Thursday, February 24, 2011
"The power of accurate observation is commonly called cynicism by those who have not got it."
- George Bernard Shaw
By now many of you have seen this, but James Bullard, the head of the St. Louis Federal Reserve Bank - one of the Federal Reserve member banks that has historically been more conservative with regard to loose monetary policies, I might add - gave a speech today in which he responded to a question about printing more money by saying "never say never to QE3." Of course we know where this is going. It's funny because I was chatting casually with some people last night about the stock market and the "QE" madness and I was asked with dismay if I thought QE3 would really happen. You should have seen the look on faces when I said that QE will go a lot higher than 3...got gold?
Time to remove the beautiful gift-wrapping around the today's economic reports delivered by the mainstream media and stock-promoting cable news outlets.
Durable goods. The media gleefully reported a 2.7% jump in durable goods orders for January. But if you dig through the report, the gain reflected a massive order for aircraft parts from Boeing. If you exclude transportation - i.e. Boeing's order - capital goods orders actually dropped 3.6% vs. expectations of a .5% increase. Worse, excluding defense and aircraft orders, capital goods orders plunged 6.9%, the biggest decline in two years. The expectation was for a drop of 1%. How's QE1 and 2 working? How are Wall Street forecasts lookin'? How's reality look vs. what is dressed up in formal wear and presented by the media sources from which 90% of those who even bother to follow the news get their news?
Housing (ad nauseum). New home sales for January reported today by the Census Bureau plunged 13% to an annual rate of 284k. 300k was the number expected by Wall Street's collective group of Einsteins. The January number collapsed 18% from January 2010. Even more horrifying, the total number of new homes sold in January was 19,000. Just let that one sink in. Annualized calculations are based on trailing 12 month sales rates. As the rate of sales declines, so does the annualization calculation. But I digress with practical matters...the 19k number was the lowest monthly new home sales number since the Census Bureau started keeping records. Here's the link to the report: LINK
Please don't pay attention to the inventory estimates. To begin with, and I researched this several years ago and no one ever talks about it, when a new home goes under contract, a sale is recorded by the CB and a home is removed from their inventory count. If the contract is cancelled, the CB does not revise its numbers. For the last 5 or 6 years, at least, contract cancellations have been running around 20%, on average. Back in 2007-2008, when I used to scour homebuilder 10Q's every quarter, most homebuilders were reporting cancellation rates in excess of 30%. In other words, the inventory of homes reported is grossly underestimated.
To make matters worse (sorry housing market optimists), last month new homebuilders reported an increase in housing starts - news which the market loved. BUT, and here's the golden truth, even more inventory will be building up with unsold new home sales plunging, more unsold new homes being built, a lot more existing homes on the market - the inventory of which we learned from a private, independent home data provider may be currently underreported by as much as 20% - accelerating foreclosures, bank inventory hitting the market, AND declining demand as more people - in truth and reality - lose their jobs and fall off the jobless benefits (work force welfare) payroll.
The basic law of supply and demand tells us how this Romeo and Juliet will end. Much lower prices and much more pain ahead for the housing market. I'm now actually starting to see some "fringe" Wall Street firms publish economic reports which forecast big declines for housing values, so I'm not the only one who sees this coming...
When you look at media reports, you can't just look at the headline number, which often shows a percentage gain from the previous month, and take it for face value. You have to pull up the actual report released by the entity which released it, dig through the details and analyze it in the context of a much longer timeframe than just month to month.
Posted by Dave in Denver at 11:16 AM