Monday, March 24, 2008

Is Irrational Exuberance Back in the Markets?

Well to steal a line from Greenspan we had another day of "irrational exuberance" in the stock markets. It seems like the worse the data gets the higher stocks go as everyone now thinks the Fed will save the markets after last weeks intervention.

This move upward was based on two pieces of news. JP Morgan raised its offer from $2 up to $10 for Bear Stearns and existing housing sales unexpectedly rose 2.9% to an annual rate of 5.03 million in February.

Ok so lets look at these two spectacular pieces of data that took the markets higher by 1.5%. JP Morgan basically said today we will give you a nickel instead of the two cents we offered you on Sunday. Bear Stearns was a $160 dollar stock a year ago! It was about a $100.00 stock in December! Losing 90% instead of 98% isn't exactly great news in my book. The majority of Bear Stearns stockholders feel like jumping off a bridge right now. The fact that we had to have the Fed broker a deal after our 5th largest bank has gone insolvent should not be taking the markets higher when its being given away at a 90% discount of its value from 3 months ago.

Now the housing number. Home builders and every mortgage related stock moved higher because sales grew for the first time in seven months. What the financial news has failed to highlight is prices dropped 8.7% versus Feb. 2007 which represents the largest drop in 40 years of record keeping. That's right, the biggest drop in prices EVER seen year on year for one month!!!

Look what happens when you drop prices...Sales go up!!! A quote from Bloomberg:

"Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said today in Washington. The median price of single-family homes dropped 8.7 percent from February 2007, the most in four decades of record keeping.
``It looks like this may be a temporary pause,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The price declines have helped, and people are still getting financing, though not on the good terms they could before. We're still a long way from a recovery in housing.''
The real estate market is unlikely to rebound quickly as a glut of houses on the market depresses property values and lenders toughen mortgage even more requirements to stem credit losses"

My man Nigel hits the nail right on the head with what to look for going forward. Expect prices to continue to free fall. One month of data does not show a trend. Sales were up to 5.03 million in Feb. but keep in mind in 2005 we were selling at a 6.6 million annual clip. This is a big drop in volume from the peak. Inventory still remains at 9.6 months which is way over the historical averages. This is why you need to sit back and wait. Prices are dropping at the fastest rate on record and inventories are still high. Prices will only continue to move downward. Why the market cheered this news is beyond me.

The data in housing tells me the housing time bomb is starting to implode! I can't wait to see the Case/Shiller index tomorrow which also looks at housing prices. I will be here tomorrow to give you the scoop.


Mike said...

Feb is ALWAYS higher than Jan. This was not unexpected if you look at the monthly data for the past few years. ALSO, Feb had 29 days this year, which was probably NOT accounted for in the 'Seasonally Adjusted' number.

Jeff said...

Makes that number look even worse doesn't it? Some spring selling season they are having. Didn't even think of the leap year this year. Great point I love how CNBC reported this as such great news. that network is a joke.

Case Shiller should be ugly tomorrow.