SPF CEO: No housing rebound in '07
Submitted by
CalculatedRisk on Sat, 02/03/2007 - 8:43pm (29 comments)
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First!
So the voice of reason squeaks up in the din of "the worst is behind us" and other "aspirational" utterances. [A lonely voice or the first of a chorus?]
So not exactly the infamous 'dead cat bounce', but how long before it now sinks in that this cat will never bounce...atleast not like it did in the latter part of this decade.
Will the Government follow the UK's path and institute some infrastructure programs or is it going to just plow the military into the Middle East?
I so think we may see unit sales improve in 2007, as some buyers step back in to pick up perceived bargains.
Dollar volume and median price may not improve much, however ... considering builder concessions, seller carries, etc.
I think inventory and days on market are the real drivers to watch, in deciding how the "landing" is performing.
from the good folks at the Big Picture.
That highly graphic graphic comes to us from the excellent Stephanie Pomboy and her irreverent and invariably informative (block those alliterations!) MacroMavens commentary. As she observes, "For all the bragging about the $6 trillion in cash households have sitting on their balance sheets, relative to household debt, this cash cushion is at a record low!"
More disturbing still, Stephanie goes on, is that the households with the cash (and assets) "are not the ones with the debt." Rather, alas, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt.
The Big Picture
New favorite quote :"THE PARADOX OF A LIQUIDITY-FUELED STOCK MARKET in a land rife with illiquid inhabitants"
The blatant and unrelenting fraud that is being played out in the various medias to shift public sentiment and distort the true economic picture is reprehensible.
The public is being told almost daily how strong the economy/consumer is and how better off they are today. That, inflation is a paramount concern of the FOMC. That institutional investors, pension funds, and individuals should continue to expose themselves to additional risk. That the Dow continues to put in record highs (Who owns the Dow?). The S&P still roughly 5-6% off of its high and the Nasdaq greater than 50% off of its high, but, this story is not told. Nor, do they inflation adjust the numbers to reflect the true picture, but, choose to distort the truth.
The public is continually told that housing is at a bottom, that equities are cheap, and that risk is at a minimum reflected by the distortions of near-term standard deviations.
Forward earnings estimates in a slowing economy and a weak consumer are clearly not connected to the reality of the situation, but, the lies are painting a different picture in order to sway opinion to support the speculative, leveraged greed of most participants. The same participants who, with the use of leverage and speculation, created the current inflation scare to mask a severely stretched consumer and deflation which is evident in many sectors. Housing in particular, but, the problem is that we cannot get clean numbers to show the true extent of the deflationary pressures that have taken hold, yet, the media and investment community choose to concentrate on numbers which are clearly fraudulent. The autos which are stuggling by any strech of the imagination to survive, this will become far more evident with the release of the Ks and Qs in coming months with the adoption of the new FASB rules. Junk spreads have also assisted in masking the true health of these domestics. Most importantly, evidence now clearly exists in regard to retail and the severe discounting that was required to boost yoy spending.
Strong economy, I think not. The consumer makes up roughly 70% of the US economy, the consumer IS the economy and the facade within the media is to mask what is fact.
This chart depicts the credit cycles over the past 25 years;
http://www.allianzinvestors.com/documentLibrary/mutualFunds/supportingLiterature/investorEducation/a_positive_climate_for_bonds_ac661.pdf
(No, this is not a bond ad)
When one takes the time to carefully consider the big picture and implications of the chart, it is quite clear what is/has actually taken place over the last two decades in regard to the consumer/economy. The chart clearly is in direct contrast to the media painted lies in regard to the economy and the overall strength of the consumer. We now have 21 consecutive months of negative savings, the American public continues to finance their spending with home equity debt, credit card debt, and withdrawals from taxable & tax-deferred savi
taxable & tax-deferred savings plans to maintain lifestyles which are clearly unsustainable. The debt service has increased exponentially over the last 25 years, creating the current stress in the system as evidenced by the current foreclosures & defaults. Loose credit has created the most massive debt bubble in modern history which will end in far grander fashion due to the same leveraged, speculative excess that created the many bubbles that exist today. Private equity, hedge funds, and institutions have one thing in common, more often than not, they chase the same trade and move in the same direction, the quest for alpha has driven the greedy bastards to take on more risk in the desire to produce better than average returns, they led it on the way up and they will literally devestate on the way down.
As evidenced by the accompanied chart, past cycles show the clear pattern of where and by how much the FOMC was able to raise rates before cracks began to develop. The goal to curb inflation and slow growth while avoiding recession. What is quite clear, is that the cycles have peaked at much higher rates in the past due to a consumer/economy who was far stronger than what exists today, evidenced by the need to stop at the current 5.25%. The alarming fact is that as you move forward on the chart the FOMC peak rate cylce was almost always lower than the previous cycle, ask yourself why? Due to the consumers continued appetite for debt and the increasing need to service that debt, the FOMC saw the cracks and halted the tightening campaign due to the consumers inability to absorb further rate increases. The consumers weakness today is beginning to draw comparisons to the great depression, today, there is very little room for error, this is indicative of individual foreclosures and defaults. This alone should be sending out the warning flags to the investment community and corporate America, if the consumer rollsover, which this chart and the current underlying trends are currently telling us, than the junk-rated players will defaults in grand proportion. We have also begun to see spillover into auto loans and revolving credit defaults, non-performing loans in commercial real estate as well. The stress is wide-spread and clearly shows a consumer teetering on the brink.
Credit conditions are clearly tightening, underwriting standards are changing rapidly and the end game is near, the debt service for individuals as well as corporations will lead to a much greater rate of default and alarm within the marketplace regardless of the fraudulent commentary from the media. The default rate on cororate debt last year was .8%, there is only one way for this figure to move and it aint down. The spreads are clearly abnormal and have been for some time, the catlayst to blow out the spreads may indeed be the month of Feb and the auto suppliers, time will tell.
That said, the next time you listen to some talking head in the media, spinning blatant lies t
That said, the next time you listen to some talking head in the media, spinning blatant lies to benefit his/her own position, take a step back and think of the reality concerning the consumer today, one with less disposable income, increasing debt service, and one that has lost the access to loose money and turn off the talking head feeding you the incessant garbage concerning the new paradigm of risk-less markets.
This brings up my favorite if not very short favorite quote from Big Picture:
Like all unsustainable things, they will continue until they no longer can.
My goodness realist, what an energetic rant...kudos to you for thinking you can adjust this "reprehensible" picture that the economy is growing fine and dandy. Obviously, you are not incapacitated by this: "The blatant and unrelenting fraud", but I wonder if you might be slightly misdirected by assuming the (unrelenting) soap-box posture in the (valiant of course) hope of negating those countless sponsored/networked/leveraged (but fraudulent of course) messages.
What of this other direction of making specific criticisms or siting specific dangers that lie ahead and suggestions for coping with these hazards?
A capable mind such as yours should not confuse the leadership role with the glory of hearing the sonorous tones of one's rhetoric.
The autos which are struggling by any stretch of the imagination to survive, this will become far more evident with the release of the Ks and Qs in coming months with the adoption of the new FASB rules
The writing on the wall for Detroit has been there for over twenty years. The big three chose to ignore it. (Quality) Yet Toyota and Honda have built factories in this country while continuing to adhere to their high standard of QC.
Detroit used to say it couldnt make money building smaller cars. Japan, Inc has made it into a science. Although now Japan, Inc will need to compete with China and Korea. Lets see how they fare.
And that dalliance in the 90s into SUVs. Sure it was good for the bottom line, but didnt help with their core business. (It helps when oil is selling for $30 per barrel)
As for FASB:
FAS 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans
For an employer with publicly traded equity securities, the requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006.
All those unfunded liabilities for current and future retirees who manufacture products for people who arent as eager to purchase them as they used to be. Mmm. Maybe they should switch to the 401k like the rest of America.
Contrary investor is a good read this month.
Market Observations
EZ,
What I've found in recent years is employers running from Defined Benefit plans like scalded cats. Usually there's money to be made for me in every new FASB. Not there.
CNBC did a piece a year or so ago about China's entry into auto manufacturing. They interviewed a top exec from GM who was guffawing about the whole idea of Chinese cars. His first or second comment was "The American consumer has a standard of quality that the Chinese are not going to fulfill...blah, blah." Immediately after, they interviewed an analyst who said (to paraphrase) that the management of US auto makers live their entire lives in areas where nearly everyone drives an American car. They are emured from the reality of the marketplace. They can never believe things are as bad as they are, no matter how poor the financial results. The analyst thought the situation with US auto makers was quite hopeless for the forseable future....and he didn't even address the pensions and health benefits issues.
Anecdotal, but:
there are no for sale signs ANYWHERE in my city which is a suburb of San Diego. There are no for rent signs. There ARE hand-written paper signs: "pre-foreclosure! MUST SEE NOW! 3 bedroom, 2 bath....
As for the boomers living off of their retirement.
Retirement wealth leaves many holes. According to a study by the Congressional Budget Office, among those approaching retirement age in 2004, roughly one quarter were unprepared for retirement and another quarter were somewhat unprepared.
vader:that is 50% in trouble
Underlying this inadequacy is a large share of families with no retirement savings. The share of households with any savings in tax-deferred retirement plans was just 49.7 percent as of 2004, the last year for which there was data, and the median balance for such households was a mere $35,200. Retirement wealth is also highly unequal. Only 10.1 percent of families in the bottom fifth of income earners owned tax-deferred retirement accounts as of 2004, compared to 88.5 percent of those in the top tenth of income earners. The median balance for the bottom fifth was $5,000 compared to a balance of $182,700 for those in the top tenth bracket.
vader: Now note that the top savers only have $182,700 in retirement savings!
The lack of adequate retirement savings has been a persistent problem that may have gotten worse due to declining pension coverage. In 2000, 50.3 percent of all private sector workers were covered by an employer sponsored retirement plana traditionally defined benefit pension or a 401(k) style defined contribution saving plan. By 2005, this share had dropped to 45 percent.
Add to this that the public sector retirement and the existing private retirement plans are underfunded and likely to fail in some measure. Now you have a situation where any assumed savings does not exist.
quotes from Center for American Progress
Vader,
If I were to try to calculate Reserves for various mortgages; the hard part would be to assess when and how much are the reset dollar amounts for each mortgage, including blended HELOC and second mortgages. The easy part would be to divide that variance into the 3 months' pay that most Americans have in savings to arrive at the month where the payments can no longer be made.
The entire equation is strictly one of individual cash flows. How to accumulate data on an individual basis is the tricky part.
Dow Transports Confirm the Bull Market
One reason why this bull market isn't likely to end anytime in the immediate future is because of the clear lack of public participation, or of anything approaching euphoria. Major bull markets always end with a final flourish where the public is heavily invested (usually leveraged to the hilt) and everyone and their hair stylist is excited about the "inevitability" of higher prices to come.
Safe Haven | Dow Transports Confirm the Bull Market
Now step up to the plate, the market needs some greater fools.
Thanks for the Contrary Investor reference, Ron, and to all for the thoughtful comments...
Going through the charts at Contrary Investor made me think that US households are in trouble to an extent never seen before. (On the previous thread, Zephyr countered that in fact households have suffered even worse stress.) However, I just don't see it. By a whole series of measures (like household debt service ratio), the US household is in worse shape than in decades. None of these charts seem to leveling off. What I'm asking is where is the data showing that that US households are actually healthy financially? What data is missing from the Contrary Investor website that shows that somehow these C.I. measures of economic well-being no longer matter. Is it household wealth measured by net equity?
I would like to think we have a rosy future - it's sure hard to get that feeling after running through the CI charts. But, maybe I'm only seeing half the picture...
See: Market Observations
The problems for the bears to a great extent is that the evidence shows something bad a-coming. However, since it has not gotten here yet, the thoughtful bears wonder if there is some evidence that has been missed.
Generally the missing evidence seems to be the 'excessive' liquidity chasing returns that are less than the risk seems to indicate. This is somewhat illogical behavior that should not happen in rational markets.
So is this a new paradigm or just an irrational and temporary situation.
The bulls pull for a new paradigm or at least the bull know looking at all the evidence. The bears pull for the irrational and temporary. At some point, possibly this year, one side or the other will be proven correct. If this year there is considerable interest rise to account for rising or unanticipated risk, the bears will win. If capitalism has entered a new era or new stats showing hidden wealth show up, bull will have bragging rights.
Bragging rights are a hollow victory. Making money from being right is the real victory.
FredW:
I don't think Contrary Investor considers itself a gloom or bear site in particuliar. It simply presents information that may be useful to someone making investment decisions.
Making money and more importantly keeping it, is the victory.
Bragging rights are a hollow victory. Making money from being right is the real victory.
Amen.
Or if you are working class - not losing your ass. Sometimes that is a major victory too.
It is hard for people with a lot of money to think like working class but when guessing wrong means ending up on the street the price of losing is a lot more severe than if losing means just having to sell one of the vacation homes.
That is why risk reward calculations are more than a simple scalar... it is a very complex calculus with different inputs & results for about everyone.
I believe that is why so many here talk past each other - they have no idea how the others live. What drives them.
But talking past is still better than anonymous silence - some of the talk sticks.
Shanghai Copper Falls to 10-Month Low After Report of Fund Loss
The $1 billion hedge fund of Red Kite Management Ltd. lost 20 percent in the year to Jan. 24
Shanghai Copper Falls to 10-Month Low After Report of Fund Loss - Bloomberg.com
Ouch
Remember the first rule of investing is not to lose the dang capital in the first place.
Or more complexly, opportunity loss is not as bad as a real loss.
"In a mania, knowledge of history and value are judged to be an impediment to success, and the advantage falls to the utterly unknowledgeable novice." "
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'nother interesting quote to lift the spirit of my fellow bears.
dryfly has it right at least for my perspective. My Grandparents lived thru the great depression, you would have thought it was still going on when they died. Rubbed off on me. That's why I have chuckle when the bulls chime to mock us.
I'm sure most of us here are in pretty good shape and will remain that way regardless of what housing and the markets do.
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