It's just not a good day for the "respectable" media, is it?
I very nearly fell off my chair when I read the first sentence of this article, which CR did not see fit to post:
Tucked away in the briefcase of Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., is a chart so scary she's hesitant to show it to investors.
I want a gig writing stuff like that for actual money.
I see blogger wcw has the same slightly more panoramic look at that correlation.
The news spreads fast and I shouldn't care about the direction as long as it spreads. Compliments to you both.
Give a blogger or reporter an excel spreadsheet and a graphic artist and they all think they're PHDs. Doesn't anybody have to pass a basic stats class anymore?
AOL/CNN/Business 2.0 all the same - Real Estate news now sells better than sex (according to Business 2.0 ed).
Of course builder confidence is down, especially if you know you won't get a bonus this year. But I bet the publics write down enough losses and land values in 2006 to make 2007 a bonus year. Follow the money.
Yes, but you can't deny that there are temporary correlations that occur and can continue to occur.
In the end, though, I think everything really comes down to what the chinese will do with their reserve and trade surplus. That is the elephant in the room.
CR -- I agree with your conclusion because i think the stock market is irrational and driven by psychology as much as funamentals. However, I'm sure you would agree that there is a long run correlation between housing and the economy. If the stock market is any sort of indicator of how the economy is doing there should be some correlation between the stock market and housing -- well maybe not the NAHB but housing in general. But again -- since the stock market is kind of nuts there really might be no correlation. The recent stock market rally is a case in point - NAHB down and stocks way up.
CR: Your graph makes it perfectly clear that the original graph was misleading (as stocks DO increase with a log curve over the long term--sentiment just bounces up and down), but my eyeball analysis of the YOY graph suggests a pretty significant correlation.
The YOY figure might be interpreted as "sector psychology" for NAHB vs. "broad economic psychology" for the S&P 500. It's very clear that NAHB figures fluctuate much more than the S&P, which makes sense as the S&P addresses the entire economy rather than just one sector. This is akin to a stock market sector bet--what about correlating the value of builder/finance stocks with NAHB sentiment over the same period?
The pattern from '98 to present IS strongly correlated in both figures, but it's not clear what, if anything, that means. It may suggest that housing sentiment was being driven by stock and easy money sentiment rather than the other way around--a 1 year lag is for all pratical purposes the same point in time. Furthermore, the correlation grows strongest when the dotcom bubble had been underway for a couple years ('98), at which point it had set a whole range of bubbles in motion (i.e. gold, oil, collector cars, real estate).
I think there's a 50% chance of a stock correction in '07, but mostly because the bull market is now pretty old. US stocks have been fairly flat for some time, which does not suggest a radical decline is in the offing. Furthermore, there's a real chance that already pricey emerging market stocks will turn into a flat out bubble around '08 (China Olympics, jobs outsourcing hits mass consciousness as housing becomes old news and people seek an explanation for flat wages).
NAHB index is already a 'derivative' index. Reading of 50 means neutral sentiment. Above 50 is positive and below 50 negative. You should subtract 50 from the NAHB index and compare to S&P change year to year. There is some long-term correlation if you look at these two indicators in this way.
poszi reminds me that everything is related (esp long term, people) much to the dismay of people (ok, only some people) who don't know they are related, --some long-term related, to this other human being, w.
You can deny it if if you like, but he is one of ours nonetheless --not some alien from outer space as some Dems are thinking...
Just sayin...for any of you still needing a push to get out and vote.
This chart is very old. I saw it in mid-summer already.
About coincidense. I think the 96-00 boom was 100% dot-com and technology driven, so I see no correlation with NAHB whatsoever.
The chart must be inflation-adjusted to show things better. You clearly see no drop in S&P on this chart in early 90's, but it was a violent recession.
The inflation-adjusted chart will be fair, as S&P will not grow constantly, but it will swing up and down in the same range.
What correlation? Here are the lagged correlations for monthly YoY% changes of HMI vs SPX "returns" (scare quotes for the idea of calling diffusion-index changes "returns") from 1985-2006, going out to a maximum eighteen-month lag:
lag\tcorrel
6\t0.12
7\t0.11
8\t0.10
9\t0.10
10\t0.08
11\t0.05
12\t0.06
13\t0.08
14\t0.11
15\t0.15
16\t0.15
17\t0.12
18\t0.10
If you subtract 50 from the HMI, it does not help -- it hurts.
lag\tcorrel
6\t0.01
7\t0.00
8\t0.01
9\t0.03
10\t0.05
11\t0.04
12\t-0.03
13\t-0.04
14\t-0.05
15\t-0.01
16\t-0.04
17\t-0.04
18\t-0.01
Adjusting for inflation does not markedly change these numbers.
You know it's very possible there are periods where there is strong correlation and other periods where there isn't. That doesn't mean the factors are never causal nor does it mean the factors are always causal. And it also doesn't mean that the exact same factors that had an effect before 1998 were in play after 1998 or for that matter now. Things change.
This is often the case with complex multi-factor relationships where weighting per factor increases & decreases with conditions & events. A factor that has a huge effect for a while might ebb and another might increase.
The thing that is interesting are the switch points in the data record... where it looks like something changed - either because of causation or coincidence.
All I would infer from that chart is that in 1998 something interesting changed in sentiment or fundamentals to either allow or cause the two to converge (coincidence or causation factors unknown)... and that now that process (or a different process) has allowed for the two to diverge... again either by cause or coincidence.
I used to look at charts like that real time as a chemical engineer at my 'China Syndrome' control station... believe me, when I saw something like that spill out from a tape recorder or across a screen, I might not know if it was due to a cause or coincidence... But I sure got up and went out into the plant to look. A change in process is sometimes just a change, sometimes it's a disaster.
John, come on now, it's impossible for non-existant future stock returns to influence past builder sentiment.
That wasn't the argument, obviously, rather the S&P is the wrong predictive index. Consider the tech sector as the driving influence and having spillover effects on assets prior to its effect showing up in the S&P.
Pretty high brow there. I can't even remember what a good correlation number is, but I would expect the things that affect it would change over time...ie change in mix of consumer vs institutional control of S&P investment?
But for us slower types, ice cream sales and crime rise and fall together with very high correlation; but there is no cause and effect.
Hey. you can correlate anything. Like the number of chickens hatched in a day to the number killed crossing the road. Assuming, a 6 week lag of course. A good number for correlation is .9 or better. This means that the correlation explains the 90 %of the variability in the data. If you come up with a function that correlates the market that well then you will win the nobel prize in economics. I am aslo a chemical engineer and very seldom do we find correlations that close in process data in which we have a fundamental scientific basis for the function and are running at steady state where the input variables are closley controlled. Too many other uncontrollable factors come into play when measuring real time data. Fear and greed are the major market movers,and which cause momentum in either direction.
Having said that, I am of the opinion that the economy is in serious trouble now that China is divesting US treasuries in favor of gold and euros.
It is possible that the most dynamic driving force of the market between 1998 and 2006 was the housing market. Because of the shift of financial attention to the bubble, the correlation may be valid in terms of the psychological hype investors and traders and prone to. Idiots with no skill were making $8k per loan sale, and the bosses couldn't argue with all the easy money they were getting. Given the virtually uncontrolled nature of American capitalism, the financial attention was given to where the easy money came from. However, in 2006, the market really started to eat it. I'd say that the trend has a better chance of being legit if described in terms of the time period and the influence the overall housing market had on the S&P 500. To predict a crash, produce an inference relating where the money came from- investment banks and hedge funds- to the influence investment banks and hedge funds have on stock markets.
Now it's October 2007. Are the bulls still as bullish? Not until the frogs boil I guess...You need to use critical thinking. It's good to be optimistic, but don't think your attitude can change the world. It is what it is, and it ain't good. Get ready for a rough ride. In the end, it's only money if you don't screw up.
It's just not a good day for the "respectable" media, is it?
I very nearly fell off my chair when I read the first sentence of this article, which CR did not see fit to post:
Tucked away in the briefcase of Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., is a chart so scary she's hesitant to show it to investors.
I want a gig writing stuff like that for actual money.
I see blogger wcw has the same slightly more panoramic look at that correlation.
The news spreads fast and I shouldn't care about the direction as long as it spreads. Compliments to you both.
Thank you.
Give a blogger or reporter an excel spreadsheet and a graphic artist and they all think they're PHDs. Doesn't anybody have to pass a basic stats class anymore?
AOL/CNN/Business 2.0 all the same - Real Estate news now sells better than sex (according to Business 2.0 ed).
Of course builder confidence is down, especially if you know you won't get a bonus this year. But I bet the publics write down enough losses and land values in 2006 to make 2007 a bonus year. Follow the money.
The real question is, how the heck did Liz Ann Sonders rise to Chief Investment Strategist of Charles Schwab?
Yes, but you can't deny that there are temporary correlations that occur and can continue to occur.
In the end, though, I think everything really comes down to what the chinese will do with their reserve and trade surplus. That is the elephant in the room.
CR -- I agree with your conclusion because i think the stock market is irrational and driven by psychology as much as funamentals. However, I'm sure you would agree that there is a long run correlation between housing and the economy. If the stock market is any sort of indicator of how the economy is doing there should be some correlation between the stock market and housing -- well maybe not the NAHB but housing in general. But again -- since the stock market is kind of nuts there really might be no correlation. The recent stock market rally is a case in point - NAHB down and stocks way up.
It's not just psychology, Silicon Valley's reported median prices may be holding up but we increasingly see evidence of manipulation of the data.
We see it in our own neighborhood:
http://www.viewfromsiliconvalley.com/id277.html
and also in reported county-wide stats:
http://www.viewfromsiliconvalley.com/id125.html
Keep checking
http://www.viewfromsiliconvalley.com for all the latest numbers and news.
Thanks!
Now which did you say was the tail and which is the dog?
CR: Your graph makes it perfectly clear that the original graph was misleading (as stocks DO increase with a log curve over the long term--sentiment just bounces up and down), but my eyeball analysis of the YOY graph suggests a pretty significant correlation.
The YOY figure might be interpreted as "sector psychology" for NAHB vs. "broad economic psychology" for the S&P 500. It's very clear that NAHB figures fluctuate much more than the S&P, which makes sense as the S&P addresses the entire economy rather than just one sector. This is akin to a stock market sector bet--what about correlating the value of builder/finance stocks with NAHB sentiment over the same period?
The pattern from '98 to present IS strongly correlated in both figures, but it's not clear what, if anything, that means. It may suggest that housing sentiment was being driven by stock and easy money sentiment rather than the other way around--a 1 year lag is for all pratical purposes the same point in time. Furthermore, the correlation grows strongest when the dotcom bubble had been underway for a couple years ('98), at which point it had set a whole range of bubbles in motion (i.e. gold, oil, collector cars, real estate).
I think there's a 50% chance of a stock correction in '07, but mostly because the bull market is now pretty old. US stocks have been fairly flat for some time, which does not suggest a radical decline is in the offing. Furthermore, there's a real chance that already pricey emerging market stocks will turn into a flat out bubble around '08 (China Olympics, jobs outsourcing hits mass consciousness as housing becomes old news and people seek an explanation for flat wages).
John, come on now, it's impossible for non-existant future stock returns to influence past builder sentiment.
NAHB index is already a 'derivative' index. Reading of 50 means neutral sentiment. Above 50 is positive and below 50 negative. You should subtract 50 from the NAHB index and compare to S&P change year to year. There is some long-term correlation if you look at these two indicators in this way.
poszi reminds me that everything is related (esp long term, people) much to the dismay of people (ok, only some people) who don't know they are related, --some long-term related, to this other human being, w.
You can deny it if if you like, but he is one of ours nonetheless --not some alien from outer space as some Dems are thinking...
Just sayin...for any of you still needing a push to get out and vote.
The inflation-adjusted chart will be fair, as S&P will not grow constantly, but it will swing up and down in the same range.
Sigh.
What correlation? Here are the lagged correlations for monthly YoY% changes of HMI vs SPX "returns" (scare quotes for the idea of calling diffusion-index changes "returns") from 1985-2006, going out to a maximum eighteen-month lag:
lag\tcorrel
6\t0.12
7\t0.11
8\t0.10
9\t0.10
10\t0.08
11\t0.05
12\t0.06
13\t0.08
14\t0.11
15\t0.15
16\t0.15
17\t0.12
18\t0.10
If you subtract 50 from the HMI, it does not help -- it hurts.
lag\tcorrel
6\t0.01
7\t0.00
8\t0.01
9\t0.03
10\t0.05
11\t0.04
12\t-0.03
13\t-0.04
14\t-0.05
15\t-0.01
16\t-0.04
17\t-0.04
18\t-0.01
Adjusting for inflation does not markedly change these numbers.
Though really, a simple inspection of the charts would suffice.
You know it's very possible there are periods where there is strong correlation and other periods where there isn't. That doesn't mean the factors are never causal nor does it mean the factors are always causal. And it also doesn't mean that the exact same factors that had an effect before 1998 were in play after 1998 or for that matter now. Things change.
This is often the case with complex multi-factor relationships where weighting per factor increases & decreases with conditions & events. A factor that has a huge effect for a while might ebb and another might increase.
The thing that is interesting are the switch points in the data record... where it looks like something changed - either because of causation or coincidence.
All I would infer from that chart is that in 1998 something interesting changed in sentiment or fundamentals to either allow or cause the two to converge (coincidence or causation factors unknown)... and that now that process (or a different process) has allowed for the two to diverge... again either by cause or coincidence.
I used to look at charts like that real time as a chemical engineer at my 'China Syndrome' control station... believe me, when I saw something like that spill out from a tape recorder or across a screen, I might not know if it was due to a cause or coincidence... But I sure got up and went out into the plant to look. A change in process is sometimes just a change, sometimes it's a disaster.
John, come on now, it's impossible for non-existant future stock returns to influence past builder sentiment.
That wasn't the argument, obviously, rather the S&P is the wrong predictive index. Consider the tech sector as the driving influence and having spillover effects on assets prior to its effect showing up in the S&P.
Pretty high brow there. I can't even remember what a good correlation number is, but I would expect the things that affect it would change over time...ie change in mix of consumer vs institutional control of S&P investment?
But for us slower types, ice cream sales and crime rise and fall together with very high correlation; but there is no cause and effect.
Hey. you can correlate anything. Like the number of chickens hatched in a day to the number killed crossing the road. Assuming, a 6 week lag of course. A good number for correlation is .9 or better. This means that the correlation explains the 90 %of the variability in the data. If you come up with a function that correlates the market that well then you will win the nobel prize in economics. I am aslo a chemical engineer and very seldom do we find correlations that close in process data in which we have a fundamental scientific basis for the function and are running at steady state where the input variables are closley controlled. Too many other uncontrollable factors come into play when measuring real time data. Fear and greed are the major market movers,and which cause momentum in either direction.
Having said that, I am of the opinion that the economy is in serious trouble now that China is divesting US treasuries in favor of gold and euros.
It is possible that the most dynamic driving force of the market between 1998 and 2006 was the housing market. Because of the shift of financial attention to the bubble, the correlation may be valid in terms of the psychological hype investors and traders and prone to. Idiots with no skill were making $8k per loan sale, and the bosses couldn't argue with all the easy money they were getting. Given the virtually uncontrolled nature of American capitalism, the financial attention was given to where the easy money came from. However, in 2006, the market really started to eat it. I'd say that the trend has a better chance of being legit if described in terms of the time period and the influence the overall housing market had on the S&P 500. To predict a crash, produce an inference relating where the money came from- investment banks and hedge funds- to the influence investment banks and hedge funds have on stock markets.
Now it's October 2007. Are the bulls still as bullish? Not until the frogs boil I guess...You need to use critical thinking. It's good to be optimistic, but don't think your attitude can change the world. It is what it is, and it ain't good. Get ready for a rough ride. In the end, it's only money if you don't screw up.