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Farrell: The News Does Look Ok, But Beware the Ides of Kass

New home sales have historically been about 15% of total home sales but that percentage has declined with the collapse of the housing market. Nevertheless, it's worth noting that Wednesday's report on new home sales looked pretty good. Sales were up 9.6% from last month to 433,000. This was the fourth month in a row of increase and we haven't seen that in five years. Inventory of homes held for sale dropped to 7.5 months from 8.8 months in June. With the recent Case Shiller data and the fact that existing home sales also were up four months in row, it is fair to say the housing corner has been turned. But only turned. New home sales are 70% below the peak and about 40% below the long term average. Mortgage applications were up 7.5% last week with refinancing applications leading the way. This shows the remarkable sensitivity of applications to interest rate moves.

We also saw a good headline number for durable goods being up 4.9% in July. But ex-transportation the number was up .8%. That does compare nicely to last month's -.2%. Non defense aircraft surged 107% and that is not sustainable which is why you take out the erratic transportation orders. This was the third month in a row the headline number was up and the highest reading since last September.

News overseas was good as well. The German IFO Index - a measure of the business climate - climbed to 90.5 in August from 87.4 in July. Singapore's Industrial Production soared 23% last month, and Japan's small business confidence index rose for the seventh month in a row to the highest reading since May, 2008. But the news at turns is never uniform and Japan's exports dropped. The negative view is that the stimulus programs are running out of gas and world trade will roll over. Could be, but I think the $787 billion US program - be it good or bad - has spent very little of that money and the impact is yet to be felt.

My pal, Doug Kass, an excellent investor if there ever was one, but more importantly, Lola Jane Farrell's honorary uncle, feels we have see the highs for the market for the year. Kass did call the March bottom almost to the day so he is worth listening to. Doug worries there aren't enough bears, hedge funds are more invested on the long side than they have been for years, and there is just too much complacency and optimism. He also worries that the cost cutting that has propelled earnings recently can only go so far, the overleveraged consumer will save more and consume less, commercial real estate will be a growing problem, and taxes are sure to go up. He sees, like Nouriel Roubini, the chance for a double dip and a fall back into recession when the government stimulus programs are ended. Food for thought.

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