Wednesday, December 26, 2007

If Everything is so Wonderful, Why are You Sweating?

Welcome back! I trust everyone had a great holiday. Just a few days to go until 2008 is started. Does anyone else have the problem of writing checks with the incorrect year besides me? It takes me into mid February until I finally get the new year thing set into my head. Maybe I am just strange.

Disappointing Christmas Gift
I had asked for, and received the book "The Great Crash" by John Kenneth Galbraith for Christmas. I read half of it yesterday, and the other half today. I constantly see this book recommended as a commentary on the 1929 stock market crash and ensuing Great Depression. The book was written in 1954, and the new copy I have has a new foreword written in 1997. I was very disappointed by the book. First off it was boring. Now most financial books tend to be boring by nature, but I mean this thing was a sleeper. You would think the most amazing market crash ever would be exciting stuff, but not in this book.
Second, the analysis was very simplistic. Perhaps it was as easy as "Speculation was to high and when it stopped things went bad" which was the basic take home point of the book. There was some market psychology analysis, but not much. Lastly, the book offers no real information about the great depression save that the author seems to think there was no major reason for it. Again, a disappointment. I do not recommend the book to anyone.

If Everything is so Wonderful, Why are You Sweating?
When I have days off my guilty pleasure is watching CNBC on TV. As we have discussed, the problem with all things financial is the glacial pace at which things occur. It is fun to watch CNBC and see the analysts and commentators try and make every little piece of news into a market moving event. I do not really blame them, they need to earn their paycheck by providing content, so it is not anything sinister.

The talk today was mostly about the Case-Shiller home price index, which was ugly, and the meaning of it all. For those that may have missed the index news, here is a recap via Yahoo Finance:
October Home Prices Post Record Decline
Wednesday December 26, 2:59 pm ET
By Stephen Bernard, AP Business Writer
S&P: US Home Prices Fall by a Record in October for 23rd Straight Month of Deceleration
NEW YORK (AP) -- U.S. home prices fell in October for the 10th consecutive month, posting their largest drop since early 1991, according to a key index released Wednesday.
The record 6.7 percent slide in the Standard & Poor's/Case-Shiller home price index also marked the 23rd consecutive month that prices either fell or grew more slowly than the month prior.

No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert Shiller, who helped create the index, in a statement.
The previous record decline was 6.3 percent, recorded in April 1991. The index tracks prices of existing single-family homes in 10 metropolitan areas.
It is considered a strong measure of home prices because it examines price changes of the same property over time, instead of calculating a median price of homes sold during the month.
Home prices could fall another 10 percent over the next 12 to 18 months before bottoming out, said Patrick Newport, an economist with financial consultancy Global Insight, in an interview.
Newport said four of the largest groups currently trying to sell homes -- banks holding foreclosed properties, homebuilders, speculators and unemployed consumers -- are typically flexible about lowering house prices because they need to get rid of the property.
Sales of homes will likely start to rebound late in 2008, with price appreciation to follow, Newport said.

So there you have it. Record price drops. A couple of things stand out to me from this article. First, the piece highlights a real problem that has been glossed over and that fact is that there indeed was a prior real estate boom and bust. The late 80's to early 90's bust was huge. While the parrots at the NAR like to say "real estate never goes down" you don't even have to go that far back to see a time when it did. The market mania that was home buying has always blown my mind because not only was there a very big bust in REAL ESTATE not that long ago, we were coming off a immense STOCK MARKET collapse in 2000-2001 as well. Speculation was clearly a loser in 2001, and yet home speculation took off on the dust of the Nasdaq collapse. You can lead a horse to water and all that.

Second the article quotes Mr. Patrick Newport (from Global Insight). The guy is all over the place. First he says prices could fall 10% over the next year to year and a half before the always watched for bottom occurs. Then he says sales will pick up, get this, in late 2008 and price appreciation will follow. On what basis does he make such a call? What factors is he considering that warrant that kind of prediction? We don't know. What we do know is that any real estate advice sold by Global Insight should be taken very lightly!

Which brings me to tonight's main point. Everyone and their brother is out running around screaming that things are wonderful and this is all overblown. Take a look at the list below which is just a small sampling of things seen and heard on mainstream media today. Note the beginning of the statement and compare with the end:
  • FED "Auctions" of capital now will run as long as needed. This is strong news because it means plenty of money available to banks that desperately need capital.
  • Foreign cash infusions are a great move by the banks because this way the banks can set terms that they can live with.
  • Home prices falling around 10% is no big deal after several years of double digit growth, unless you are a recent buyer.
  • Retail sales are down, but they are higher than the most bleak projections made.

You get the idea. When all news is bullish and strong, you are closer to a market top than a bottom. If things are so good and the mortgage mess is so contained, and the consumer is still pumped on steroids, and so on then why is everyone sweating?

The debt based US economy needs one thing and one thing only to keep chugging along. That one thing is positive psychology. There is no amount of debt that will stop a consumer from spending if they can play the monthly payment game. As long as sentiment is positive, hanging on will be done. The actions of the FED and the general language of "remain calm" by the business sector clearly shows that the worry is about perception. Any fundamental look at income versus spending, or debt load versus repayment shows clearly that the US consumer is tapped out. Every trick known, as well as some new tricks, will be tried in an effort to keep public perception positive. Will it work? I am not sure, but my answer to that question will be covered in the "2008 Predictions" post later in the week.

Financial Sector Stocks - Strong Buy?

I try to stay away from stock specific commentary here, but I kept hearing ALL DAY LONG that the financials are a screaming buy at current levels. Are they? The truth is I don't know. There is still no transparency in regards to what kinds of crap paper most banks hold. Writedowns have been huge, but are they done yet? Again, no idea. I have two major questions, and the answers to them really make my mind up about banking shares:

  • If home prices continue to fall and foreclosures continue to accelerate, is a big bank a good place to be?
  • If commercial real estate, which has begun to show some strain, adds to the problems for the banks are they really a good buy here?

My answers are both NO. The real pain in housing is just starting and the commercial lending problems have not even entered into the discussion as of yet. Let foreign countries buy all the shares they want. Let the FED take as much phantom capital as collateral as they want. Until the true exposure of the banks is known with some kind of certainty, they are all strong sells in my book.

On another stock note, both GG and PAAS broke out today. KGC as well. Gold and silver seems to have turned a corner here. We will have to wait for a real trading week's action to be sure, but I am optimistic about miners near term.

Have a good night.


getyourselfconnected said...

Adendum to tonight's missive, Itulip has a perfect story on what the capital infusions really represent, I recommend the post:

brokenotbroken said...

I just finished "Only Yesterday" by Frederick Allen. While not an investment book, it does paint a nice picture of life just prior to the depression. Overall, worth a look if available in the local library. I especially liked the part where he talks about real estate in Florida. I also thought that "Hard Times" by Studs Terkel was interesting. Again, not an investment book, but interesting commentary on the depression none the less. So, if the big D is coming what to do--I look forward to Mish's thoughts on this.

Anonymous said...

"It takes me into mid February until I finally get the new year thing set into my head. Maybe I am just strange."

I'm the same way so maybe we are both a little strange are it may be almost universal as humans are creatures of habit and don't particularly care for change.


watchtower said...

I like change...when it changes back to the way I like it:)