Tuesday, July 8, 2008

Pending Home Sales Drop More Than Forecast

Good Morning folks!

As I write to you the market is flipping from red to green looking for direction. Well, pending home sales came out today and were back in the red down 4.7% after actually popping slightly in April. This has quickly quelled any hope that the rise seen in pending home sales in April was possibly signaling that we had found a bottom.

Here is the home sales scoop from Bloomberg

July 8 (Bloomberg) -- Americans signed fewer contracts to buy previously owned homes in May for a third month in four, a sign house prices have yet to touch bottom.

The index of pending home resales fell 4.7 percent, a bigger decline than forecast, after a revised 7.1 percent gain in April, the National Association of Realtors said today in Washington.

Would-be buyers are holding off purchases as they expect further price declines, and as rising mortgage rates and tougher lending standards make it harder to qualify for loans. Record delinquencies on home loans have led to concerns that Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, may need to increase their capital by $75 billion.

``After a healthy bounce in April, the housing market appears to have lost steam again in May and June,'' said Mike Larson, a housing analyst at Weiss Research in Jupiter, Florida. ``Unless and until the economic clouds part, we'll likely see the housing market continue to struggle.''

Economists had projected the index would fall 3 percent, according to the median forecast in a Bloomberg News survey of 38 economists. Estimates ranged from a drop of 6 percent to a 0.2 percent gain."

Quick Take:

This number shouldn't have been a surprise given the current lending standards and higher interest rates seen in the last few months. What amazes me is how these numbers keep coming in worse than economists forecast. How can these economists not see the slow motion train wreck that I and many of you see so clearly?

Are they dropping acid when they write these research reports? Anyway, this number took away any hope after a promising April that housing is rebounding.


Commodities Breaking Down?

An interesting development this week has been the big drop off in oil and commodities. Dennis Gartman who is a well known commodities guru talked in his newsletter today of a potential popping in the commodities bubble.

Many were expecting the stock market to pop if the commodities like oil came down in price. Guess what? Its not happening folks!

The main problem with this theory is energy stocks have soared during the commodities run. This sector has basically been carrying the DOW. Imagine where we would be on the DOW without energy? If commodities breakdown, we are about to find out.

This brings me to my big question. Where does the money go if the commodities run is over?

Financials? HA! Yeah right. No one with a brain is going to touch these right now.
Consumer staples? Crowded trade and most have underperformed.
Tech? I can't see this being a leader as the consumer falls apart.
Healthcare? Performed poorly. Pharma is a nightmare. National healthcare risk looms.
Consumer related companies? As I said before. The consumer is dead.
Transports? Anyone seen Fed Ex, UPS and the airlines lately?

Obviously my point is there is nowhere left to hide in the market. This does not bode well for equities. I expect too see a lot of the smart money head to the sidelines in cash waiting to pick up distressed assets after the market is done tanking.

That's what I would be doing if I was a Warren Buffet. Houses will be pennies on the dollar in certain bubble areas when this crash climaxes.

Billions of dollars are waiting to be made once this storm passes. The smart money is foaming at the mouth already!






8 comments:

Avl Guy said...

As commodities go down...and im not sure they will stay down...I wonder whether Chindia and other growth areas will see this as an opportunity for an inventory-build or contract/price -locking.

Jeff said...

avl

Good question. I think they may stay down for awhile. I know many people that have changed their driving habits.

Demand has to be dropping for oil. People are feeling even poorer now that the market has tanked.

Usually when deflation hits it takes down all commodities including gold.

I am tempted to buy some DUG and short commodities here but I am a little gun shy after seeing that massive bull run.

The dollar could blow at any time which also increases the risk on that trade. If I do it its gonna be a quick trade.

johndaniels said...

i understand you have to keep the premise of bearishness towards the economy. But at what point does the focus change? just always focusing on the negative for the sake of being negative is not wise. Do you have assets? are you all cash right now? whre is your own money going if you dont like anything? cash? you would have to be having a true dilema along with anyone that does have investment capital...if you had capital

johndaniels said...

just to add: personally i do agree with much of what is said on this blog, and i appreciate the research put into it; it is a viable source of info.

I don't see housing recovering anytime soon either...bank earning must correct and foreclosures must go down first. that being said: there is a substantial amount of capital on the sidelines: too much in fact: and this will appreciate everything: stocks real estate, etc once it commits. if you are cash it is a good position now...but it must be managed or suddenly your pp will be deteriorate rapidly as all markets recover.

wheres my money going? the stock market, specifically companies that historically beat earning estimates with low PE's. i hate financials; but some are getting so damn low that they are almost worth gambling on. I keep a very close eye on prec metals and have roughly 30% in metals in case the financial system crashes, which it very well could. i really like euro's...as a currency they are well managed (at 4.25%) and will certainly overtake the dollar as the worlds currency. no interest in reale estate now; i dont need liabilities.

Jeff said...

john daniels

I understand what you are saying. This will be a bullish blog when things look better.

I am 80% cash and bonds in a variety of ways. CD's, PIMCO, vanguard money market(not by choice BTW its the only thing available my 401k)

10% short(variety of inverse ETF's and Bearx) 10% long in a variety of funds. I also own some small positions in a few biotechs.

I would love to focus on the positives. I just don't see many. I find it very frustrating. I do not like being in cash making 3% on my money.

It sounds like your conclusions are similiar to mine. Cash is about the only place to be.

This is a huge dilemma for me right now! the most logical thing to do in my eyes is to dege myself and wait for opportunities.

I think its too early to be jumping in anywhere but I wish you luck!

Be careful on the Euro IMO. Half of the Euro countries are in big trouble. Spain being one of them. Some have even threatened to leave the Euro because the interest rate increases are killing their individual economies.

I don't think it will happen but it makes the Euro very vulnerable right now.

Avl Guy said...

JohnDaniels, I don’t think Jeff is too bearish. I have a lot of non-financial friends with a feel for the Midwest for whom I use this metaphor: imagine that ur from a tropical climate and you've never heard or experienced winter. If u travel to a new clime and suddenly see every flora just ‘die’, and most animals disappear, u'd think it was the end of the world.
But if you have someone to explain what’s coming down, how to prepare, how to cope...then it’s less of a shock. This unprecedented global deleveraging unfolding after the US has lost economic independence from global monetary, trading, credit and energy markets, makes for very unique times and a recession that may be an 'L' or 'W'.
I’m in cash & equivalents after a winter/spring foray into RIMM, and plan to re-assess about every 180 days....so for me, that will be after Labor Day when the nation has adjusted to a full summer of high gas prices and market headfakes, and some of the forward-looking indicators are clearer (like container shipping from Asia for the Xmas inventory build).

Avl Guy said...

Jeff, I’m also betting we'll see some recidivism on the part of consumers and drivers. U know how the gyms are over-crowded in January with all the 'New Years Resolutions" newbies, only to thin out by Valentines Day? Same with all this 'cutting back on driving'...we'll see when the schools resume in August/September.

Jeff said...

avl


I don't think there will be such a thing as traffic at the end of the summer unless you are on a bike path.

It seems like when gas got to $4 a gallon was when I started noticing people really cutting back on their driving/spending.

The shock of these oil prices is just beginning.

As for the stock market the last few days. Whoa! Its absolutely bipolar. This is a very dangerous time to be trading.