The Big Sleep

This market is just like that great scene from the Bogart & Bacall classic directed by Howard Hawks.  Not the steamy love scenes or the chase scene or the tension filled dramatic scenes — but the credit roll at the start of the movie.

We know something really cool is coming, but there’s a lot of preliminary tripe to suffer through first.  So, we watch the 5-7 point fits and starts, hoping something good happens before we run out of popcorn.

We had early strength following generally positive earnings reports and despite a mixed December new housing sales number (reported down 7.3% from November but up 8.8% from Dec 2011.)

The non-annualized, non-seasonalized numbers from the Census Bureau are presented below.  There’s a lot of good historical economic data available on the website that rarely jibes with the MSM versions which are basically re-written press releases.

The columns represent (from left to right) total, Northeast, Midwest, South and West for 2012 and comparable periods in 2011.  Total sales have obviously picked up versus last December, though primarily in the South and West.

2012                                                                2011


It might seem to some like I’m a bit of a housing bear, nay saying all the “great news” coming out.  I agree there are pockets of strong sales and price increases such as San Francisco.  But, most of the uptick in construction has been driven by multi-family.  And, most of the uptick in sales has been, IMHO, driven by a steady drumbeat of glowing reports produced by the very people who want you to buy a house.

While it’s entirely possible this hopium will catch hold and actually instigate a recovery, it’ll be several years at best before the overhang of underwater current homes and bank-owned foreclosed homes works its way through the sales cycle.   If the country dips back into a recession (or remains in one, depending on your POV) or if interest rates begin to tick back up — good luck with a housing recovery.

I spent a year in the 90’s working for a well-known institutional asset management company specializing in real estate.  While the experience was, on the whole, miserable, I did enjoy a great relationship with the company’s economist.  He and I spent many hours trying to crack the price model nut.  From every angle, it always came back to employment that ultimately drives prices.  Seen any real employment growth lately?

Some would argue inflation also plays a role.  I would generally agree with that, but housing tends to lag the inflationary cycle, not lead it.  First, you need jobs — especially in an environment where lenders expect borrowers to have an actual income.

It’ll be interesting to see how NE sales (essentially flat) do once we’re past the Hurricane Sandy sphere of influence.  Right now, it’s too easy an excuse for lagging sales of everything except generators and batteries.

Currency markets are mostly quiet this morning, with the dollar showing some indecision.

Since we hit our downside target at the white .786 on the 13th, the index has been non-committal.  My best guess is a repeat of the .786/.886 retrace down to the red zone before DX takes off higher, but this is neither assured nor necessary for our equity forecast to play out as expected.

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