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Hello
I want to continue in my assigned role as duty curmudgeon, by presenting some recent housing data, most of which I've posted in bits on the blog. But first, some good news:
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The main reasons housing is hurting include
- Financing. Over 90 percent of recent loan originations have been sold to the GSEs [Government Sponsored Entities: Fannie Mae/Freddie Mac] or securitized with a Ginnie Mae guarantee. There is, practically speaking, no private mortgage lending happening at this time. Banks, big and small, are basically mortgage brokers: They originate and sell. This has been going on, to a greater or lesser extent, for 20 years and more. Here are some discussions about what to do about the mortgage market and the GSE's. If the US can't establish and maintain a private mortgage market, housing as we know it is "inoperative". In any case, any course of action described in the previous link will impact housing prices negatively. For example, one idea is to do away with 30 year loans, and be more like Canada, with 10 year loans. What would that do to housing prices? Exercise left for the reader.
- There is a huge inventory of housing. Six or seven years.
- We have not reached the bottom in house prices. See previous link. Actually, see all these bullett points...
- Also there's forclosuregate
- Appraisals are harder to obtain at asking prices.
- Lenders require Higher down payments and are imposing tighter lending standards
- Unemployment: Long-term and becoming structural. The chart above shows the change in U2: The BLS figure for as-reported unemployment. IMO real unemployment is better shown by U6, which is U2, plus those who are looking for work, those who are working part-time, or those who are temporarily discouraged. U6 is officially at 15.9% as of a week ago. Beyond U6. there are also a lot of permanently discouraged workers - who would work if things obviously improved "enough". These people do not exist officially - they are not counted by the BLS. Many of them are "structurally" unemployed - their skills do not fit into the current workplace. John Williams estimates that this group comprises about 7% of the total potential workforce.
Note of course that economics-wise, housing and employment are analogs, ie, two sides of the same coin. The easy fix to housing is more and better employment, disregarding the hand-wringing above about mortgage finance.
However it's hard to talk about employment without getting into politics. I really don't want to do that here. However, I'll reference a post* I did a while ago to the effect that destroying the middle class is not a winning strategy for leaders, current or aspiring. For some reason, I've received no calls from the White House to further discuss my insights.
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Market-wise, wow, it's a very confusing time. Basically the market is in wait-mode until June, to see if there will be any more QE's coming from the Fed; the current batch runs out then. A lot of the down-sliding of late in the DOW and S&P is directly attributable to the fact that people are starting to bet that not much more QE will be forthcoming. If you don't see more QE, you can fuggedaboud 40% of the 100% rise in the averages since March of '09. Ie, an S&P of about 1050 is quite possible by year-end.
Gold so far is still doing well. If we do get some kind of new QE in June, Gold is toast for six months+. IMO of course...
Here's David Rosenberg's answer to the investment quandary [ref]:
Start looking for the trend towards consensus growth upgrades we saw take hold last fall to reverse course and along with that a broad investment thrust towards capital preservation strategies, and here are strategies that we like:
- Relative value strategies (true long-short & true hedge funds)
- High quality stocks over low quality stocks
- Dividend yield and growth, including Canadian banks
- Defensive growth over non-resource cyclicals
- Oil and gas equities
- Large cap stocks over small caps stocks
- Low P/E stocks over high P/E stocks
- Corporate bonds
- Precious metals — accumulate on dips
- Ongoing overweight to Canada and the Canadian dollar
- Hybrid funds that carry a yield better than one can get in the government bond market and with low beta to the overall stock market.
Comments: The following are not recommendations; they are examples.
- For many of us, true long-short investment through hedge funds is not an option so much. However there are a lot of mutual funds and even etf's which do this. SWHEX. CSM.
- High quality means long-term profitability and dividend paying, good financials, and industry prominence. Examples are KO, PG, MCD, WMT, and even MSFT.
- The dividend and low P/E themes overlap High Quality. There are a lot of dividend ETF's such as DTN, SDY, DVY, and VIG to name a few.
- Oil and gas: COP, XON, OIH, XES
- Precious metals: PHYS, SGOL
- Canada: EWA. Whoops. EWC. EWA ain't bad...
- Hybrid funds: PTTDX
I could type more ticker symbols.
Rosie has been consistently positive on treasuries and muni bonds, although he's been burned on that recently so I think the bond theme is embedded in the hybrid theme he mentions. But he did mention muni's as late as today. Most of punditland swears up and down that treasuries and munis are toast. I'm with Dave - the equity boom will un-boom, but not if the Fed announces or hints at more Quantitative Easing.
I hope the above is interesting, or useful, or at least amusing.
Bill
* Beware of this link: Material inconsistant with "conservative" views.
Update
Rosenberg today says: There is a great debate both in the markets and among Fed officials about whether QE3 will be necessary. Atlanta’s Lockhart was the latest to voice his view that such will be unwarranted, and he seems to find support from the likes of Richard Fisher from Dallas and Charles Plosser from Philadelphia. But there are others like Janet Yellen and Bill Dudley who appear to desire even more doses of stimulus. Bernanke is keeping his cards close to his vest. All we can say is that by the time the decision will be made, the headline U.S. inflation rate is very likely going to be at or above 3%, so the Fed is going to have a real job on its hands to convince everyone that “core” is the measure to watch (though even here we can expect to see fuel kick into airlines and cotton seep into apparel).
Not only that, but with European Central Bank’s (ECB) Trichet saying that a euroland rate hike is “possible” next month to combat rising inflation and mentioning those two sabre-rattling words “strong vigilance” after last week’s policy meeting, it would seem that if the Fed were to ease monetary policy at a time when the ECB is snugging liquidity would seem to be a prescription for a disastrous result for the U.S. dollar.
Bill: So - this wrinkle says: If Fed and ECB diverge, gold UP, not down. sigh.
Update
Rosenberg today says: There is a great debate both in the markets and among Fed officials about whether QE3 will be necessary. Atlanta’s Lockhart was the latest to voice his view that such will be unwarranted, and he seems to find support from the likes of Richard Fisher from Dallas and Charles Plosser from Philadelphia. But there are others like Janet Yellen and Bill Dudley who appear to desire even more doses of stimulus. Bernanke is keeping his cards close to his vest. All we can say is that by the time the decision will be made, the headline U.S. inflation rate is very likely going to be at or above 3%, so the Fed is going to have a real job on its hands to convince everyone that “core” is the measure to watch (though even here we can expect to see fuel kick into airlines and cotton seep into apparel).
Not only that, but with European Central Bank’s (ECB) Trichet saying that a euroland rate hike is “possible” next month to combat rising inflation and mentioning those two sabre-rattling words “strong vigilance” after last week’s policy meeting, it would seem that if the Fed were to ease monetary policy at a time when the ECB is snugging liquidity would seem to be a prescription for a disastrous result for the U.S. dollar.
Bill: So - this wrinkle says: If Fed and ECB diverge, gold UP, not down. sigh.
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