Is This (Finally) the Bottom? Part II

Last week with the stock market having turned modestly higher, I asked if this turn could hold when so many other recent upturns have failed.

I concluded that my answer was yes; not because the chart of the Dow Jones Industrial Average looked good, but because of the massive under-girding of the economy by the various government programs that would shore up the banking industry, unfreeze consumer lending, and stimulate spending. I should have added something that I have been saying for months: the law of supply and demand.

Sometimes I think the US media are the most economically illiterate people in the world. They simply have no idea of the power of the free market and the law of supply and demand. The free market (of course with proper regulation) is simply a marvel at setting price where the merchandise will sell.

As we are all too familiar, the US has been in an incredible housing recession over the last two years, which has caused prices to fall by 25% and more in certain areas. Countless news media reports I have read have been saying that there was no end in sight. Prices and housing unit sales could only go lower. They were partly right. Prices are going lower, at least for a little while, but housing on a unit sales basis has had some very good news in recent days, and I believe it is one of the big reasons that the stock market has risen nearly 600 points since last Friday.

Last week new building permits and housing starts were surprisingly strong, and this week new and existing home sales were much higher than expected. Home prices, indeed, have fallen and will continue to do so until excess inventory is worked off, but unit sales of homes appear to be turning up in many parts of the country. Importantly, if unit home sales have bottomed and are turning up, they will ultimately take home prices - and stock prices - with them.

I do not want to discount the good durable goods orders data this week, or the new program announced by Treasury Secretary Geithner to rid the banks of toxic loans. The latter particularly is vital to the health of the banks. Having said this, housing on a unit basis appears to be bottoming, and housing is the key to a sustained rally in stocks. The simple reason is this: housing got us into this mess, and I believe housing will have to get us out.

As I write this, the market is pushing 8000 on the Dow. I would be a very surprised person if the recent upturn races right through 8000 and keeps going. If you look at the chart above, you will see that 8000 was an important level of support from October through November. There are plenty of sellers waiting at the 8000 level to sell out and get their money back. Thus, I would predict some back and forth sideways motion for a few weeks as we digest recent data and evaluate new housing statistics for a corroboration of the recent good news.

If this is the bottom in housing unit sales, it has come the old fashioned way: by prices falling to a point where the buyers were waiting, and the same goes for stocks.

A bottom in housing unit sales would be welcome news, but for a full turn-around to begin in the economy, we need home prices to at least flatten out. That has not happened yet, so the stock market will remain on edge. But this was a very good week for stocks and lends credence to the notion that we have seen the bottom.

Comments

[ron_paulite:]

"Thus, I would predict some back and forth sideways motion for a few weeks as we digest recent data and evaluate new housing statistics for a corroboration of the recent good news."

predict?

hahaha everybody likes to call the bottom too soon ...

Mar 27 05:34 AM

[chennian:]

Old style economics doesn't fit in here. It is not the banks that were lending. It is the foreigners. The problem is, are they frightened? Why did Bernanke have to buy treasury bonds? Because foreigners are frightened. So forget about V shaped recovery.

Mar 27 05:37 AM

[Roger Knights:]

I think maybe the Fed's pledge to buy bonds and keep their prices up was a concession to China, to save its face--i.e., so the nominal value of its holdings wouldn't decline. A side-effect of artificially holding yields low on Treasuries is to insulate equities, somewhat, from competition from bonds. This could explain the strength of the rally. But it'll be the "last hurrah."

Mar 27 05:55 AM

[Dave Wrixon:]

The strength of the recent rally makes me conclude that the market hasn't capitulated yet. I am becoming much more convinced that a steep second leg of this downturn will soon take S & P below 500. The longer the false rally continues the steeper the next downward leg.

I believe the real problems lie with Government debt and the willingness of overseas lenders to cover their borrowing requirement. If it is left to Bernanke to buy all the Treasuries then the dollar will go to hell and things will start to get an awful lot worse really quickly. We might even see scaling back of current stimulus efforts as the Treasury loses it nerve.


On Mar 27 08:39 AM Cetin Hakimoglu wrote:

> nope. rally much much further to go.

Mar 27 08:59 AM

[Blair Kuhnen:]

I don't see a V shaped recovery, but with interest rates at historic lows and pension money sidelined, managers are eager to start this bull. While there is a huge yield spread in corporate debt, fund managers need to ride a rebound which will be fueled by money flowing out of real estate and narrowed yield spreads on corporate debt.

Mar 27 09:06 AM

[Obi-Wan:]

I don't see a "U" or a "V" type recovery.....I see a "WWW" for some time.....

Dow not above 10k until 2010.

Mar 27 09:15 AM

[toobad41:]

The Federal Banksters have one goal in mind and that is to make money. Greed rules and whatever it takes to get their goal back on track will be to get the market going back up. They have sold their soul to the demon called money. Without money you cannot buy "stuff" and we all know that we all need more "stuff". How can we measure our greed without buying more "stuff"? The more "stuff" you have the more "stuff" you want. Status is everything. Money buys you more "stuff" and "status". I can go on and on...

Mar 27 09:22 AM

[mrresponsible:]

I guess I will respond by saying that the bottom is not an event but a process. The DOW certainly isn't the only idicator. Most of the bottoming characteristics can never be identified in current time. I agree that a recovery probably doesn't have much to do with fundamentals but because of the government interventions, good or bad. Pumping money into the system seems to be the best idea around other than permitting people starving in the streets, which doesn't seem very appealing.

Mar 27 10:31 AM

[flow5:]

OBI-WAN "I don't see a "U" or a "V" type recovery.....I see a "WWW" for some time" ---- the twin deficits will prevent a "V". We will bounce around for some time.

MRRESPONSIBLE "Most of the bottoming characteristics can never be identified in current time" It is a fact that rates-of-change in bank debits correspond to economic output. These rates-of-change are always exactly the same length. It is therefore impossible to miss economic forecasts. You have all the information needed to pick the tops & bottoms of the financial markets.

Mar 27 11:09 AM

[Gedankonomist:]

Look at the DJIA/Gold ratio.

It's been going down for several years. Adjusted for inflation, methinks, that "v" would look more like a backwards "L."

Mar 27 10:09 PM

[Blair:]

I wonder how many of the posters have examined the point & figure charts for the dow industrials?

The 2007 downside count still stands at 4,000. This recent rally satisfied the upside rally count to Thursday's close. In addition, the steep down trend still has not been broken.

So, if you are a technician, rather than a fly-by-seat investor, the analysis shows that this market still has a way to go on the downside.

Mar 28 02:59 AM

[mrbill:]

“They simply have no idea of the power of the free market and the law of supply and demand.”

Oh, but the law of supply and demand can be fixed with funny money.

“If this is the bottom in housing unit sales, it has come the old fashioned way: by prices falling to a point where the buyers were waiting, and the same goes for stocks.”

The old fashioned way? HELL NO. If it's bottoming it's due to artificially low interest rates and the purchase of toxic assets using funny money.

No free market in sight.

Mar 30 05:41 AM