Seeking Alpha
Long/short equity, special situations, momentum, research analyst
Profile| Send Message|
( followers)  

Here are three important articles for you to read as we begin the final week of August.

  1. Housing Double Dip Is Not Just Tax Credit Hangover: The chief economist for the National Association of Realtors issued a warning last week saying that the lack of confidence in the housing market could pose a bigger risk to recovery than expected. According to the data out of San Francisco, July home sales fell off a cliff down 19% from June. The existing home sales report will be released today and we will hold off on buying back into the market until we see the market’s response. Our cash level of 74% is a nice safe haven as the market expects the worst on a housing report release. Over the last two years these reports have not been market movers; today’s report will show us if the market truly has priced itself for the next leg down in housing.
  2. Reagan's first term offers measuring stick for Obama: In the August E Weather newsletter, we suggested that the economy is in the process of establishing a new baseline from which it will resume its recovery. We suggested that President Obama might be the beneficiary of such timing as the cyclical recovery could produce market returns similar to the final two years of President Clinton’s first term. The Washington Post is taking this stream of thought a step further by comparing President Obama to President Reagan! I didn’t see that coming! Nevertheless, it is an interesting thesis to consider because I do believe the market will react positively to the end of this period of rapid fire reform. The market responded well to the newfound certainty of Reagan's administration; it did the same for Clinton, and if gridlock brings certainty back to Washington in November, we can expect similar performance.
  3. Inflation In The Pipeline: If housing-induced deflation is our biggest concern then we might not have to worry too much. Stock returns during deflationary periods are surprisingly strong as long as the deflation remains tame. In the previous 34 instances of zero to -2.4% deflation the S&P 500 has averaged a better than 15% 12-month total return.

These three articles provide solid supplemental statistics for the major market catalysts of the moment. As long as we know that the low valuation of the market has already priced in housing, our confidence will remain high that re-entry into the stocks mentioned in the August E Weather newsletter will yield terrific returns. Today's market reaction to the existing home sales report is an important tell.

Disclosure: No positions

Source: Housing, Obama and Deflation Run This Market