Bearish News

I love the Economist for pieces like this: Please do feed the bears: The financial world needs its pessimists. I’ll post a few excerpts and commentary, but the whole thing is a must-read.

NOBODY loves a party-pooper. When asset prices are going up, most people are inclined to celebrate. The bears who argue that asset prices are about to fall tend to get dismissed as out of touch (dotcom sceptics supposedly “just didn’t get it”) or are likened to stopped clocks: occasionally right, but mostly wrong…

Over the past 20 years it has been the repeated interventions of central banks to rescue bulls, not bears, that have contributed to the current mess by encouraging too much risk-taking. Those interventions, by shoring up stockmarkets with cheap money, have made life even more difficult for the bears.

So when the bears say, as they do now (see article), that the stockmarket rally is built on sand, they are worth listening to. On historical measures, Wall Street looked cheap only briefly, earlier this year, and now looks expensive again. The rally has once more been driven by interest-rate cuts.

Perma-bulls do love their broken-clock analogy. Whenever a realist/bear is proved correct, the “bulltards”, as Denninger calls them, snidely remark that even broken clocks are right twice a day. They never bother to think about why the bear’s analysis was right. They only care about the ticker and their paycheck which depends on it. Inflation, accounting manipulation, bailouts – none of these matter (except as they will affect markets).

Most never stop to think about the root of the problem. Bears do. When the dust settles after a bust, it’s amazing how quickly the focus shifts to getting in on the next bubble. So-called pessimists are the only ones trying to figure out what went wrong, and how it can be avoided in the future. I truly appreciate that The Economist recognizes this fact.

Bearish commentators provide a valuable (and largely thankless) public service.  Think Peter Schiff highlighting the moral hazards of bank bailouts, Bill Black and Nassim Taleb railing against corruption and systemic risk, or Ron Paul fighting against inflationary policies. Such efforts are critical for any meaningful economic reform.

Bearing Ain’t Easy

Most bears don’t set out to profit from gloom and doom. After all, being a bull is infinitely more profitable. Consider Wall St. analysts and execs: 99% perma-bulls, constantly pumping stocks with questionable motives and limited insight. The few critical-thinkers, like ex-Merrill Lynch top economist David Rosenberg, inevitably end up elsewhere.

There is no place for realists on Wall Street. They talk a lot about corruption, transparency, and the stealth-tax of inflation. Where’s the profit in that? As The Economist states, “NOBODY loves a party-pooper”. That applies doubly for Wall Street.

It’s certainly no fun being a bear at dinner parties (as my wife constantly reminds me). Nothing dampens a mood quicker than saying fair-value for the S&P 500 may be around 400, and the only thing propping it up is taxpayer cash and changes to accounting rules, both of which are utterly unsustainable. I also advise against informing the masses that inflation is inevitable, and explaining how it benefits precisely the wrong economic players. Or that the alternative to an inflation-based recovery is a severe (but necessary) economic contraction, which would result in a lower standard of living while the economy adjusts.

Nope. Lately I just steer clear when stocks come up. I change the subject to something safer; abortion, war, maybe affirmative action. Kidding, only kidding… Fantasy Football works like a charm in my circles, and I’m happy to talk shop since all 3 of my teams are on a tear this year. Here’s to hoping Frank Gore gets healthy soon!

David Rosenberg discusses ugly September data, and why this recovery is not sustainable:

THUD, DUD AND CRUD

There’s no other way to describe the U.S. employment report that was just released for September. And guess what? The rose-colored glass donning set of economists who have been talking about sequential improvement in the data and how “less negative” the employment numbers have become can’t say that after today (thank the good lord). That’s because at -263,000 on nonfarm payrolls, instead of the -175,000 print that was widely expected, we actually saw sequential deterioration for the first time since May as the August decline was -201,000 (though revised from -216,000; July was revised lower to -304,000 from -276,000). If you think that is bad, consider that the Household Survey showed a massive 785,000 plunge in September which again was sequential deterioration because the decline the month before was 392,000…

These numbers far from validate the overwhelming consensus view that the recession has come to an end just because of one positive stimulus-crazed GDP print (didn’t we have that in 2008 too?); not to mention the fact that the last time we came off such a two-month falloff in Household employment was back in March when the stock market was testing fresh 12-year highs.

Sustainability is the key and there can be no durable recovery without net job creation and organic wage growth. Both were lacking in today’s report – in fact, the combination of the workweek edging back down to retest the all-time low of 33.0 hours and the near-stagnation in hourly wages dragged the proxy for personal income down 0.2% (reads: in nominal terms) and the year-over-year trend is getting perilously close to deflation terrain at +0.7% from +0.8% in August and +1.2% in July.

Great commentary, as always. The big question is: When harsh reality sets in, what will the policy response be? If leadership believes they can spend more, they will. America’s lenders have started making noise about fiscal responsibility and inflation. Will they balk next go-round?

The near-term deflationary data will likely embolden the Fed with their monetary decisions. That much seems certain.

Guest Post by Stefan Karlsson. Stefan is an economist based in Sweden. See his blog here, and more of his articles on mises.org here.

How sustainable is the U.S economic recovery? Before I make a more definite statement on the subject, I’ll have to look at the data released later this week. But given what we know now, it appears to be very weak and vulnerable.

First of all, the durable goods order report indicated weakening investment demand, considering both the negative monthly change and the downward revision of previous numbers.

Secondly, the Chicago Fed National Activity Index showed continued contraction in August.

And both the existing and new home sales reports were disappointing.

The one positive report was the retail sales number which showed strong growth. Because of that, it is highly likely that notwithstanding the above numbers, GDP growth was positive in Q3 2009-at least compared to the previous quarter and not adjusting for terms of trade effects.

However, that gain was largely built on people taking advantage of the “cash for clunkers”-scheme. But since that is a temporary scheme, there will likely be a hangover in the form of lower sales later.

In short, current data suggests that the risk of a “double dip” recession is very high.

Visit Stefan’s blog here.

Homebuilders: Short or Steer Clear?

KB Homes missed big today, reporting an $.87 per share loss. Their outlook on the market wasn’t rosy either. They dropped 8.5%. Builders appear to be a good short candidate. But like most industries, one needs to consider government interventions before shorting.

Major HB names are still up more than 100% from their 52-week lows. Kinda makes the S&P 500′s rally look meek:

1. Meritage Homes (MTH) up 307%
2. M/I Homes (MHO) up 198%
3. KB Home (KBH) up 145%
4. Ryland (RYL) – up 111%
5. Toll Bros (TOLL) up 47%

Government Crutch

Since last Fall, when a depression seemed imminent, builders have clearly benefited from government-support. The big question is: How long can this last? The Fed claims to be planning their exit strategy. But they always add a disclaimer, “not too soon“. Meanwhile, the fundamental side has changed little.

Cheap mortgages are here to stay for an extended period. Bernanke and Geithner have made this clear. They will do all it takes to prevent (or postpone) a depression. Cheap rates will buoy builders, but enough? This is where the homebuyer-tax-credit comes in, acting as another gross distortion of markets. Think about those people who bought a day/week/month before the credit passed. “Oh, gosh. You bought your home yesterday? Too bad.”

$8,000 Credit: Double and Expand It, Please

The first-time home buyer credit is scheduled to expire in November. But lobbyists are fighting hard to get it renewed. Congress seems likely to bite, despite our huge deficits. These market-interventions will largely determine the direction of home-builder stocks over the next year plus.

Sen. Johnny Isakson of Georgia, an ex-realtor, has proposed not only extending the credit, but expanding it to a max of $15,000. And he thinks everyone should be eligible in 2010; not just first-time buyers (WaPo). Bailouts and moral hazards don’t show any sign of abating.

So while the administration is under (a little) pressure to shrink deficits, more bailouts will probably pass. Our economic leadership views these market-distorting actions as victimless. Everyone benefits from rising home prices, right? Wrong. What about the millions of renters who are going to face higher taxes, due to drops in tax revenue? And what about responsible savers who have been waiting for homes to drop into their price range? They get screwed.

The Dreaded Spillover Effect

There would be a spillover effect on the broader economy if housing prices dropped. But do we really want to return to the days when houses were ATMs? Clearly that’s not sustainable. And despite falling prices, house valuation ratios remain out-of-whack. In a recent piece titled Falling House Prices Are The Solution, Not The Problem Patrick Killelea wrote:

It’s still much cheaper to rent than to own the same size and quality house, in the same school district. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money to buy a house than it does to borrow (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents.

Shifting to a non-supported housing market too quickly would have negative effects. But we need to let housing prices fall much more than we have. It’s important to remember that we are fighting fundamental market forces here. Even the US government can’t really “win”. Something’s gotta give, someone has to lose. Let banks take the hit. They benefited from low interest for long-enough.

In short: For the immediate future, I won’t be shorting homebuilders. Too risky while all this cheap money is flowing. But I’ll be watching them, especially MHO, KBH, and MTH.

Disclosure: No positions in any companies mentioned
Disclaimer: None of this information should be treated as investment advice. Always consult a professional.