Sep 25, 2010

Alan Abelson builds the skeptic's case against economic recovery

That the market is on a roll is undeniable (and who but a cockeyed grizzly would want to deny it). But what's providing the biggest lift is the prevailing investor tendency to respond like gangbusters to even a glimmer of good news and to ignore bad news no matter how telling. Take the response to the latest data on housing.

First came the disclosure that existing home sales were up 7.6% in August—immediately seized upon as evidence that housing was on the mend, supposedly a harbinger of an accelerated recovery and reason enough to take the plunge into equities. But it ain't necessarily so.

As Mark Hanson, of Hanson Advisors, is quick to point out, while last month's sales were better than economists' forecasts (most of whom never saw the housing crash coming), they were down 19% from sales in August '09, and inventory edged up to 11.6 months. That awesome pile of unsold homes all by itself is going to be exceedingly tough to unload.

Moreover, Mark warns that you better be prepared from here on for the full impact of the end of government stimulus, including some pretty irresistible tax breaks, which helped goose demand this year. The absence of such artificial resuscitation is likely to translate into extremely disappointing year-to-year comparisons, including more than a few months of double-digit declines in existing home sales. He also sees the heavy mass of foreclosures and so-called short sales "pushing median and average prices lower, quickly."

As for new home sales in August, they were flat at a pitiable annual rate of 0.288 million units, just a sneeze above May's all-time low of 0.282 million. As a matter of fact, Mark says August sales were the smallest for the month ever. And he notes that foreclosure starts and actual foreclosures were close to 300% of overall new home sales, which stacks up as "a huge obstacle to builder sales" as we head into the slow season for housing.

Again, maybe we're missing something, but a decent recovery without a revival in housing strikes us as a BLT on toast without bacon. It just isn't going to happen. But investors at the moment apparently couldn't care less.

~Alan Abelson, Barron's magazine, "The Bad News Bulls", September 25th, 2010

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