Monday, July 19, 2010

Jim Cramer comments on this week's upcoming housing numbers

Before calling it a night, we read a CNBC article summarizing Jim Cramer's comments regarding this week's upcoming housing data. Similar to what we said early on Monday morning and what we have been saying for a while, Mr. Cramer expects the housing figures to disappoint.

However, Mr. Cramer is blaming such potential disappointment on economists that provide the housing estimates. He actually said, "thanks to the eggheads economists who've created absurdly bullish expectations." This is an interesting way of thinking about the housing numbers. It seems that he's basically trying to minimize their possible negative impact on the equity market this week, especially given the fact that he had made some bullish statements last week. We don't recall much criticism of the same economists by Mr. Cramer when their estimates were too low or too conservative. We assume criticism was not applicable or necessary as their low and inaccurate estimates partially helped drive the equity market higher.

Mr. Cramer is looking for home prices to rise when builders begin building fewer homes. In other words, when inventories decline, prices are likely to go up. Unfortunately, the tax breaks offered by the government delayed such necessary inventory adjustment by creating an artificial and short-term increase in demand for real estate.

One thing with which we certainly agree is Mr. Cramer's view that one of the main factors slowing down the housing recovery is the lack of recovery in employment, especially given the fact that households remain burdened with debt.

Mr. Cramer also stated that the housing market is not a big percentage of the economy. This may be true, strictly speaking. However, given average household's massive investments in real estate, any significant downturn in housing certainly impacts average household's purchasing power and consumption. Let's not forget that consumption is a big part of the economy.

On top of all of that, we sensed a bit of excess boastfulness when we read his quote saying, " ... remember that you have the real numbers from me, and you can rest assured that you have not only seen tomorrow's headlines today, but Thursday's as well, and it can't get any better than that."

We certainly do not have as much credibility as Mr. Cramer (and likely never will). Nor are we respected and experienced as he is. For this reason, his statements were a surprising, which is why we thought to comment on them.

Disappointing July NAHB

The NHAB housing market index was released this morning. And yes, it was disappointing.  We have been saying for a long time that the real estate market may experience a double dip, and latest data show that this may actually take place.

The NAHB for July was 14, a 12.5% decline from June. This index has not been this low since April of last year.

David Crowe, the NAHB Chief Economist said, "the pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of improvement in the rest of the economy. That said, we do believe that favorable factors such as low mortgage rates, affordable prices, and demographic trends will help revive consumer demand for new homes this year, and that new-home sales will improve by 10 percent in 2010 from 2009."

We think that all of the factors cited by Mr. Crowe are valid, except for the fact that they will not help revive the market this year. Those factors are based on the state of employment in this economy, and that is certainly not improving. Lastly, the 10% annual improvement expected by Mr. Crowe, most likely has already taken place during the first six months, so it is still very likely that we will see another dip in the housing market for the rest of 2010.

Can we still apply the buy-and-hold strategy?

We thought that maybe we should take a step back and just see how well (or badly) certain indexes and ETFs have performed during the last 5 years. Below is what we came up with, or shall we say, it’s what the market came up with.

It is clear that the notion of buying and holding equities for the long-term is no longer applicable in this market, especially recently.  It is also clear that gold is ... well, its golden!  Here is some additional data: S&P500 is down nearly 30% during the last 10 years, while the volatility index (VIX) is up nearly 36%. These are the figures that casinos love to see - people gambling more (increase in VIX) and losing more (decline in S&P500).

We believe that the performance of stocks no longer necessarily represent the performance and/or health of a company or the economy. One may ask whether the stock is the chicken and the company is the egg, or the other way around. But merely the existence of such a dilemma or question is telling us that the performance of a company (in terms of growth, profitability, etc.) may now represent less than 50% of the performance and valuation of that company's stock. Simply put, fundamental analysis is now out the door, at least for the time being. Diversifying away stock specific risks is no longer applicable. Stock specific risks are now nearly impossible to identify, as again, we no longer place much emphasis on a company's or the overall economy's performance. And the systemic risk, we think the government has failed to minimize.

One may provide a rebuttal and propose that given such 'transition' in the market, investors must begin to adjust the way they value stocks and lower weight given to fundamental analysis of companies. We agree, if the objective is only to beat the market.  We agree, if the objective is to gamble just like one would when visiting Palms, Wynn, Caesar's and many other casinos in Las Vegas (or Macau). Well, as mentioned earlier, at least some figures demonstrate that the market is becoming a casino. But all of this will make the economy dependent on the stock market.  Excuse us, we just realized that this is already the case.  The economy is dependent on the stock market. The stock market is no longer an indicator of the economy.  The health of the economy is based on how high or how low those stocks go. Is this really the type of economy and equity market that we'd like to have? In our opinion, no.

There are many reasons as to why the market is becoming a casino (if it hasn't already). The one that stands out is the huge influence that large businesses and/or industries have over the government. The leverage that these lobbying groups have over our so-called lawmakers is unbelievable and it could surpass leverages historically demonstrated by the NRA, AIPAC, etc. And we're certainly not blaming the lobbying groups as they have a right to push for what's best for them and their clients.  The lawmakers and their 24/7 election concerns are what concern us.  From the day they get elected, they begin to think about their re-election campaign strategies, which certainly makes them more and more vulnerable to that cash and those promises and possibly threats they receive from lobbying groups. 

Basically, nearly every industry gets its way. All of this creates more red tape for other industries and this goes round and round, and creates a potentially very costly cycle. The red tapes create additional risks for the market. The red tapes induce many (mostly the quants on Wall Street) to design securities to get around them or to make money via them. By the way, we believe they have a right to do so.  This again adds to volatility.

The market will likely become more volatile, as we have seen (and as indicated in the table shown earlier). Volatility may be good for professional traders/investors and quants, but it is the worst for retail and Mom & Pap investors. And they are the people that drive this economy. They are the ones that consume, of which we have not yet seen enough. 

Besides our whining and complaining we think the market could take a further dive.  From a technical standpoint, if S&P500 goes below 1050, then 1000, or another 6% decline, could be next.  In addition, although the 100-day and 200-day moving average (MA) have not yet begun to trend down, another couple of flat to slightly down weeks could initiate the downward trend for those MAs, which would also make it more likely for them to cross. 

We note that as compared to 3 weeks and 5 weeks ago, when S&P500 was basically at current levels, VIX was between 9% and 33% higher than where it closed at on Friday.  This may somewhat lessen the fear in the market.  However, we believe this is mainly due to expectations of good earnings releases during the next few weeks.  Unfortunately, we also think that the good numbers will likely be followed by disappointing guidances.  Its during most earnings seasons that the market and investors realize that fundamental analysis of companies just cannot be ignored. 

Lastly, given the lack of artificial high provided by the government for the real estate market, the market appears to be dispplaying withdrawal symptoms, similar to many drug addicts.  We think basically the housing market, the auto market and the rest of the economy has become addicted to government help.  Once aid from the government is no longer available, the markets get off of their artificial highs.  We're seeing this with the real estate market.  Next week's building permits, housing starts and existing home sales figures will likely be disappointing, even with the more conservative estimates.  In addition, we think initial jobless claims will increase as last week's reported decline may have been due to the shortened 4th of July week.