The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

In the light of today’s rally, perhaps it would be instructive to look at the volume on some past rallies. Fortunately, William Hester at Hussman Funds has done the heavy lifting for us, as these two charts show:

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Changes in S&P 500 Leading to, and Coming Off of, Major Troughs

(Note: Data set = bear-market bottoms since 1940 )

Volume Changes From Major Bottoms

(Note: Data set = bear-market bottoms since 1940 )

Charts courtesy of Hussman Funds

Eventually, one of the Bear market rallies will be the one that is the turnaround. But until then, its guilty until proven innocent.

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Source:
Trading Volume Separates Bull Markets from Bear Rallies
William Hester, CFA
Hussman Funds, April 2009

http://www.hussmanfunds.com/rsi/rallyvolume.htm

Another ugly New Home Sales report:  There was no statistically significant monthly improvement, as the reported change of 0.6% was within the margin of error of ±19.0%. The year-over-year data, however, was god-awful: A drop of 30.6% (±10.7%) below the March 2008 data.

There is a slight silver lining in the inventory: Months supply fell to 10.7 from 11.2 — the lowest level since October 2008. The cycle high was in January 2009 at 12.5. And the absolute # of homes for sale fell to 311k from 328k to the lowest since Jan ’02. While this is an improvement, 6 months is the 30 year average, so we still have a ways to go.

And as Rex Nutting points out, even with Builders cutting prices in March, “the time it takes to sell a home rose to record high of 10.2 months.” Blame competition from cheap foreclosures, with nearly half of all existing sales distressed property.

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New Home Sales

Source:  Census Bureau

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Previously:
Media Misreports New Home Sales –they didn’t rise, they fell 41% (March 26th, 2009)

http://www.ritholtz.com/blog/2009/03/new-home-sales-fell-41-in-february-2009/

Source:
NEW RESIDENTIAL SALES IN MARCH 2009
Census Bureau, APRIL 24, 2009 AT 10:00 A.M. EDT

http://www.census.gov/const/newressales.pdf

New Home Sales Chart

http://www.census.gov/briefrm/esbr/www/esbr051.html

Ford is joining Best Buy and Bed Bath & Beyond in taking advantage of their competitor’s woes while at the same time executing well thru a difficult economy and its stock is being rewarded after earnings.

European stocks are strong after Germany’s IFO, their main business confidence #, rose to the highest level since Nov at 83.7, 1.4 pts more than forecasted. The Euro is at a 1 1/2 week high vs the US$ in response.

Q1 GDP in the UK fell at the biggest pace since ’79, by 1.9% q/o/q, .4% more than expected and Moody’s made cautious comments on their sovereign credit outlook although they remain firmly Aaa.

Like the anxiety of opening up the letter from the college you really wanted to go to, banks get to hear how they did in the ‘stress test.’ This afternoon, the rest of us get to hear what assumptions were used and analysts can go to work to see who needs what.

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March Durable Goods were down but better than expected. The headline figure was down .8% vs expectations of down 1.5% and ex transports, orders fell by .6% vs forecasts of down 1.2%. HOWEVER, Feb was revised down sharply to gains of 2.1% headline and 2% ex transports from up 3.4% and up 3.9%. Non Defense Capital Goods ex Aircraft, the pure cap ex component, rose 1.5% and is up for a 2nd straight month but after sharp drops in Dec and Jan. Shipments, which gets directly plugged into GDP, fell 1.7% and is now down 6 months in a row. We thus need to see if the orders over the past two months turn themselves into shipments as opposed to getting canceled. The inventory to shipments ratio continued higher, rising to 1.90 from 1.88 and is at the highest level since 1992. The early hopes of economic stability have been focused on inventory replenishment and today’s data point should be included in that analysis with the outcome still very unclear.

Over the past few years, I have frequently referred to US housing as over priced and over valued by traditional metrics. These include:

• Median Income vs Median Home Price (mentioned yesterday)
• Ownership Costs vs Renting Costs
• Market Value of Housing as a percentage of GDP
• Housing Inventory Supply vs Sales Rates

During the Housing boom and credit bubble, prices moved several standard deviations away from the norm to extremely over bought, over valued levels. As prices have come down, these metrics are getting closer to typical levels. They remain elevated, but no longer outrageously so, as they revert back to historic means.

Those who are now calling a housing bottom (despite having done so for years) are finding comfort in this mean reversion. They shouldn’t — and for three reasons. The first is that asset classes which become wildly over-priced do not merely revert to the mean — they tend to carom straight through the mean, eventually becoming significantly under-valued. You see, if you only spend time above the mean trend line, and never below it, well then, that cannot possibly be the “mean” — the line down the middle.

Second, we know the recession plus a glut of foreclosed homes creates a “self-reinforcing cycle.” Job losses and income decreases lead to more distressed sales, with prices especially pressured. Falling prices make put mortgage holders underwater — holding homes worth less than the mortgage. This leads to walkaways, jingle mail, and even more foreclosures. All of this adds up to an even greater excess supply of homes for sale. More supply equals lower prices. The entire vicious cycle continues.

But the third issue is the biggest one of all. Its something we touched upon previously in NAR Housing Affordability Index is Worthless. None of the factors outside of price and interest rates are constructive to home sales. Outside of the $8,000 buyers tax credit, all of the rest of the factors impacting sales are deeply in the red:

1) Employment:  Job losses and unemployment data remain at deep recession levels;

2) Down Payments: Surprisingly few buyers have a cash down payment of 20%. Some banks are now asking for down payments of 30%. Unless we go back to LTV of 90 and 100%, that reduces the pool of qualified mortgage applicants.

3) Debt servicing: Many mortgage applicant do not qualify in terms of 25% of monthly gross income available to pay for Mortgage Principle and Interest. This is a function of the prior debt binge — credit card, HELOC and auto.

4) Credit: As the above #3 implies, lots of potential buyers damaged their FICO credit scores in the last round of leverage; Qualifying for a prime loan is problematic for these folks;

5) Non-purchase costs:  have risen dramatically. The biggest being local property taxes, and energy. The silver lining is energy prices are more reasoanble lately, and thanks tot he recession, maintenance and repair costs (especially labor) are the cheapest they have been in years.

All of these factors relate to the process of qualifying for a mortgage, and the financial wherewithal to buy a house.

The bottom line: Fair value for Housing is a concept that under normal economic circumstances is dependent upon many different factors. But during the current secular economic shift, it is even more elusive. There are an increasing number of families who might have qualified for a standard conforming mortgages in the past, but no longer can today.

And, the trend for many potential buyers is heading in the wrong direction even faster than prices are coming down. The gap between the potential home buyers and actual home buyers is not getting better, its getting worse.

We are still no way near a bottom in housing . . .

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Previously:
NAR Housing Affordability Index is Worthless (August 13th, 2008)

http://www.ritholtz.com/blog/2008/08/nar-housing-affordability-index-is-worthless/

No Housing Recovery Before Further Price Declines (February 21st, 2009)

http://www.ritholtz.com/blog/2009/02/no-housing-recovery-before-further-declines/

Homes: Still Too Pricey to Stabilize (February 18th, 2009)

http://www.ritholtz.com/blog/2009/02/homes-still-too-pricey-to-stabilize/

NAR and Housing Forecasts (June 2007)

http://bigpicture.typepad.com/comments/2007/06/nar_and_housing.html

Tracking NAR Spin (April 2008)

http://bigpicture.typepad.com/comments/2008/04/tracking-nar-sp.html

See also:
For Housing Crisis, the End Probably Isn’t Near
DAVID LEONHARDT
NYT, April 21, 2009

http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html

Let’s revisit the old linkfest days:

• U.S. Is Said to Prepare Filing for Chrysler Bankruptcy (New York Times) See also Who killed Chrysler? (Fortune)

•  Mr. Geithner Flexes Muscles: The Treasury Secretary Tells Investment Banks Government Is in Charge That was seen Tuesday in his disabusing the Street’s investment banks from the idea that they get to decide when they can pay the government back on funds received through the Troubled Asset Relief Program, or TARP. The final call on that, Mr. Geithner made it clear (Wall Street Journal)

• Fed’s Bear Losses Dominated by Commercial Real Estate (Bloomberg)   The Federal Reserve released its most detailed breakdown to date on the types of assets it accepted from Bear Stearns a year ago and the cause of losses on the portfolio. The biggest losses in the $25.7 billion portfolio of Bear Stearns assets as of the end of last year came from commercial and residential mortgages, according to a report released by the Fed in Washington today.

• U.S. mass layoffs rise to highest on record: Large-scale U.S. layoffs rose again in March, according to Labor Department data on Thursday, as the economy struggles with what many expect will be the country’s worst post-World War II recession. (Reuters)

• The Goldman Conspiracy: 10 reasons why Wall Street has absolute power over America’s democracy   (Marketwatch)

• Thievery Under TARP: We are being robbed big-time, but you can’t say we haven’t been warned. Not after the release Tuesday of a scathing report by the Treasury Department’s special inspector general, who charged that the aptly named Troubled Asset Relief Fund bailout program is rife with mismanagement and potential for fraud.  (The Nation)

•  Gold: Inflows into ETFs up by more than 300% Figures from the World Gold Council show that investors appetite for gold showed no sign of abating with record inflows in to gold exchange traded funds. (The Telegraph)

• Bloomberg Housing 3-fer:

1. -Rising Home Vacancies Give Bernanke Extra Time to Withdraw Cash
2. -Mortgage Bondholders Form Battle Lines Over Obama Housing Plan
3. -Hamptons Home Prices Plummet 23% as Summer Home Demand Cools

• What’s a Global Recession? The International Monetary Fund was slow to apply the word “recession” to the current global downturn, partly because it didn’t have a good definition (and partly because it didn’t want to spook markets and IMF members). (Real Time Economics)

• Stress Tests Flash a Lot More Red: Federal bank regulators are expected on Friday to start sharing preliminary results of stress tests with the banks that have been scrutinized since February. The findings are expected to be made public next week. (Wall Street Journal)

• Banking credit catch-22 in action? (FT Alphaville)

• 60% Say Government Has Too Much Power, Too Much Money Just nine percent (9%) say the government has too little power and money. Twenty-four percent (24%) believe the government has about the right amount of both  (Rasmussen)

• Top Ten Tech Cocktail-Party Questions: I can’t help noticing that the same questions tend to come up over and over again. Here they are, then: the Top Ten Pogue Cocktail-Party Questions (and Their Answers).  (David Pogue)

The Credit Crisis and Cycle Proof Regulation1

1 Remarks delivered by Raghuram G. Rajan, Eric Gleacher Distinguished Service Professor of Finance at the Homer Jones Lecture organized by the Federal Reserve Bank of St Louis in St Louis on April 15, 2009. I thank Luigi Zingales for very useful discussion including some of the ideas in this talk. All errors are mine.

The 2009 Homer Jones Lecture
by Raghuram Rajan
Eric J . Gleacher Distinguished Service Professor of Finance,
University of Chicago Booth School of Business

Federal Reserve Bank of St. Louis
April 15, 2009

We are currently engaged in a search for the causes of the current financial disaster. But in
pinning the disaster on specific agents, we could miss the cause that links them al. I will argue that this common cause is cyclical euphoria, and unless we recognize this, our regulatory efforts are likely to fall far short of preventing the next crisis.

But let me start at the beginning. There is some consensus that the proximate causes of the crisis are: (i) the U.S. financial sector misallocated resources to real estate, financed through the issuance of exotic new financial instruments; (ii) a significant portion of these instruments found their way, directly or indirectly, into commercial and investment bank balance sheets; (iii) these investments were largely financed with short-term debt. (iv) The mix was potent, and imploded starting in 2007. On these, there is broad agreement. But let us dig a little deeper.

This is a crisis born in some ways from previous financial crises. A wave of crises swept
through the emerging markets in the late 1990’s: East Asian economies collapsed, Russia
defaulted, and Argentina, Brazil, and Turkey faced severe stress.

In response to these problems, emerging markets became far more circumspect about borrowing from abroad to finance domestic demand. Instead, their corporations, governments, and households cut back on investment and reduced consumption.

Read the rest of this entry »

Nice cover image from the Economist on the brown shoots.

Excerpt:

“But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.”

Here’s the cover image:

Hat tip Gary

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Source:
A glimmer of hope?
The worst thing for the world economy would be to assume the worst is over
Economist, April 23rd 2009

http://www.economist.com/opinion/displayStory.cfm?story_id=13527685&

Existing-home sales fell 7.1% from March 2008; Since February 2009, they fell 3% (seasonally adjusted annual rate of 4.57 million units). Even that weak monthly number was due to a “downwardly revised level of 4.71 million in February.”

Prices rose 4.2% from February to March, but ignore that, and stay focused on the annual datapoint, as that what matters much more (see foot note below).

Once again, “distressed” properties accounted for over half of all transactions in March. The NAR said that discounts on distressed property averaged 20% or more versus traditional homes. The national median existing-home price for all housing types was $175,200, down 12.4% from March 2008.

As noted above, I found this footnote via the NAR release to be rather interesting (is this new language?):

“The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns.

Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.”

Is it possible these guys are getting religion . . .?

Oh, and here is my favorite Real Estate chart: Take the data before its seasonally adjusted (and therefore skewed by the 2003-06 period) and show each annual series separately.

Existing Home Sales, NSA

via Calculated Risk

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According to an NAR survey, first-time buyers accounted for 53 percent of transactions. I would want to see the specifics and lots of prior data before drawing any conclusions from NAR surveys given their historic lack of credibility. (In other words, I don’t trust them).

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Source:
March Existing-Home Sales Slip but First-Time Buyers Rise
NAR, April 23, 2009

http://www.realtor.org/press_room/news_releases/2009/04/march_ehs

Elizabeth Warren Part I

Elizabeth Warren Part II

Recorded April 15, 2009