Wednesday, April 15, 2009

Tumbling down the mountainside and Home Sales...

Like I've said before, you can go broke being right. Right now the market is being told there are two drops of bacteria filled water in the glass and the market views it as half full of crystal clear spring water. It's wrong, but don't lose your shirt trying to fight it.

Consider that today the Fed Reserves Beige book reported that 5 of the 12 regions noted that the deterioration of economic conditions slowed. Now, this means that 7 of 12 regions saw the same rate of deterioration or acceleration of the deterioration, but let's not get confused by the facts. Also, note that these Fed regions said that the rate of deterioration merely slowed. This fits with the analogy that the economy has fallen off a cliff and we're now tumbling down the mountainside. We're still going downhill just at a slower rate (for now - more on this in minute).

The rate of decline in economic activity was so substantial last year that math dictates that it has to slow. I'm still of the opinion that at some point in 2010 the economy will make a false start as a result of some stimulus spending. However, I'm also increasingly convinced that we're facing the strong possibility of a double dip recession in 2011-2014 (like 1937-42). I'll try to discuss my rationale for that thinking at some point next week.

The market also got excited today when word came out from the National Association of Home Builders that their index hit a six month high of 14. Just for a little context, when the Home Builder index is at 50 the index indicates an equal number of builders find the market poor as those that find the market good. A number of 14, while admittedly better, is still indicative of a terrible housing market.

There also was some surprisingly strong housing data out of California today.

"A total of 19,486 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 27.9 percent from 15,231 for the prior month, and up 52.1 percent from 12,808 for March 2008, according to MDA DataQuick of San Diego."

Now before you starting getting all giddy about the housing boom 2.0 -

"Regionwide, foreclosure resales accounted for 55.4 percent of March's resales activity, down from a revised 56.7 percent in February and up from 35.7 percent in March 2008." Foreclosure resales accounting for 55% of sales!?!?!!

Also, the sales seem to be concentrated in the very low end of the market as FHA mortgages accounted for 37% of all mortgages (up from just 10% last year). I think it's going to be important to start focusing on total value in the housing market. If 2 houses sell for $500k in 2008 and then in 2009 5 houses sell for $150k, has the market rebounded? I'd argue that the total value of the transactions is down 25% ($1 mil vs. $750k) and thus, the market is not as healthy as it would appear if you looked at just units (2 vs. 5).

As I've noted the two big shoes that may be ready to drop are credit cards and commercial real estate. Today some really bored investors tore through a giant SEC filing from Capital One (the "What's in your wallet?" people) to find this nugget.

The annualized rate of charge offs now exceeds 9% and jumped over a full percentage point in March. This seems to reflect the growing problems facing the US consumer as unemployment continues to soar.

I don't think this is a Capital One specific issue. However, watch out as fundamentals get tossed out of the window for the rest of the week because it's option expiration week :)


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