubled Assets
EDMUND L. ANDREWS and ERIC DASH
NYT, March 23, 2009

http://www.nytimes.com/2009/03/24/business/economy/24bailout.html

Redux: No, Existing Home Sales were not good

Its March, and that means its time for our favorite annual mainstream media math mess up: The February Existing Home Sales errata.

As previously discussed, Home Sales are highly seasonal. Anyone with kids tries to avoid disrupting their school year when possible. And so, the ideal time to move into a new town (and school district) is prior to the start of the new school year in September. That factor, along with other annual holiday activity, explains the annual rhythm of the existing home sales.

January is the worst month of the year for sales. From that low point, sales improve gradually for each of the next 6 months. They plateau over July and August, and then began heading down until December. This occurs year after year.

For those people who actually want to understand the state of the Housing market, you have two options that avoid the cyclical seasonality: 1) You use year over year data. This removes the seasonal patterns by  comparing January to January, June to June, etc. And 2) Compare non seasonably adjusted monthly data over the course of multiple years.

Since the market peaked in 2005, we have been in a strong downtrend. Prices have fallen about 27% nationally, and units sales are off about 30% from the highs of over 7 million annual sales in 20056.

There was one bright spot in the Housing data: Housing is now falling at a decelerating level. While year over year prices are still dropping double digits, unit sales are falling at a slower pace. Housing sales are getting worse, just not quite as quickly. The second derivative improvement suggests that we may be nearing a point where the unit sales may stop dropping. But that does not mean we are at a bottom yet, and it certainly does not imply a turnaround is at hand.

Let’s take a quick look at two mainstream articles that have gotten this wrong: Today’s Investor Business Daily, and last years Wall Street Journal.

IBD:

Sales of previously owned homes unexpectedly rebounded in February from January’s record low, the latest evidence that housing — and the overall economy — may finally be hitting a bottom.

I count 3 major errors in that sentence: “unexpectedly,” “housing may finally be hitting a bottom” and “the overall economy [may finally be hitting a bottom}”

The data does not show that Housing is hitting a bottom, it only shows that it is falling at a slower pace. Just because the parachute has deployed does not mean you are on terra firma.

As to the overall economy bottoming, not only is there no evidence of that, but the leading indicators (ECRI, LEI, etc) all suggest the opposite: The economy is likely to get worse before it gets better. IBD is proferring an opinion, not facts  — and its an unsupported opinion at that.

Last, here’s why the word “unexpectedly” is wrong: The people who follow housing closely expected an increase in February. It happens every year, as the chart I showed yesterday revealed. And the March data will improve over February data, and April over March, and May over April and June over May. That is the seasonal pattern, and it is only unexpected by those people who are unfamiliar with the data, and simply do not know better.

This especially applies to the NAR, who have been not just wrong, but wildly wrong the entire way down.

Let me also point out that the economists on “Wall Street who expected a dip” are the same folks that did not understand the credit driven housing boom, missed the peak in sales and prices, and failed to see the housing collapse. They have been generally clueless about the entire economy for the past 5 years. That they were surprised by the same data they have consistently misunderstood and misinterpreted should be unexpected by no one at this point.

Last year, the WSJ had a front page article that got the seasonal data totally wrong: Wave of Foreclosures Drives Prices Lower, Lures Buyers:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest . . . On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.

No, the 2.9% was nothing special. It was the regular February increase from January.

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What is so amazing about this is that we see the same errors every year. And given how wildly wrong the usual pundits have been on this issue, one would hope the MSM would be a touch more circumspect.

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Previously:
Existing Home Sales, Non Seasonally Adjusted, Explained (March 25th, 2008)

http://www.ritholtz.com/blog/2008/03/existing-home-sales-non-seasonally-adjusted-explained/

NAR’s Existing Home Sales & Prices (November 2006)

http://www.ritholtz.com/blog/2006/11/nars-existing-home-sales-prices/

NAR Housing Market “Bottoms” (January 2008)

http://www.ritholtz.com/blog/2008/01/pending-home-sales-index-nar-housing-market-bottoms/

Sources:
Existing Homes Surprise: Sales Turn Up, Prices Firm
BRAD KELLY
IBD, Posted 3/23/2009

http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20090323

Wave of Foreclosures Drives Prices Lower, Lures Buyers
Oversupply Triggers Lenders’ Fast Sales; Mr. English Bids
JAMES R. HAGERTY and KRIS HUDSON
WSJ March 25, 2008; Page A1

http://online.wsj.com/article/SB120640573882561087.html

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Huge day today! Major indices saw 7% plus moves upward.  And as Bloomberg noted, this capped off the biggest 10 day rally since 1938:

U.S. stocks rallied, capping the market’s steepest two-week gain since 1938, as investors speculated the Obama administration’s plan to rid banks of toxic assets will spur growth and investor Mark Mobius said a new bull market has begun. Treasuries and the dollar fell.

Bank of America Corp. and Citigroup Inc. both soared at least 19 percent as the U.S. Treasury said it will finance as much as $1 trillion in purchases of distressed assets. Exxon Mobil Corp. and Chevron Corp. jumped more than 6.7 percent after oil rose to an almost four-month high. The Standard & Poor’s 500 Index extended its rebound from a 12-year closing low on March 9 to 22 percent as all 10 of its main industry groups advanced.

The S&P 500 gained 7.1 percent to 822.92, its biggest increase since Oct. 28. The Dow Jones Industrial Average jumped 497.48 points, or 6.8 percent, to a five-week high of 7,775.86. The MSCI World Index climbed for the ninth time in 10 days, adding 5.4 percent. Twenty-one stocks rose for each that fell on the New York Stock Exchange, the broadest rally since at least July 2004.

Always better to be lucky than smart . . .

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Source:
U.S. Markets Wrap: S&P 500 Caps Biggest 10-Day Gain Since 1938
Lynn Thomasson and Adam Haigh
Bloomberg, March 23 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=atgwohr1NWTs&

Previously:
“Big Bear Market Rally Coming,” Says Noted Bear Barry Ritholtz
Aaron Task
Yahoo Tech Ticker Mar 10, 2009 08:35am

http://bit.ly/7KgSG

And just for shits and giggles:

When Barry Ritholtz Talks, People Listen
STEPHEN J. DUBNER
Freakonomics
NYT March 11, 2009, 1:13 PM

http://freakonomics.blogs.nytimes.com/2009/03/11/when-barry-ritholtz-talks-people-listen/

LEGACY SECURITIES PROGRAM:

Much of the information about the Legacy Securities Program (a UST/Fed program) is unclear, undefined and can’t be mapped out from the summary or term sheet FAQ.

As I wrote last week:

“UNFORTUNATELY, we have heard that as of yesterday afternoon Treasury decided to get back to playing games and putting forth half baked plans. It is amazing that three months into the new Administration we have these decisions, about structuring distressed asset disposition programs, being made not by the FDIC, not by qualified and confirmed Treasury appointees, not by those senior and capable career Treasury staffers with a great depth of institutional knowledge but rather by a plethora of in-sourced “friends” from Wall Street and orchestrated by three unconfirmed consultants to Treasury and an former junior technology banker… Instead, Treasury would set up a separate program for distressed securities. Treasury said their program would allow less leverage and would allow the bidder more time to pull together the capital. While they might argue the purpose was to reduce taxpayer exposure, this is not the real motivation. Given the inexplicability of the change of plans, it seems reasonable to ask if a large and preferential asset buyer may have gotten to them. At a time when there is nobody at Treasury to respond to independent inquiries one might wonder if there have been discussions between Treasury and Fed’s banks or Pimco or Blackstone about which Secretary Geithner forgot to inform the White House. Perhaps a large asset manager convinced Treasury that once a specific distressed security (MBS tranche as example) was publicly announced for sale, that asset manager could use its market power to try and track down the other tranches in an effort to put the entire deal back together and “create value”. By having Treasury allow less leverage it would reduce the pool of available buyers and, therefore, reserve the play to a very small group of oligopolistic players who happen to be very close and have unprecedented access to Treasury.

The lack of detail and limitation that assets may only be managed by institutions that are $10 billion in AUM or larger suggests that this was created at the suggestion of, and as a gift to, our Treasury Secretary’s ‘friends’ at those large firms that are rapidly becoming the buy-side’s “too big to fail” institutions. There is no rational reason to limit management of the assets to those few firms with more than $10 billion in AUM. While I think highly of the “Loan Program”, I believe the “Securities Program” stinks like a payola program. Once the market and public figures out the reality of this program, whether tomorrow or in a few years, it will become a rightful focus of public outrage far larger than the outrage over the AIG bonuses.

While exclusions from TARP compensation limits should exist to protect the public bidders of assets in the Legacy Loan Program they should not exist for the five ‘largest and most sophisticated’ firms that will manage the Legacy Securities Program. This Geithner giveaway to managers that appear to have unlimited access to the Treasury Secretary, and to the White House, appears to be the real scam of the century. Isn’t the unfettered access and unlimited market power these firms wield reason enough to ask if they are being provided “protection” in their bids to grow to become systemically risky and globally dominant?

The “hunting license”, as the Legacy Securities Program has been termed, allows giant “F.O.T.” firms (“Friend’s of Tim”) to buy the assets anywhere they can find them (not just from banks – perhaps even from each other or their own separate funds). The details are scant. Is it dollar for dollar matching private/public funds? It appears but isn’t clear that it may include UST debt financing as well as equity . It seems to allow the winning firms time to present a plan to UST, take time to raise money, time to identify securities, try and buy back pieces of ARM and CMBS to reconstitute CDOs and “add value”. The program requires RMBS to originally have to have been AAA rated and ABS and CMBS to currently be AAA. Are they able to use this as a mechanism yo bid up the value of their own separate portfolios?

LEGACY LOAN PROGRAM:

On the other side there is not much to say about the Legacy Loan Program (a UST/FDIC program). It is a straightforward program that appears clean This program, the LLP, will allow the FDIC/UST to use it not only for resolution of loans but also securities and was therefore made somewhat redundant by the inexplicable creation of the Legacy Securities Program. It will likely have three classes of bank participants:

1 – Institutions that have conservatively marked their exposures can sell through the LLP at a likely premium relative to the distressed price in the market. This is due to the attraction of government funded guarantees and cheap funding.

2- Institutions that might take hits to equity from the sale of exposures but would remain viable and solvent… they may be given incentives to sell, in the form of some TARP capital in return for a contingent agreement to raise private equity capital.

3- Institutions that are fundamentally deeply troubled and may sell into the program as a result of regulatory pressure. For them it will be a way of shrinking or winding down without a clear receivership.

Joshua Rosner
Managing Director
Graham Fisher & Co., Inc.
O – (646) 652-6207
C – (917) 379-0641

Dr. Martin Weiss, chairman of Weiss Research, talks to Kelsey Hubbard about what’s being done to fix the economy and assesses whether the strategy will work. (March 20)

3/20/2009

My friend Josh points out:

We have not had a 5%+ up month on the S&P since December 2003 — a streak of abut 62 months. With a week left in March, and the SPX up +9%, we could end that cold streak.

The last such month was December ’03. (Peter Boockvar notes we got close in April ’08 when SPX was up 4.75%).

The key question is, does this have any correlation to market bottoms?

Home prices dropped 15% from the same period one year ago; Despite the price drop, sales fell 4.6%. How anyone can try to spin this as a positive is beyond my mathematical comprehension.

Even the NAR reported that “overall sales activity remains relatively soft,” as existing-home sales increased in February (month over month).

This was another weak housing report. Do not be fooled by the monthly gains, as we have been saying for 4 years now, as they are meaningless (see chart at bottom):

-Single-family home sales rose 4.4% to a seasonally adjusted annual rate of 4.23 million in February. They fell 4.6% from the 4.95 million-unit level of February 2008;

-Distressed properties accounted for 45% of all sales;

-Home foreclosures were up 30% in February from a year earlier;

-The national median existing-home price for all housing types was $165,400 in February, down 15.5 percent from a year ago.

-The median existing single-family home price was $164,600 in February, down 15% from a year ago

-Total housing inventory at the end of February rose 5.2% to 3.80 million existing homes available for sale, a 9.7-month supply at the current sales pace.

-The absolute number of homes for sale rose to 3.8 million from 3.6 million

-The West continued to see the biggest drops in prices due to foreclosures.

While there was a healthy increase in sales from January, a look at the non-seasonal data might be instructive: As expected, the gins are primarily seasonal in nature, with January the worst sales month of the year, and February the start of modest seasonal improvements.

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Existing Home Sales, Non-Seasonally Adjusted

chart via Calculated Risk

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Sources:
Existing-Home Sales Rise In February
NAR, March 23, 2009

http://www.realtor.org/press_room/news_releases/2009/03/february_existing_home_sales

The Treasury seems to be one big step closer to implementing the initial intentions of TARP but with the hoped for help of the private sector. In theory it all sounds great, with private sector involvement we rid the banking system of all its troubled debt, cleansing their balance sheets and positioning them to lend freely again during a time of credit constraint. In practice will be the question of to what extent will the private sector want to be a part of this because god forbid they make money what will the repercussions be and will the rules change, whether banks will want to sell to these new SIV’s and at WHAT PRICE and is this just an act of Houdini where we’re just shifting assets to the taxpayer who will have a 50% ownership rather than seeing an extinguishment or payoff of the debt which would happen without this program over time. We need the private sector and clarity in pricing, fingers crossed.

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.

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On his “60 Minutes” interview last week, Ben Bernanke was asked what kept him up at night. Interestingly he didn’t say Citi, or deflation, or the TARP and TALF plans. What keeps him up is the fear “that we don’t have the political will. That we don’t have the commitment to solve this problem.” Congress should have reflected on his wise words this past week. Prodded by President Obama’s statement that “I don’t want to quell anger. I think people are right to be angry. I’m angry”, Senator Grassley went around the bend and offered that AIG employees should commit suicide. Death threats were delivered to AIG employees, and Congress unmercifully attacked a $1 a year man who came out of retirement at his country’s urging to try to help solve the financial crisis by heading up the beleaguered AIG. I don’t see much political will or commitment to solve this problem. I see the villagers gathering in the town square with torches getting ready to head off to burn the castle where the evil Dr. Frankenstein lives. And with as much level-headed leadership as howling mobs usually have.

It’s not likely to get a lot better this week as the House Financial Services Committee has a hearing scheduled for Tuesday featuring Ben and Treasury Secretary Geithner. Its sole focus is what did the two men know about the AIG bonuses and when did they know it. Gee, the House already passed a bill taxing bonuses at 90%. Do they want to fire up more rage so they can go to 100%? Actually, if you live in high tax areas like NY City, when you add in State, City and FICA taxes the tab would be 102.5% of the bonus. Makes you want to stay late and get the job done.

“Politicians acting in haste rarely act wisely, least of all when guided by rage” commented the Financial Times over the weekend. The paper calmly, but effectively, editorialized that to use “the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact with retroactive force…is Constitutionally dubious…and an abdication of responsibility.” Those FT guys really know how to use the King’s English, don’t they?

Sunday’s NY Times was not going to be outdone by their brethren across the pond. The headline in the paper was that the Obama Administration is going to call for increased oversight of executive pay at “all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation.” The other thing likely to be announced this week (and may already have been by the time you read this) is a three pronged approach to rid the financial system of toxic assets. It would encompass a: 1) an entity backed by the FDIC to buy and warehouse loans; 2) an expansion of the TALF to buy older asset backed paper and not just newly issued stuff; and 3) the long awaited private/public partnership to buy mortgage backed paper and other troubled assets on banks’ balance sheets.

Beyond the problem of how to price this stuff that we have been wrestling with since the idea was first formed, the other, and bigger issue, is who will step up from the private sector to play with the bully that changes the rules after the fact? This should be an interesting week. But suppose the market takes all of this uncertainty and manages to deal with it? A market that can do such a thing is a market that could be rewarding.

As we have said before- stay tuned.