When Bad News Isn't Really Bad News

Good news or bad? You be the judge. Most in the media, looking at the chart below, which shows the median price (half above, half below) of a California home will describe in their accompanying articles that real estate plunged/plummeted/dove/tumbled/crashed (pick your scary verb) from $427,000 to $254,000 in the 12 months through Jan 31. That’s awful -- IF you now have a mortgage balance higher than the value of your home and IF you bought at the top and IF you need to sell right now. But if you are going to continue to live in your home, it’s no different than holding a stock that you bought for $20 that went to $40 and is now back to $25. If you like the company’s prospects, you’ll still hold it.

The way bigger news below is that sales doubled in that year, from 311,000 in January 2008 to 624,000 in January 2009. Better yet -- the people who had to qualify in Jan 2009 are considerably better credit risks than those who had to qualify in Jan 2008. (At least they had to provide real tax returns rather than just sign a liar loan.)

What you see on TV is, “Home Prices Plunge 40% in California!” What I read is that home sales are up 100% -- and the ownership is going from weak, over-extended borrowers and flippers to stronger, higher-quality borrowers who are likely to actually live in the homes. Think about this the next time some headline writer tries to scare you. There’s plenty to be worried about, but let’s not obfuscate or over-simplify what really counts. They haven’t repealed The Law of Supply and Demand. I said this in 2006 when I warned to get out of this over-heated sector as I saw massive overhanging supply. That supply is quickly diminishing.

In the same vein of "Good news or bad? You be the judge," there is much tearing of hair and gnashing of teeth over retail sales. “Who will buy a big-screen TV when they fear for their job?” scream the headlines. Well, at some price -- everybody. Take another look at the chart above. When California homes were overpriced at a median of $427,000 only 311,160 were sold. Now that the price has dropped to a median of $254,000, twice as many homes are being sold. “The Consumer Will Never Come Back…” blare the headlines. Phooey. I’m not going to rush out and buy a big-screen TV for $1100 (down from about $4000). But for $299? We’d be lined up around the block. As technology improves, raw material prices decrease, volume increases, and manufacturers and retailers are willing to accept lower margins to secure market share, prices come down and sales increase. They haven’t repealed The Law of Supply and Demand.

January 2009 was the worst January in market history -- worse than any in the Great Depression. February was the 3rd-worst. That’s when many people sold. But no market has ever gone straight up or straight down. We gutted it out and are now selling (boy howdy, are we selling) into this excellent March and April rally. (Yes, it's down nearly 200 today. But, then, we aren't day-traders. Our sector selection and market allocation decisions are based on months, not days, and I believe this rally will continue for at least another 2-4 weeks, after we approach and bounce off the 200 day moving average.)

More importantly, the emotional volatility we are seeing may seem a temporary aberration, a result of the current bear market. I suggest it is much more. I see this as a permanent fixture we must adapt to. Why? This is the first real bear market with massive public participation. Virtually no one is left unaffected. As recently as 1990, less than 1 in 5 American households owned stocks. That figure is now 7 in 10. With the advent of 401ks, 403bs, Keogh Plans, IRAs, SEP-IRAs, et al and the concomitant demise of defined benefit plans, there are now far more disparate subsets of investor clamoring for clarity and no end of advisors, seers, gurus, researchers, students of the market (like me!) and clueless commentators who find a bully pulpit in print or on line in order to fill that need.

This creates confusion: in the Intelligence Community, information is not the same thing as intelligence. By the same token, market information is not the same thing as market intelligence. This madness of crowds can be a violent market accelerator, both on the upside and the downside. Imagine if you will a rowboat taking on water. If there are only a couple gallons onboard, and it all sloshes to one side, it isn’t a problem. But when it’s 200 gallons, the boat will capsize. Right it, and if it continues to take on that quantity of water, it capsizes every time all the water goes to one side -- just like institutions and individuals do as they panic in and panic out

I expect a continuation of the rally this month, then a re-test of the lows. I do not presume infallibility, so after we sell all those securities we bought in early March, I'll be protecting our clients via cash and inverse ETFs. Buy when others are selling, sell when they are clamoring to buy our shares. That strategy is the most difficult of all to carry out. But it's also the most rewarding...

FULL DISCLOSURE: If/as the markets rally this month as I expect, we will be initiating buys on the following inverse ETFs at or around their current lows for the past 52 weeks -- 400 EMERGING MARKETS (EEV) at 33, 400 NASDAQ 100 (QID) at 37, 250 S&P 500 (SDS) at 57, 400 REAL ESTATE (SRS) at 37, 250 FINANCIALS (SKF) at 75, 300 TECH (REW) at 45, and 500 CHINA (FXP) at 20. Follow-up to previous advice: We have now sold all but 10% of our golds and have placed sell orders above the current market on just about everything we own, even the fabulous high-yielding preferreds we bought just a month ago. If the bear returns this summer, nothing will be spared. Nothing.

Comments

[Ferdinand E...:]

Excellent article. The real deal! This is the way to present economics.

Apr 08 08:45 AM

[dybydx:]

Doesnt matter you call it good news or bad news, the fact is, there is a price correction happening. The homes were overpriced as we all agree and this is what needs to happen.

The bad news is Fed is printing money to prevent these prices from falling. Effectively confiscating wealth from those who make an honest living and kept their savings in their bank account.

Apr 08 10:05 AM

[Just an inv...:]

Any which way, housing price has dropped so much in one year and the 2x houses sold only reflects the market is dumping. It is a simple demand and supply curve. This is the equilibrium point because the price has dropped so much that the qty of houses sold increased. This does not reflect the housing market is good.

Apr 08 10:45 AM

[henarl:]

There is one piece of news that cannot be construed in any way but bad. Over five million people have lost their jobs. These people will not be able to buy that house for $254,000 or even that big screen TV at any price.
If unemployment continues to rise the economy will continue to fail. It's that simple.

Apr 08 12:02 PM

[Bill S. Friend:]

News flash: the median home price is still falling. Many will tape the key to the front door on their way out. The cascade has no end in sight. The government is trying to get out in front of it and stop this locomotive with confidence but it cannot work. If you think this is good for real estate you exist in an alternate reality. We have a fiat currency and once everyone in the world learns quadrillion comes after trillion the hurting will begin. I personally view this as an opportunity, but everyone starts at square one again. The government is "all in" and its make or break time. Nobody knows the outcome or the unintended consequences of throwing trillions into the fray.

Apr 11 11:27 PM