The Big Picture | September 2006

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The Caveat Emptor Market: Barron's Picks Up 2 comments

Saturday, September 30, 2006 | 11:17 AM

Wow, kinda crazy: Our commentary Wednesday and Thursday both got picked up by Barrons. The MARKET WATCH page, and for the 2nd week in a row, Alan Abelson's column. Both are below:

MARKET WATCH: Dow Ready to Top Last High
RR&A Market Letter by Ritholtz Research & Analytics
230 Park Ave., New York, N.Y. 10169

Sept. 26: As markets march higher, we note the short-term factors at work: window dressing-funds buying more of their favorite stocks to improve their short-term performance...; there is a surfeit of cash in the hands of fast traders; expect them to chase momentum ...; technical analysis and intermediate-term trend remain constructive.

Those are up against longer-term issues of economic softening and market internals: real estate, continues decelerating; market advances have taken place on lower-than-average volume; energy is oversold, and likely to bounce upward; [a] double top may present a formidable barrier ( an upside penetration could create a bull trap); despite the Dow rally, new highs are lagging while the number of new lows are expanding; fewer stocks are participating in the advance:

Indeed, this rally is very Dow-centric, meaning it's focused more and more on fewer and fewer stocks...as the Dow [hit] its all-time high, the other indexes are further away. This is no coincidence.

And the ever popular Alan Abelson:

The Caveat Emptor Market:

WALL STREET, WE MUST SAY, IS HAPPILY free of any appreciable outbreak of bugging. That has to be, we've not the slightest doubt, because brokers, analysts, investment bankers and traders are models of virtue.

Although it also may be because Wall Street is so taken with e-mail and so proud of its electronic scribbling that it can't bear to consign to the ether even a single, solitary sentence. So when hungry regulators pay a visit, subpeonas at the ready, they can be assured of an abundance of incriminating evidence waiting to be harvested. With such thoughtful suspects, who needs to bug a phone?

Besides, these days, with the stock market on a bit of a roll, the Street's stalwarts are raking it in hand over fist and too busy counting their money to spare any time to play with bugs, even if the spirit so moved them.

After more than a month of vacillating between dawdle and decline, the market decided for reasons known only to itself, except that most of the investment crowd was nervously peering down, to go up. And by quarter's end, the Standard & Poor's 500 was ahead 5.2% (the S&P's strongest third-quarter showing in nine years), the Nasdaq, 4%, and the good old Dow, 4.7%. (Toss in dividends, and you can add another tick or two to the returns.)

On Thursday and Friday, the Dow actually, if briefly, topped its all-time closing high of 11,722.98, set in the giddiest of those gloriously giddy days back in 2000 -- but slipped a tad each day before the final bell.

For its sterling performance, that hoary average is especially indebted, as the keen-eyed Barry Ritholtz points out, to this year's outsized gains in Boeing, United Technologies, Caterpillar and Altria Group (the newest incarnation of Philip Morris). By contrast, some big names and erstwhile hot numbers in the Dow are off sharply from their historic highs, including Intel, down 73%; Microsoft, 54%; Home Depot, 47%; Merck, 53%, and GM, 65%.

Even among the blue chips, this recent bull move has been anything but encompassing. The Nasdaq, moreover, heavily laden with techs, still hovers a scant 2,790 points below its all-time top of 5,048, also, as you might guess, reached at the most maniacal moment of that runaway bull market that turned tail in 2000. Breadth, which, for the uninitiated, is the difference between advancing and declining stocks, hasn't been terribly impressive, confirming the pronounced choosiness of investors in their stock buying.

The absence of widespread participation obviously reflects a lack of investor conviction. But it also reflects, we suspect, ambivalence on the prospect for the economy and corporate profits. The lack of conviction can change quickly as bullish sentiment continues to build, a likely result of headlines blaring "new highs." The concerns about the economy, however, seem apt to deepen rather than dissipate as they're reinforced by fresh signs of weakness in the economy and disappointing profits.

There may well be some speculative steam left in the boiler. But we don't think investors have paid much heed to the possibility of economic and earnings shortfalls; nor to next year's looming budget deficit (possibly as much as $400 billion, compared with this waning fiscal year's relatively benign (?) $260 billion; nor to indications that the Democratic devils may score substantial gains in the congressional elections; nor, lest we forget, to the likelihood that Iraq will remain a place you do not want to vacation in.

In short, this is unmistakably a caveat emptor market, one of those markets, as someone once put it, that has discounted everything but the bad news.

As we related back on Wednesday, credit for putting together the full list of Dow Components goes to Mike Panzner.

Sources:
Infestation of Bugs
ALAN ABLESON
UP AND DOWN WALL STREET
Barron's, October 2, 2006
http://online.barrons.com/article/SB115956988746978619.html

MARKET WATCH
ANITA PELTONEN
Barron's OCTOBER 2, 2006
http://online.barrons.com/article/SB115956974332878591.html

Calling All Conspiracy Theorists!

Friday, September 29, 2006 | 06:30 PM

in Energy | Markets | Politics | Psychology/Sentiment

At Wednesday's Kudlow & Company, Larry laid down an interesting challenge to me. "The Dems in D.C. are saying the White House cut oil prices just before the election. What do you think of that?"

My answer was straight forward: "I don't really believe in conspiracy theories. The White House couldn't even keep a 2nd rate burglary under wraps. Sure, it was fortuitous timing for the GOP to have Gas prices plummet by a third 6 weeks before elections. But I need to see a market mechanism. We know the Saudis have been pumping all out for 3 years. What made prices go down?"

This was before we went on air, and in the subsequent "Goldilocks" infused adrenal rush, I kinda forgot about it.

On the train in this morning, I overheard a couple discussing how they tanked up at $2.45, and how much lower gasoline now is.

And it got me thinking:

Yes, the timing is convenient. But so far, there's nothing more than few funny coincidences. Show me the market mechanism for this, and give me a credible person saying this happened, and I will push it further.

Larry raised this issue, and all I have now are some interesting "coincidences. So I ask the assmebled multitudes -- what proof is there of energy price manipulation? I don't want theories or any tin foil hat crowd conspiricies -- show me facts data or some evidence, and we will dig deeper into this.

The Spock Market

Friday, September 29, 2006 | 06:30 PM

in Markets

I'm outta here early for the holidays, but let's leave you with this amusing piece of nonsense for a Friday afternoon :

I'll see you at Leonard Nimoy's house for apples and honey . . .

Dow 36,000!

Friday, September 29, 2006 | 02:49 PM

in Investing | Markets | Psychology/Sentiment | Technical Analysis

James K. Glassman, the author of the book Dow 36,000 was on CNBC just now, credibly discussing his 36,000 forecast.

This one is so obvious, I will not even comment, and instead ask you: What do you suspect this might possibly mean?

Dow vs Money Market (Since Peak)

Friday, September 29, 2006 | 05:30 AM

in Finance | Markets | Psychology/Sentiment | Technical Analysis | Trading

On Wednesday, we looked at the breakdown of Dow components, surprised to discover that only 10 of the 30 Dow components were above their ~~2006~~ 2000 highs. Four stocks -- Boeing, United Tech, Caterpillar and Altria -- were the primary drivers, pulling the Dow higher despite the drag of so many other relatively weak components. 15 of the 20 Dow stocks still below their prior highs are down substantially, with GM and Intel off ~60%, and Microsoft still down by 51%, and Home Depot and Merck off ~ 40%.

But before we get too excited about the new highs on a closing basis -- perhaps even today? -- perhaps we should look at the actual real performance of the Dow.

Consider what happened if you actually held these 30 stocks (individual issues or through the Diamonds) since January 2000: After 6 1/2 years, you are now almost breakeven on a nominal basis. If you reinvested the dividends from the Dow, you would be up 12.7%.

On a real basis, adjusted for inflation, you are actually down 19%; With reinvested dividends, you are down around 9%.

If you were lucky enough to sell back in January 2000, and you instead simply placed the money in a cash fund (money market), you would be up ~20.87% on a nominal basis; On a real basis, you are up just under 2%.

So while everyone on TV is celebrating the new highs, I can't help but think: "Yeah! We only underperformed cash by 818 basis points! Yeah!

Dow Industrials and Fidelity Money Market Fund

That's on a real or a nominal basis.

Soft Landing Continues to Fade

Thursday, September 28, 2006 | 10:47 AM

in Data Analysis | Economy | Real Estate

>
The market can stay irrational longer than you can stay solvent.
-John Maynard Keynes (1883 - 1946)

Yesterday, I received the following question: "Why aren't you short yet?"

The short answer is, "No manager can afford to be too early on the short side. You can be long and wrong; you can even afford to be in cash and wrong; but short and wrong is fatal."

The more complete answer is simply this: The markets have been banking on a soft landing; As the recent economic data points have shown, this is an increasingly unlikely outcome. Consioder the following:

Durable Goods Orders: A key barometer of business CapEx equipment spending - decreased by 0.5% in August. Durables were downwardly revised to 2.7% in July. This confirms prior reports indicating slowing growth in the manufacturing sector. ISM index slipped 54.5, in August from 54.7 in July. The Philly Fed reported a -0.4 reading of its business conditions index. Economists had expected 15.0;

Mortgage Apps Despite rates sliding to multi month lows, mortgage apps were soft.

New Homes Sales: We looked at the New Home Sales data last year, and found them unreliable -- they are based on statements from Builders; A more accurate basis is to use a moving average, and to ignore wild swings beyond the margin of error.

Existing Homes Sales: Existing home sales, at 6 X the size of the new home sales, continue to slide as sales units slow, inventories rise and prices fall.

Consumer Revolving Debt: As HELOCs and Mortgage refis fade, we see revolving credit increase. That's right, the US consumer has maintained their consumption by taking on more debt;

Business CapEx Spending: See Durable Goods

The market's short term technicals do support the run for the highs; We have an excessive short interest, as well as generally gloomy sentiment readings.

But that peak is unlikely to be very sustainable.

Sources:
Durable-Goods Orders Declined Unexpectedly in August by 0.5%
JEFF BATER
WSJ, September 27, 2006 9:16 a.m.
http://online.wsj.com/article/SB115935977968175402.html

Paul Volcker at Bloomberg HQ

Thursday, September 28, 2006 | 07:05 AM

in Economy | Federal Reserve | Inflation

The King Report, an institutional commentary, recounted a fascinating discussion that took place at Bloomberg's HQ in NY on Monday night. A panel of ex-NY Fed Presidents (Paul Volcker, Gerald Corrigan, William McDonough and Anthony Solomon) held a panel discussion on the risks to the US economy. The panel chair was current NY Fed President Tim Geithner.

Here are a few comments that Bill King was kind enough to pass along:

"Volcker and Corrigan warned about inflation.

Gerald Corrigan on our current structutral issues: “Once the genie [inflation] is out of the bottle, it is very, very difficult and expensive to put it back in the bottle...The U.S. savings rate is virtually zero. It brings with it some potential of very serious problems down the road, as far as the well-being of our citizens.”

While Greenspan gets most of the credit, the reality is we have been living in the house that Volcker built. Easy Al has frittered away much of the solidity of that Anti-Inflation structure.

Here are Volcker's comments:

Paul Volcker: “I am a little bit more worried about inflation…it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word, psychological pressure, political pressure, there is not to do anything about it.”

Volcker added, “A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that nothing very startling will happen in terms of restraint…But once people are convinced that that’s the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.”

Volcker also criticized the LTCM bailout. “I expressed certain reservations about that particular operation at the time and I hold steadfast to my reservations.”

Paul also takes a swipe at the contemporary Fed for its penchant to warble. “I do think actions speak louder than words and the words should as little as possible confuse things. The market ought to make up its own mind once in a while and eventually it will. I don’t know how much they need to be spoon-fed, so to speak.”

Mr. Volcker, God bless him, ridicules contemporary central bank & Street sophistry:
“We live in this peculiar world where 3 percent inflation is stability but a half percent decline in the price index is deflation. I am not quite up with modern nomenclature.”

Great stuff. Thanks, Bill.

Source:
The King Report
Bill King
M. Ramsey King Securities, Inc.
Tuesday September 26, 2006 – Issue 3482 “Independent View of the News”
http://www.mramseyking.com/thekingreport.html

Outrage!

Thursday, September 28, 2006 | 05:38 AM

in Politics | War/Defense

I was speaking with Kudlow yesterday before the show, and he loved a cartoon I had sent him (via Weedon):

It would certainly benefit Moderate practioners of Islam if they were to recognize the disrepute the radical Islamofascists (is that really a word?) brings to their religon. Even the Pope apologized for the holocaust and the Spanish Inquistion. I hope we don't have to wait 400 years to hear moderates condemn the violence somewhat louder . . .

Media Appearance: Kudlow & Company (9/27/06)

Wednesday, September 27, 2006 | 04:00 PM

in Media

Back in the studio for the regular appearance with Kudlow tonite.

The topics will be Dow Rally, The Economy, Sentiment, and Earnings. Guests include Diane Swonk (Mesiro Financial), Brian Wesbury (1st Trust Advisors) and Stephan Abrahms (Trust Company of the West).

Should be rather interesting.

Change in Dow Components

Wednesday, September 27, 2006 | 12:21 PM

in Markets

Mike Panzner on the Net change in the constituent members of the Dow from the January 14, 2000 record close through earlier today...

Dow Components

Eastman Kodak	-62.22%	[No longer in Dow]
General Motors	-60.74%
Intel Corp	-60.18%
Microsoft Corp	-51.27%
Home Depot Inc	-41.21%
Merck & Co	-39.47%
Intl Paper Co	-38.47%	[No longer in Dow]
Du Pont	-36.06%
Honeywell Intl	-31.31%
IBM	-31.19%
Alcoa Inc	-30.83%
General Electric	-29.46%
Coca-Cola Co	-26.62%
Wal-Mart Stores	-23.24%
AT&T Inc	-21.05%
Hewlett-Packard	-18.83%
Disney (Walt) Co	-7.43%
McDonalds Corp	-6.35%
JPMorgan Chase	-4.43%
******************************
Dow Jones Indus. Avg -0.12%
******************************
Procter & Gamble	7.72%
American Express	19.73%
Citigroup Inc	24.22%
Johnson&Johnson	38.18%
3M Co	50.67%
Exxon Mobil Corp	59.09%
Boeing Co	80.93%
United Tech Corp	98.52%
Caterpillar Inc	153.77%
Altria Group Inc	220.83%


SBC Communication		[Now part of AT&T]

What's amazing is that 20 of the 30 Dow Components are off their highs, and that so many of the them are WAY OFF their 2006 highs. Of the 20 Dow components that are below their 2000 peaks, 14 of those 20 off by more than 25%.

That is the nature of a price weighted index . . .

UPDATE: October 27, 2006 11:10am

Attention Slate readers: Be sure to also see our comparisons between the Dow vs Money Market since the market peak. You may be surprised to learn that since January 2000, cash (yes, cash) has outperformed the Dow.

Quote of the Day

Wednesday, September 27, 2006 | 10:28 AM

in Federal Reserve

Former Federal Reserve Chairman Alan Greenspan "raised eyebrows with several unusually frank remarks in an hourlong discussion in front of 800 members of the Mass. Technology Leadership Council."

Greenie told the audience that "Sarbanes-Oxley corporate governance rules enacted in 2002 had become a “nightmare” and should be scrapped as soon as possible." The former Fed head said SarbOx "discouraged risk-taking and were driving foreign companies to shun the New York Stock Exchange for the lighter rules in London."

That is a major reversal; Greenspan had previously supported the Sarbox.

Jim Bianco was none too impressed with the former Fed chief, noting:

"Anything else, Dr. Greenspan, you would like to change your opinion on? Maybe the productivity miracle? The fallacy of using corporate visibility as a forecasting tool? The quit rate? The world awaits your next confession at $150,000/hour."

-Jim Bianco of Bianco Research

Sources:
Greenspan unleashed
Brett Arends
Boston Herald
Monday, September 25, 2006 - Updated: 11:41 PM EST
http://business.bostonherald.com/businessNews/view.bg?articleid=159256

Et Tu, Greenspan?
WSJ.com/marketbeat
September 27, 2006 9:17 a.m.
http://online.wsj.com/article/SB115935934213875397.html

Fascinating Development

Wednesday, September 27, 2006 | 07:56 AM

in Weblogs

~~Post to follow before noon~~.

This won't be ready for some time -- but I will post updates as I gather the details; Here's some early hints:

Raw-Material Pullback, Catches Some Off Guard
ANN DAVIS
WSJ, July 3, 2006; Page C7
http://online.wsj.com/article/SB115151516900993222.html

U.S. third-quarter profit warnings ramp higher
Reuters

Americans look for political manipulation as gasoline prices plunge
http://www.usatoday.com/money/industries/energy/2006-09-25-gas-poll_x.htm?csp=15
USA Today 9/25/2006 7:01 PM ET

Energy refinery margins fall; stock ratings cut
Thurs., Sept. 21, 2006, 8:50 AM
http://www.billcara.com/archives/2006/09/energy_refinery.html

How Low Can It Go?                http://tonto.eia.doe.gov/oog/info/twip/twiparch/060920/twipprint.html

Meanwhile, talk amongst yourselves . . .

“When would you short the markets?”

Tuesday, September 26, 2006 | 11:45 AM

in Economy | Psychology/Sentiment | RR&A | Technical Analysis

NOTE: This Trading alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tue 9/26/2006 2:28 PM EDT;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

Last week, we were asked “What would turn you Bullish?”

This week, we received what is the opposite question: “When would you short the markets?”

The answer to this question – to both questions, really – depends upon how much further and how fast the internals decay as the markets rally towards the May 2006 highs.

This could be a very crucial phase of the market. The next 5-10 trading days may turn out to be a key period that determines the following few months.

As Markets march higher, we note the short term factors are at work:

1) This is the final week of the quarter, and with it, “Window dressing – funds buying more of their favorite stocks to improve their short term performance. I would expect this to continue for a few more days;

2) The Dow highs are about a 100 points away, and as we have mentioned previously, I expect them to be taken out – likely before the week’s over.

3) Pessimism continues to be thick; The one way to guarantee a correction will not occur is for too many people to expect it.

4) Some sectors may have priced in at least some of the bad news: Neither Lennar’s preannouncement of bad news for Q4, nor Home Depot competitor Lowe's (who sees income at lower end of prior view) led their stocks lower; Indeed, as of this writing, both are higher.

5) There is a surfeit of cash in the hands of fast traders; Expect them to continually chase momentum –until that stops working for them;

6) Technical analysis and intermediate term trend each remain constructive;

Those are the short term factors; These are up against longer term issues of economic softening and market internals:

1) The main engine of economic growth – Housing & Real Estate – continues to decelerate;

2) Market advances have taken place on lower than average volume;

3) Energy prices have become oversold, and are likely to bounce upwards;

4) The May highs represent appreciable resistance – the double top may present formidable barrier; An upside penetration could create a Bull trap;

5) Despite the rally in the Dow, new highs are lagging, while the number of new lows are expanding.

6) Less and less stocks are participating in the advance: Indeed, this table makes it clear that this rally is very Dow-centric, meaning that it is focused more and more on fewer and fewer stocks.

Note how close the Dow is to its all time high, while the other indices are significantly further away. This is no coincidence:

Indice	All time high	Date of high	Recent high	Percent off all time high
Dow Indus	11,750.28	(1/31/00)	11647.69	0.87%
Tranny	5,013.67	(5/31/06)	4413.34	11.97%
SPX	1,552.87	(3/31/00)	1333.7	14.11%
Nasdaq Comp	5,132.52	(3/31/00)	2258.3	56.00%
NDX 100	4,816.35	(3/31/00)	1656.07	65.62%
Russell 2000	784.62	5/31/2006	729.94	6.97%

Most of the positive factors mentioned above are short term in nature; Meanwhile the negatives are longer term and structural.

All this leads us to the answer to the question “When would you short the markets?”

As we get closer and closer to the May highs, we will look to the internals to scale into various index shorts. We are not there yet, but we expect we could possibly reach that point sometime over the next few weeks.

Our perspective is to be conservative and patient; We have seen too many bears "treed" and forced into coverage their early shorts; We would much rather wait until the market is gives us its best signal . . .

Are You Missing the Real Estate Boom?

Tuesday, September 26, 2006 | 10:23 AM

in Books | Psychology/Sentiment | Real Estate

I criticized the NAR's Chief ~~Economist~~ Marketer David Lereah yesterday, and received a polite email (from a reader, not the NAR) asking why I was so disparaging.

Here's my answer:

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them
by David Lereah

Real Estate Sales Slump Generating Ugly Press

Tuesday, September 26, 2006 | 07:30 AM

in Consumer Spending | Data Analysis | Economy | Real Estate | Retail

Yesterday's Housing data is producing some pretty ugly headlines today; If the market chose to ignore the data, let me remind you that this is the last week of the quarter, so anything can (and will) happen.

Here's how its being played in the WSJ:

"Yesterday's report also confirmed home prices are coming under pressure. The median sales price of an existing home was $225,000 in August, down 1.7% from a year earlier. That was the first year-to-year price decline since 1995 and the second sharpest in the nearly 40 years the data have been collected.

Prices fell faster for condominiums than for single-family homes. In August, the national median price of a single-family home fell 1.7% from a year ago to $225,700. The median price of an existing condominium fell 2.4% from a year earlier to $223,200. . .

Falling prices have a flip side. If their homes are worth less, consumers may feel less wealthy and therefore spend less on goods and services, a worrisome trend for the broader economy. "We have to acknowledge that this is a clear risk to the consumer," said Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co. In the short term, he said the recent drop in gasoline prices should offset the effect of declining home values."

The Chicago Tribune observed:

"At a pace that some analysts described as "astonishing," the price of existing homes declined nationally for the first time in 11 years in August, signaling that the long-awaited other shoe has finally dropped on the real estate market.

Home sales have been slowing for months but sellers appeared to be holding out to get their price. Now the pressure to sell is intensifying, leading to a drop in house values across the country."

The issue that has Economists worrying is the "housing slump's ripple effects. Even as the boom began to wind down last year the housing market probably contributed about $2 trillion to the U.S. economy, according to the National Association of Realtors. One estimate from Goldman Sachs predicts that the slowdown will cut 1.5 percentage points from the nation's economic growth in 2007."

Two other comments via the Trib:

"It's pretty amazing how fast the reversal has occurred since last year," said David Stiff, chief economist at Fiserv CSW, a property-data analysis firm in Boston.

"There has never been such a quick deceleration in price appreciation," Stiff said. "I was looking at data from 1969 forward, and it's unprecedented."

Bloomberg noted that "Home construction in the second quarter subtracted more from economic growth than at any time since the first three months of 1991, the Commerce Department said."

But the key issue remains the impact on consumner spending. Joseph Stiglitz had the money quote on this:

"What worries me is how long we can sustain consumption on the basis of what we have sustained it in the last several years: by taking money out of your house,'' Joseph Stiglitz, Columbia University economics and Nobel laureate, said in an interview Sept. 22."

Here's yet another chart of price changes, along with regional prices:

UPDATE Septmber 26, 2006 5:05PM

Here are a few more lovely headlines:

Mass. home prices fall 6.1% as downturn gathers speed
Kimberly Blanton,
Boston Globe, September 26, 2006
http://tinyurl.com/quave

Home prices likely to fall more
Noelle Knox
USA TODAY, September 26, 2006
http://www.usatoday.com/money/economy/housing/2006-09-25-existing_x.htm

Sources:
Existing Homes' Median Price Falls Decline Is First Since 1995
As Sales Continue to Slump; Risk to Broader Economy
MICHAEL CORKERY
WSJ, September 26, 2006; Page A2
http://online.wsj.com/article/SB115918982382973038.html

U.S. Existing Home Sales Fall 0.5% in August; Sales Price Drops
Shobhana Chandra and Joe Richter
Bloomberg, September 25, 2006 10:00 EDT
http://www.bloomberg.com/apps/news?pid=20601087
&sid=aAFuT8YFNJQk&refer=home

Home prices finally hit wall
Decrease is 1st in 11 years; Chicago avoids drop—for now
Mary Umberger
Chicago Tribune, September 25, 2006, 10:43 PM CDT
http://www.chicagotribune.com/news/custom/newsroom/
chi-060925housing,1,6517110.story?coll=chi-news-hed

Upcoming Blog Developments

Monday, September 25, 2006 | 04:15 PM

in Weblogs

We have some pretty interesting changes coming up -- some will make the blog more usable, others are design based, and still others are marketing based.

I am adding a 3rd column (on the left), and in it I will include some media quotes, a link to the premium site, a new blogroll, and perhaps the site's greatest hits.

Functionality wise (assuming it can be done via typepad), we are going to set up a "Print this post" and "Email this post." I am also looking into a registered member program, where those who provide a legit email address will be able to avoid the turing test when posting a comment. If we can figure out how to only allow registered users to post, it would mean bringing back the weekend Open Threads w/o fear of spam or trolls.

At this point, I am still against putting any advertising on the blog (too much clutter); However, I am considering allowing the RSS feed to show the full post rather than an excerpt. If I end up going that way, I am thinking about allowing ads in the RSS feed.

I also have a few ideas about bringing in content from what I consider the best undiscovered bloggers out there; I am not looking to become a Seeking Alpha, but rather, would like to add some fresh voices you may not be familiar with.

~~~

As always, your feedback is appreciated.

UPDATE September 29, 2006 7:49 am

Typepad response: "Thanks for letting us know you would like to see an approval setting for commenters added as a feature to your accounts. We have have this request from other users, and we are considering adding it as a future feature."

Perhaps if other Typepad users repeat the request, it can be done.

Home Prices Drop; 1st time in a Decade

Monday, September 25, 2006 | 12:54 PM

in Economy | Fixed Income/Interest Rates | Psychology/Sentiment | Real Estate | Retail

The National Association of Realtors announced Existing-Home Sales today. The data is consistent with our expectations of softening sales and prices and increased inventory:

• Total existing-home sales slipped 0.5 percent in August; This was 12.6% lower than August 2005;

• National median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000. . .

• The drop in prices is the first year-on-year decline since 1995, and is the second-largest decline in the 30-year history of the survey;

• Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale -- a 7.5-month supply at the current sales pace. This is the highest supply since April 1993;

• Sales have now declined for five months in a row and 9 of the past 12 months;

• Existing home sales weakness is similar to the New Home Sales report last week , which showed construction plunging by 6% in August; New Home Building activity has returned to leves seen in 2003.

As we noted last month, there are a variety of reasons Why Don't Big Housing Sales Drop Produce Big Price Drops. Suffice it to say, the data assmebly methods leave something to be desired.

I continue to be impressed with the disconnect between Housing and the Equity markets. Its pretty clear the bond markets get it, as have the commodity markets. Equity markets, on the other hand, are still contemplating some sort of a a soft landing / Goldilocks environment. Well, someone will be right and someone will be wrong . . .

The WSJ's Marketbeat noted a disconnect between "today's figures on sales of existing homes and other data from the National Association of Realtors:"

"Richard Iley, senior U.S. economist at BNP Paribas, goes so far as to say today's figures are "suspiciously strong." He notes that the NAR's index of pending home sales is down 11% in 2006, while existing sales are down just 4%. The year-over-year rate of decline in existing-home sales is 12.5% through August, but the pending index, as of July, was down 16%. "Expect catch-up in the 'official' NAR resale numbers next month," Mr. Iley wrote.

The existing-home-sales report's headline number -- that sales had only fallen 0.5%, better than expected -- buoyed the stocks of homebuilders after it was released at 10 a.m. EDT. But those stocks fell sharply thereafter, as the underlying data still remain weak...

Mr. Iley also notes that the housing-price decline is likely to hurt consumer spending. Mortgage-equity withdrawals, which consumers have used in the past several years to finance spending, have declined. According to last week's Fed flow-of-funds data, mortgage-equity withdrawal sits at 1.5% of household disposable income, the lowest since the 2001 recession. Lower home prices won't help that, and prices could stay under pressure as more houses go unsold -- 7.5 months' worth of supply is on the market now, the most since April 1993. "As the rate of house-price inflation continues to fall and heads into negative territory, this wealth spigot is not only being turned off, but may move into reverse," he said."

Most astounding of all, the National Association of Realtors somehow spun the data as Bullish:

David Lereah, NAR’s chief economist, said home sales appear to be leveling out. “After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace,” he said. “It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build up in the inventory of homes on the market.”

Kevin Depew pointed out the absurdity of this:

"Just ask the chief economist for the realtors group: 'The price correction is a welcome development,' he said, because it stops the bleeding. 'Sales have hit bottom,' he said. 'Sellers are finally getting it.' "

Given that Realtors routinely describe tiny apartments as "cozy," and manage to use the phrase "Handyman Special" to describe houses which you and I would call "shit-holes," perhaps we shouldn't be all that shocked by any spin from the group's chief economist . . .

UPDATE 2 September 25, 2006, 8:08pm

Via Mike from interest rate round up, these 2 charts show the price drop and inventory rise:

Year Over Year Price Drop:

Existing Home Inventory:

UPDATE September 25, 2006, 1:45pm

The Canadian Globe and Mail points out that U.S. house prices could drop another 10%:

Stéfane Marion, an economist at National Bank, disagrees with the NAR's statement that the faltering U.S. housing market has hit a trough and prices will start climbing again. "In our opinion, this forecast is way too optimistic."

The inventory of unsold U.S. homes climbed 1.5 per cent in August to its highest level since April, 1993. That surge, Mr. Marion said, has changed the dynamic of the housing market, but houses are still too expensive for many people . . . Even at the current reduced price of around $225,000, it is important to keep in mind that the median single family home is still selling at 3.7 times median-family income."

Sources:
Existing-Home Sales Down With Softening Prices
Walter Molony
National Association of Realtors, August 23, 2006
http://tinyurl.com/kxrfp

MarketBeat: House of Pain
Housing Prices On the Decline
David A. Gaffen
WSJ, September 25, 2006 12:00 p.m.
http://online.wsj.com/article/SB115918630195573000.html

Existing Home Sales Bullish!
Kevin Depew
Minyanville, Sep 25, 2006 10:11 am
http://www.minyanville.com/articles/index.php?a=11274

Why Don't Big Housing Sales Drop Produce Big Price Drops?
The Big Picture, Friday, August 25, 2006 http://bigpicture.typepad.com/comments/2006/08/why_dont_big_ho.html

U.S. house prices could drop another 10%
ROMA LUCIW
Globe and Mail (Canada), September 25, 2006 12:00 p.m
http://tinyurl.com/gy6vy

Why is Oil Dropping (and what might its impact be)?

Monday, September 25, 2006 | 07:39 AM

in Commodities | Economy | Energy | Psychology/Sentiment | Technical Analysis

Oil has dropped under $60 this morning, to reach 6 month lows. Prices have "dropped more than 23% since hitting a record $78.40 in mid-July." At the same time, stocks have closed in on their May highs.

Why has oil dropped so precipitously over the past 2 months? AP notes that:

"The high prices in July and August were largely fueled by concern over the possibility that Iran could disrupt oil supply if sanctions were imposed or if the monthlong conflict between Lebanon and Israel escalated. Fears of hurricane damage to U.S. Gulf Coast refineries also drove the market higher this summer but the storms so far have blown past the coast."

Here is a short list of the most common current explanations circulating in MSM:

1. More Supply coming online;
2. Reduction of global terror threat;
3. Cooling of hostilities between Israel and Lebanon
4. Seasonally weak demand, as Hurricaine season ends;
5. Iran cooling inflammatory rhetoric

I find these some of the mainstream explanations unsatisfying. At the risk of creating a strawman (only to knock it down), let me put forth my top 5 list:

1. Fast money rotating out of commodities and into tech;
2. Cooling economy consuming less energy;
3. No major supply disruption from weather or Middle East;
4. Psychology peaked earlier in year; (see Business Week Cover Story)
5. Stretched consumer shifts behavior;
6. And lastly, the ~~Weak~~ Strong US Dollar (Crude is priced in greenbacks)

The biggest mis-statement on the mainstream list/energy discussion is the perplexing meme that somehow terror concerns have been alleviated. I find that rather astonishing, given that the leaders of two of the larger Oil suppliers were in NY at the UN last week talking trash about the Unied States of America.

The eventual confrontation with Iran -- last I checked, they had not given up their nuclear ambitions -- is still looming on the horizon.

On top of that bit of psycho-drama, we learned this weekend that US Spy Agencies Say Iraq War Worsens Terrorism Threat.

So the new idea that somehow the terror threat or the Middle East turmoil has improved fails to resonate with me.

All these explanations remian squishy, however. When in doubt, we go to the charts:

Crude Oil, 6 Month Chart
click for larger chart

Crude Oil, 3 Year Chart
click for larger chart

Major Support for Crude is at $58, minor support is at $55 and $49.

Oil is in the midst of a major correction, and by the traditional measure of 20%, can be defined as in a Bear market. The mainstream explanations are greatly over-simplified.

Why is this important? Understanding why energy prices have dropped can help you avoid positioning your portfolio on unrealistic assumptiuons . . .

Source:
Oil Falls Below $60 a Barrel As Supply Concerns Ease
Associated Press, September 25, 2006 4:36 a.m.
http://online.wsj.com/article/SB115916984508472928.html

Linkfest!

Sunday, September 24, 2006 | 06:30 PM

in Weblogs

Sometimes, the numbers don't tell the full story: For the week, the Dow lost "only" 52 points -- about 1/2 a percent -- while the SPX gave up 5 and the Nazz lost 16. Funny, it seemed a lot worse Thursday and Friday, as several economic releases suggested a much sharper deceleration than consensus.

The Fed stayed on Pause, Oracle reported good numbers, and -- ex 20 cent a share Labor expenses -- Fed Ex maintained guidance for 2007. Oh, and I heard something or other about a hedge fund blowing up.

This week, we have some housing data, Durable Goods, GDP and Personal Income to look forward to. While we wait, here is the weekend linkfest:

ECONOMY

• I can sum up the economy, market sentiment, and the late week shift in trading in just 2 words: Whither Goldilocks?;

• There's too much Amaranth stuff out there, so here is a quick overview: Dealbreaker does a full round up of all the coverage; Jeff Matthews explains how the fund was related to LTCM; I place blame squarely where it belongs: on investors who encourage excessive risk-taking.

• Economists Debate if Fed Is Done Raising Rates; Caroline Baum observes the