Stocks are hanging tough in the face of some heavy duty bad news. For the last two days, November 17 and 18 the Standard & Poor’s 500 has refused to drop below 1100. That’s often a sign that stocks are ready to move higher when the bad news flow stops.
How bad has the news been?
Heavy duty bad.
On November 18, for example, investors got early morning news that housing starts had collapsed in October. Starts fell by 10.2% to 529,000 from 592,000 in September.
That was a huge negative surprise. Wall Street had be3en expecting that starts would inch ahead to 600,000 for the month.
And a huge disappointment to investors who had convinced themselves that the economy was on the mend after starts climbed to 593,000 in July. Starts stayed at about that level in August and September. With the economy returning to growth in the third quarter—and at a very healthy 3.5% annual rate too—there seemed to be solid evidence that housing, the sickest sector of the economy, was headed to the recovery room.
The recent numbers threw that all into doubt. Yes, you can rationalize them by saying the drop in starts was a response to what was supposed to be the end of the federal government’s $8,000 tax break for first-time home buyers on December 1. (That program, with changes, has been extended but too recently for the effects to show up in the October numbers.)
But as comforting as that logic is, it runs smack into reality once you look a little deeper into the data. Starts for single-family homes fell 6.8% but starts for multi-family homes fell 34.5%. Hard to see how that lunge might be related to worries over the expiration of tax credits for first time home buyers. With rental demand projected to climb in the next few years, you’d expect activity in the multi-family sector to hold up well. What’s going on? I haven’t heard a convincing explanation.
But the key point for investors is that confronted by this huge piece of bad news, the S&P 500 dropped a whole 0.52 point. That’s 0.05%. The index closed at 1109.80.
The pattern the day before was similar. Bad news on weaker than expected U.S. manufacturing activity couldn’t even keep stocks down for the day. On November 17 the S&P 500 actually climbed by 1.02 points. Not much. But any gain in the face of bad news is an indicator of how strongly the stock market is being pushed up by cash flows.
In fact it helps to understand this market in terms of a battle between economic news and fears, on the one hand, and cash flows into U.S. equities (and commodities and overseas financial markets). Right now cash flows are strong enough to outweigh some pretty negative economic news.
It won’t always be this way. But right now cash trumps news.
The trend is still up.
I agree with Pat, T2 and Walt but would like to stress 1 thing. There is WAAAAAAAAY too many houses/condos/units in this country. As an owner of rental properties in multiple locations, I’ve never seen rent prices collapse as they have in the last 3 months. Like someone above mentioned, no one cares what I think, but I think the future will bear out exactly how big the Real Estate bubble was. You almost can’t over-estimate how many empty/shadow foreclosure properties there currently are.
Jim, I hope you’re convinced.
Could be normal. housing historically slows in late fall…as does employment. To a builder weather is a big factor…also shorter workdays(daylight). The real test for housing and emp;oyment is in the spring. Should rise significantly.
I agree with Pat and T2 – I don’t think this housing data is the “huge piece of bad news” that Jim says it is. I think the drop in housing starts is actually good news. The housing market already has a glut of inventory. Sooner or later, prices must come in line with the true market (i.e. non-gov’t-supported). And that market is one of increasingly un- and under-employed folks who are seeing their standard of living decimated by reckless currency policies. The correction will be painful, but the longer it is postponed, the more havoc it will wreak.
Pat is correct. The government is stimulating demand for residential purchases while commercial real estate owners and lenders are suffering. Some former homeowners are renting but a significant portion are doubling up with family. In addition, many of the condo developers have chosen to rent out their units until prices rise, which increases rental supply. There is less demand than you think and more supply.
“What’s going on? I haven’t heard a convincing explanation”…
Simple,the gov’t doesnt provide a backstop for the banks to lend money for buying or building mulitifamily housing. The local or regional banks who usually would back these projects are up to their eyeballs in bad commercial RE loans already. Additionally I would think that until unemployment turns the builders of these types of housing would be asking themselves, “who is gonna rent from me and how much will they be able to pay?”. Everybody thinks the rental unit demand will increase. I agree but at lower rents than were being paid in the past. If the price of housing has come down but the ability to buy isn’t there then people will rent. Logically if the cost to buy is down then the cost to rent will have to come down as well. Dropping rents, rising unemployment and banks who won’t lend to builders who don’t really want to build at these prices. Biggest issue is nobody wants to touch anything that Uncle Sam isn’t a partner on. Think about how that effects the outlook to start these projects.
Hmmm… a market driven by momentum money discounting fundamental news. Sounds a little like a bubble forming. If you can time it right, you can make some money on the rise. But when the turn comes, it could be brutal. Everybody now buying because everyone else is, will turn quickly to sellers because everyone else is selling. The big money in this rally was made back in the spring and summer. That was the time to be fully invested in equities. Everyone was fearful then, so it was time to be greedy, per Buffet. I sense greed driving some folks now, which is really what feeds the momentum crowd. So maybe it’s time to harvest some of those spring and summer gains and wait. I think we’ll get a chance to buy lower at some point. Something bad will happen and spook the herd. News will all of a sudden matter. I’m not smart enough to know when that will happen, but I think it’s likely at some point. JMHO. (I know… no one reads this blog for my opinions.. they want to hear what Jim thinks. But I thought I’d offer a somewhat different view, anyway.)
http://www.stockpickr.com/members/port/Jim-J-s-Utility-and-Power-picks/
Hey Jim – will these utilities do good again this year?
I recall you wrote about these about a year ago and always a place for a few conservative, divie paying stocks in my port. thanks.
Thanks so much for your insight Jim. Unlike so many others, what you have to say makes a lot of sense.
Jim,
You are doing an amazing job. With your recent purchases as sales of stocks how much cash are you holding. I know before you were somewhere around 30%.