Farrell: Think Bear Market ... Not Housing Stats
Chief Investment Officer, Soleil Securities
Just to annoy Dylan Ratigan I want to make sure everyone knows I'm working from home today. I have sandals and a tee shirt on. No suit, no tie. And Dylan does. I also wouldn't be able to get within a mile of my office at Rockefeller Center. Mylie Cyrus (did I spell that right?) is performing in the Plaza and a notice went out not to even try doing anything but going the long way around and through the 6th Ave. subway entrance. When I left Thursday night there were several hundred young girls and Mom's settled in to camp out for the night. Remarkable!
As we all know the market got crushed Thursday. The report that existing home sales fell more than expected seemed more than the market could bear. The report was no where near as bad as interpreted with the price decline on an annual rate much less than recent reports. A short while ago home prices were falling at an annual rate of -30% and this report shows them falling at a -3% annual rate and the median price of a home at $215,000 is well ahead of February's hysterical low $196,000.
Bill Gross of Pimco was on CNBC with a negative take on the housing market (See video). He said the price-to-rent ratio is usually 15 to 1 (that's correct) and it is now 27 to 1 which indicates housing is still overpriced and will come down more to close the gap. But I wrote two weeks ago that Mark Zandi of MoodysEconomy.com, a correctly positioned bear on the housing market, saw some glimmers of improvement in that the price-to-rent ratio had fallen to 20 to 1. Not back to the historical 15 to 1, but much better than the recent peak of just shy of 25 to 1. Bill Gross is smarter than I, but I will go with Zandi as I have seen the same info from several other sources. But the market chose to misread the housing number and Bill Gross has a deservedly wide following, so the market had a bad day.
Mickey Levy, economist at Bank of America, said in regards to the housing report that "if there is a silver lining it's the number of existing homes changing hands has steadied on a month-to-month basis" and "by the end of the year, I suspect we'll start to see a light at the end of the tunnel."
I think there were several lights blinking the last few days. A number of banks -- Bank of America , Sun Trust , Wells Fargo among others -- have said they had no plans or need to raise equity capital. They were joined yesterday by National City , a Cleveland based bank long rumored to be in need of capital trading at $4.67 down from $31, who said "it's well capitalized and expects provisions for loan losses to decline in the second half of 2008." They could all be smoking something and they could all be wrong. But in these litigious times why say anything at all unless your conviction level is high.
John Paulson who allegedly made a bazillion dollars last year shorting the housing market is forming a new fund to provide capital to cash-strapped banks. Goldman Sachs has raised a $10 billion fund to invest in loans backed by leveraged buy-outs. The smart money is picking through the wreckage which is a sign to me that they think the bottom isn't that far away (my opinion).
What we are in is a bear market that will be punctuated by ferocious counter-trend rallies that are welcome respites, but are rallies in a bear market. Remember that the average decline in a bear market is 30% from the top and we are well into that. Let's try not to assign too much to cause and effect to the news of the day. The housing report was not so far off the expected and was not nearly as bad as it was treated. We declined because we are in a bear market. But much of the damage to the market has been done and "This too shall pass."