Tuesday, September 1, 2009

Selling on the Good News

I have taken the liberty of copying Calculated Risk's post today titled Pending Home Sales Increase in July:

"From the NAR: Pending Home Sales on a Record Roll

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in July, increased 3.2 percent to 97.6 from a reading of 94.6 in June, and is 12.0 percent higher than July 2008 when it was 87.1. The index is at the highest level since June 2007 when it was 100.7....

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit. emphasis added (by CR)

The increase in pending sales has been mostly from lower priced homes with demand from first time home buyers (taking advantage of the tax credit) and investors.

And look at the cost of the tax credit! If NAR is close to being correct, 2 million buyers will claim the tax credit - times $8,000 - is $16 billion. But this only resulted in "approximately 350,000 additional sales".

So this tax credit cost taxpayers about $45,000 per each additional home sold. Not very effective ... especially considering most of these are lower priced homes."

DoctoRx here now.

CR generally avoids what might be political commentary (save for occasional praise for Dr. Bernanke). For him to point out how cost-ineffective this first-time home-buyer stimulus can be adjudged to be says something to me.

Could this have something to do why the stock market is selling off on this "good news" and the upside surprise out of the ISM?

What is the 10-year yield doing dropping to 3.38 on this news?

Could it be that the fine economics blogger Ed Harrison got it precisely right when he predicted several months ago that we would experience a "False Recovery"?

This blog stated several times this winter that the most important thing for Government to do was provide succor for the needy who were hurt by the sharpness and suddenness of this economic downturn that may or may not have technically ended, but that the economy had been whipped too hard, and that economic steroids/adrenaline/dope/alcohol were a mistake. Tired people need to rest. Shopped-out shoppers need to save. An over-housed country suffering from mortgage fraud on a massive scale does not to blow another mortgage bubble. As was pointed out in a book on the Great Depression, when a truly useful new product came on the market, most people found a way to buy it. There is no New New Thing now. There will be.

Meanwhile, there is some complacency, as exemplified by this headline in Yahoo/Finance, Why September May Not Be That Scary (duh, of course anything may happen):

September has historically been a month when stocks rose only if they had fallen in the preceding months, but this does not mean this month should be the same, as conditions now are very different, two market analysts told CNBC Tuesday.

"What we think is that most fund managers or at least part of them have missed the rally," Christian Blaabjerg, equity strategist at Saxo Bank, told "Worldwide Exchange".

Combined with the record low interest rates and stimulus money across the world, this can keep the market consolidation going, Blaabjerg added.

The US economy is under the influence of an "enormous monetary and fiscal stimulus," and it is possible that stocks will continue to rise on the back of improved hopes for recovery, Michael Ivanovitch, president at MSI Global, told CNBC.

"I'm glad I am out of New York for this September superstition," Ivanovitch said.

Apart from the better data, there is also a better mood about the economy that might continue to influence stocks, he said. "Hopefully, some doom and gloom people have been put out of business for a while," he added.

I would rather that Mr. Blaabjerg not have told CNBC that it's different this time to support a bullish point of view. I would rather than Mr. Ivanovitch not have called a true fact-- that September historically has been a mildly down month (and the only one) for stocks--a superstition. Past performance may not predict future performance, but a fact is not a superstition.

Assets with value propositions behind them that are seemingly incompatible--gold and Treasury notes, are flat to up in price on the day, whereas GE and the financials are seeing real profit-taking. Gold especially continues to look strong. Long-term, however, CR's observation about how cost-ineffective government "stimulus" has been for housing (typical, I would add), adds to the strength of a Japan scenario: pushing on a string and all that sort of stuff. That just possibly could mean much lower interest rates than almost anyone thinks possible.

Copyright (C) Long Lake LLC 2009

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