U.S. stocks posted the largest two-day rally since 1987 – following the largest two-day decline on the DOW since 1987 and since 1933 for the S&P 500, in the previous two sessions -- after the government said it would backstop $306 billion of Citigroup’s troubled assets and (this is key) provided the bank with a capital injection without wiping out current shareholders.
(This was the mistake of the Bear Stearns deal, and the terrible mistake of the Fannie/Freddie decision. By wiping out the shareholder, in the name of avoiding moral hazard, the government kicked off a bear raid in which short-sellers roll through the list of bank stocks knowing, as their trouble increases, the government may step in to help yet drive the stock price below bankruptcy value in the process. It appears they’ve learned from this mistake; mark it down as yet another unintended consequence of government action.)
Stocks continue to exhibit large swings even as we remained in positive territory the entire session yesterday. One would think, by way of the percentage changes, that the chart below tracked a multi-month period rather than one day’s worth of activity if it weren’t labeled.
The market may have also received a boost from the prospect that a major stimulus package will be coming. We’d have more confidence a sustained rally would ensue if this were a broad-based tax-cut related stimulus that increases after-tax return expectations on both capital and labor. I’m not sure $500-$700 billion in infrastructure projects (which is what’s expected) is truly igniting this rally as the budget fallout will be huge. Not the $300-$400 billion budget deficits that the media always rails on – deficits that are quite manageable in a $14 trillion economy -- but something that approaches $1.5 trillion. In any event, it didn’t seem to hurt yesterday and there will be specific industries that benefit big time from this type of action.
In the end, no society in history has spent itself out of these situations and the U.S. isn’t going to make history in this regard. Lower tax rates are key right now because we’re dealing with a lack of confidence. Lower tax rates on income permanently increases disposable income (as permanent as Washington gets anyway) and lower tax rates on capital carry with then incentive effects to take risk, which would be most evident in a stock-market upswing. The point is they affect behavior. To ignore these realities is a mistake. Nevertheless, so long as we do not raise tax rates, we’ve got to view that as a positive here.
Also helping things was President-elect Obama’s promulgation of his economic team, which includes some good, some bad in my view but they are all very capable people. There are people such as Christina Romer, who was appointed chair of the Council of Economic Advisors, that have written about the harm higher tax rates have on the economy, so that’s a good sign for now.
On this topic, the President-elect did miss an opportunity the way I see it. When he was taking questions, a reporter asked about his plans on tax rates. He could have clearly stated the current tax rates would be allowed to expire at the end of 2010, rather than repealing them sooner. Instead, he passed on answering the question; our feel is stocks could have had a 10% day, and more important than that such a statement would have encouraged a sustained rally, but alas we didn’t get that one. Still, it was a great day, so I won’t complain. With Thanksgiving a couple of days away, the fact that we’ve got a shot as delaying changes in tax rates is something for which to be thankful.
Market Activity for November 24, 2008
On the economic front, the National Association of Realtors (NAR) reported home resales dropped in October, just as the pending home sales data two weeks back suggested, and prices fell by the most on record.
Total existing home sales fell 3.1% in October to 4.98 million at an annual rate from a downwardly revised level of 5.14 million units in September – previously reported at 5.18 million.
This data involves both single and multi-family dwellings. Single-family existing home sales fell 3.3%; multi-family (condos etc.) slipped 1.8%.
Sales fell in all four major regions in October, showing the biggest decline in the Midwest – down 6%; the South endured a declined of 3.2%. The best performing region was the West, where sales fell 1.6%. This is consistent with the direction sales have taken over the past few months as West-region sales are up 31.5% at an annual rate for the last past three months.
The median price for existing homes fell the most on record, plunging 11.3% last month from the year-ago level.
For the month, prices in the West fell 7.8%, down 1.2% in the Northeast, fell 3.5% in the South and were up in the Midwest – rising 3.2%. (As sales have picked up in the West over the past few months – even though October was down – this was due to big price declines as foreclosures have helped to push Western-region prices down 26.7% on a year-over-year basis.)
The housing market is still searching for a bottom, but the good news is that we have hovered around this 5 million units range for eight months – so maybe we’re finding it. The unfortunate reality is that sales are coming at the expense of declining prices, but this is what needs to occur. We’ll note that existing home prices are still up 32% since January 2000 – the trouble spot is for those homes bought since 2004, which is an awful lot of homes.
The supply of existing homes (based on the current sales pace and in month’s worth of supply) ticked up slightly and remains elevated. This figure needs to come back down to seven months’ worth and once it hits six we’ll be back in business; we’ve got a ways to go, but when sales activity snaps back, the figure will fall quickly.
For those that did not buy more than they could afford though, time will reverse this course but we may have to wait a couple of years for prices to slowly increase. Our own judgment (or my judgment rather as I won’t speak for others as the assumption may prove to be well off the mark), is that prices will flatten out by next summer. By that point the sales and price data will depend on the more traditional determinants – the job market and income levels.
Have a great day!
Brent Vondera, Senior Analyst
(This was the mistake of the Bear Stearns deal, and the terrible mistake of the Fannie/Freddie decision. By wiping out the shareholder, in the name of avoiding moral hazard, the government kicked off a bear raid in which short-sellers roll through the list of bank stocks knowing, as their trouble increases, the government may step in to help yet drive the stock price below bankruptcy value in the process. It appears they’ve learned from this mistake; mark it down as yet another unintended consequence of government action.)
Stocks continue to exhibit large swings even as we remained in positive territory the entire session yesterday. One would think, by way of the percentage changes, that the chart below tracked a multi-month period rather than one day’s worth of activity if it weren’t labeled.
The market may have also received a boost from the prospect that a major stimulus package will be coming. We’d have more confidence a sustained rally would ensue if this were a broad-based tax-cut related stimulus that increases after-tax return expectations on both capital and labor. I’m not sure $500-$700 billion in infrastructure projects (which is what’s expected) is truly igniting this rally as the budget fallout will be huge. Not the $300-$400 billion budget deficits that the media always rails on – deficits that are quite manageable in a $14 trillion economy -- but something that approaches $1.5 trillion. In any event, it didn’t seem to hurt yesterday and there will be specific industries that benefit big time from this type of action.
In the end, no society in history has spent itself out of these situations and the U.S. isn’t going to make history in this regard. Lower tax rates are key right now because we’re dealing with a lack of confidence. Lower tax rates on income permanently increases disposable income (as permanent as Washington gets anyway) and lower tax rates on capital carry with then incentive effects to take risk, which would be most evident in a stock-market upswing. The point is they affect behavior. To ignore these realities is a mistake. Nevertheless, so long as we do not raise tax rates, we’ve got to view that as a positive here.
Also helping things was President-elect Obama’s promulgation of his economic team, which includes some good, some bad in my view but they are all very capable people. There are people such as Christina Romer, who was appointed chair of the Council of Economic Advisors, that have written about the harm higher tax rates have on the economy, so that’s a good sign for now.
On this topic, the President-elect did miss an opportunity the way I see it. When he was taking questions, a reporter asked about his plans on tax rates. He could have clearly stated the current tax rates would be allowed to expire at the end of 2010, rather than repealing them sooner. Instead, he passed on answering the question; our feel is stocks could have had a 10% day, and more important than that such a statement would have encouraged a sustained rally, but alas we didn’t get that one. Still, it was a great day, so I won’t complain. With Thanksgiving a couple of days away, the fact that we’ve got a shot as delaying changes in tax rates is something for which to be thankful.
Market Activity for November 24, 2008
On the economic front, the National Association of Realtors (NAR) reported home resales dropped in October, just as the pending home sales data two weeks back suggested, and prices fell by the most on record.
Total existing home sales fell 3.1% in October to 4.98 million at an annual rate from a downwardly revised level of 5.14 million units in September – previously reported at 5.18 million.
This data involves both single and multi-family dwellings. Single-family existing home sales fell 3.3%; multi-family (condos etc.) slipped 1.8%.
Sales fell in all four major regions in October, showing the biggest decline in the Midwest – down 6%; the South endured a declined of 3.2%. The best performing region was the West, where sales fell 1.6%. This is consistent with the direction sales have taken over the past few months as West-region sales are up 31.5% at an annual rate for the last past three months.
The median price for existing homes fell the most on record, plunging 11.3% last month from the year-ago level.
For the month, prices in the West fell 7.8%, down 1.2% in the Northeast, fell 3.5% in the South and were up in the Midwest – rising 3.2%. (As sales have picked up in the West over the past few months – even though October was down – this was due to big price declines as foreclosures have helped to push Western-region prices down 26.7% on a year-over-year basis.)
The housing market is still searching for a bottom, but the good news is that we have hovered around this 5 million units range for eight months – so maybe we’re finding it. The unfortunate reality is that sales are coming at the expense of declining prices, but this is what needs to occur. We’ll note that existing home prices are still up 32% since January 2000 – the trouble spot is for those homes bought since 2004, which is an awful lot of homes.
The supply of existing homes (based on the current sales pace and in month’s worth of supply) ticked up slightly and remains elevated. This figure needs to come back down to seven months’ worth and once it hits six we’ll be back in business; we’ve got a ways to go, but when sales activity snaps back, the figure will fall quickly.
For those that did not buy more than they could afford though, time will reverse this course but we may have to wait a couple of years for prices to slowly increase. Our own judgment (or my judgment rather as I won’t speak for others as the assumption may prove to be well off the mark), is that prices will flatten out by next summer. By that point the sales and price data will depend on the more traditional determinants – the job market and income levels.
Have a great day!
Brent Vondera, Senior Analyst
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