Monday, August 30, 2010

The Worst is Over

At the top of this post is an image of the cover of the latest issue of Time Magazine. The chart below the Time cover is a monthly chart of the housing stock index quoted on the Philadelphia stock exchange.

The historical low of the index was reached in March 2009, coincident with the low in the S&P 500. While the S&P 500 is currently trading about 30% below its all time high, the housing index stands 70% below its all time high and much closer to its all time low than the S&P.

The Time cover together with the fact that the housing index is still near the low of its historical range suggests to me that the worst is over for housing stocks. I doubt we shall see a return to all time highs in the index any time soon, but neither do I think the 2009 low will be taken out.

The important point here is that if the housing market in the U.S. can stabilize and recover, then the entire economy will get an extra upward push. This in turn will help lift the gloom that seems to have engulfed the the U.S.A. As the dark clouds begin to disperse the stock market will rally. I still think the S&P 500 is headed for 1300 and above over the next nine months.


  1. thanks for the post. i think it could have one more low, but much later down the track around 2012 - probably giving a double bottom or a head of an inverse head and shoulders.

  2. Carl, to suggest that the housing market "could" recover is based upon a hope and a prayer. I am intimately connected with the Credit markets and it is frozen based upon too many variables to mention here. Suffice it to say that consumers are showing that they do not have the kind of credit, incomes and down payments that it takes to bring stability to the markets. Larry Summers and the Crew in Washington have tried to offer lower interest rates but the underlying asset values are so deeply under water that there are no lenders there to offer financing simply because they have been forced to return to the Lending Standards of yesteryear. This has created an overhang. There are literally over a million homes teetering into foreclosure. Walking away from one's mortgage is now the rule rather than the exception because it would be absolutely inane to carry a mortgage, even with a lower rate, that will not return to break-even in less than 7 to 10 is far easier to reset with a terrible Credit score and rent. No, the big "if" you are suggesting is not going to happen. I do not mean this in a disrespectful way but only as a player in the Credit markets who has moved on from that market (I was in the lending markets). I say this with a double underscore as you have hit it on the head: the real estate market is key to our recovery.

  3. Carl,

    The low may be in but we may stay on the bottom for a while.

    With banks not lending and unemployement close to 10% I personally don't see a major rebound happening in the housing market.
    (Fannie and Freddie busted)

    Again, just my op.

    I appreaciate your post


  4. In regards to housing, it's not that banks aren't lending. 25% of Americans have FICO scores below 600 and remain uncreditworthy. They can't get loans.

    Additionally, most Americans have no savings. This means no down payment for homes and no home buying.

    Demographic trends don't support more home buying. Baby boomers more likely to sell large homes or second homes exiting from the housing market all together.

    Homeownership and homeprices remain above the long term trend lines. Where will demand from?

  5. Over time, the Govt will do whatever is necessary to support housing prices including 1% interest only 30 year loans because all existing loans are essentially guaranteed by the Govt and declining housing prices generates negative consumer confidence. Remember there is a guaranteed $75000+ to rent over 5 years. While housing prices may not go up much they are very likely to stabilize at current levels.

  6. Wow, even on this contrarian blog there are only pessimistic comments in accordance with the Time cover. I guess it would have been the same in 2005 when there was the infamous "Why we are going gaga about real estate" cover (I don't remember which magazine had the cover at the time). Why was the current cover not on in 2005? This is contrarian at its finest and imo the best indicator of a bottom in housing. I can't say anything about home builder stocks and would think the cover is more relevant for the housing market itself. We might have the largest bearish housing crowd ever, certainly in my lifetime.

  7. Re John
    There are gobloads of cash rich/income poor folk out there (inc moi) who would slit their own grandmothers throat for a 30 yr mortgage at these rates yet the banks are not lending to us. Neither it seems are private investor pools.
    Something must give soon. Don't know what or how or when but it will happen.

  8. I am very curious to see that graph charted from 1980 to 2003, and truly see the incredible run-up (particularly here in CA.) of home prices. Doesnt this graph skew towards the highs of the market?

    My most sincere question centers on the correlation (heck, causation) between the bull market in the last 30 years and the extreme equity benefited by my parents generation, that invested 100% back entirely into the market either by investing or spending! What percentage of the growth of the economy was due specifically to the mass equity tapped on their homes! I eagerly await an answer!

  9. Carl,
    What I notice is that when there is a Bearish headline on front covers, you think it is contrarian and is bullish... but when it is a bullish headline on the cover page, you don't think is contrarian and hence bearish.

    Recently there was cover story on great American recovery.

  10. if only things were so easy...heck TIME can print it sooner to ease the pain!!!

  11. Carl don't give a damn on the funny-mentals that you guys speak above, like credit frozen or high employment etc.

    Carl only look at charts. And from TA and fundamental perspective, it sure looks like Home builders have reached a possible low, especially if you think about the lone survivors builders would probably able to witstand another blow as they weathered the bigger storm 2008.

    But from Long Term TA perspective, the housing chart of 7 years does not compell me to believe housing bottom. It takes decades of chart to confirm an LT trend.

    Also, bear in mind, Carl is sort of a perma bull. :) Especially Carl grew up with SPX and used to see trees growing to sky. haha

  12. "I still think the S&P 500 is headed for 1300 and above over the next nine months".

    So does Bob Brinker....Good luck!

  13. This is a dead cat bounce.

    The true contrarian magazine covers will have headlines along the lines of "Can America Survive?"

  14. I just have 1 thing to say to anyone thinking real estate has bottomed..Population imbalance!!

    Happens every 100+ years and we are in the 1st inning of one now. The last time it happened, real estate went to 10 cents on a dollar..almost 30 years later.

    Heck, I would only hope that the cover of a magazine would stop what is coming down the road..but unless the Fed can figure out how to produce more people to soak up the supply of the retiring baby boomers and foreclosures (all of those potential homebuyers are now out of the mix to soak up the supply) Real estate will be on a 1 way path..and dat be a down!!

  15. I still think that Carl has it right: Real Estate is a harbinger. It would be a stretch, though, to suggest a bottom is in. A bottom might come in the next two to three years....the overhang is ridiculous, and contrary notions based upon headlines cannot change the obvious facts: credit standards have been rolled back to Baby Boomer early years (down payment required, credit 700+, etc. for good rates); inventories are overwhelming - - they will have to bulldoze homes in Modesto/Stockton, Ca and AZ; people are handing in their keys; there are no signs of life in the employment numbers; lower interest rates are ONLY good for the Banks who make a spread; people are wary and not likely to line up for houses with the possibility of further value declines.

    This downright scary and I am long. :)

  16. Update:

    Carl may be right on target because there are some other comments from other technical traders regarding going LONG the IYR.

    Again, I'm Not in that camp, but then again I've missed many good trends before...IE. BIDU last yr! 120 to 800!!!


  17. Jack - - I agree....Carl is much better at forecasting than most of us here including me. It is difficult. I admire Carl for that reason.

  18. Carl,
    What's your opinion on the GM IPO?
    Go for the long side after two weeks of heavy short selling? The bearishness on the company is just extreme.

  19. So far Carl's assessment is spot on. This current rally reminds me of March 2009. Let's see if we get a real upcrash here as well.

  20. One more headline for you:

    WSJ * SEPTEMBER 30, 2010

    Blue Chips Surge 10.4% Even as Small Investors Pull Back

    What could be more bullish than that?