Doomsday Pundits Are Wrong Again

It seems as though every time I turn on CNBC there is a new, or sometimes not so new, pundit explaining why the market will falter soon. Most of these commentators have been making the same call for the last six months, while the market continues to steam higher. Though they all tell a story with the same ending, each of them approaches the gloom and doom scenario from a different angle.

Some hate housing: The builders are up 13% over the last three months and 24% over the last six.

Some blame inflation: Core CPI is down nearly 0.5% since the summer.

Some think energy prices will continue to soar: Oil prices are off over 25% since the summer.

From where I am sitting it looks like the doomsday pundits are running low on things to be wrong about.

That’s not to say there are not really risks out there. Housing is still weak, but it is becoming clearer every day that it is a supply demand problem and will likely be isolated to areas over built with supply. There was an article in the NY Times yesterday citing New York City’s increase in housing prices and strong demand. I would argue that last week’s 14.3% reduction in housing starts is good news; it shows that builders are slowing the supply side of the equation and allowing demand to catch up. Last week the Association of Home Builders released data that builder confidence was at its highest level in eight months. Apparently the builders’ agree.

With over 80% of the S&P500 having reported Q4 earning, Thompson’s Financial reports 10.8% earnings growth for the quarter. This is now the 14th straight quarter of double digit growth, and well exceeds December forecasts for Q4 growth. The most interesting part about earnings season was how nonchalantly investors took the news of anemic earnings projections for 2007. Weak 2007 growth could be the first real blemish on that shiny bull that we’ve all been watching over the last six months, though relatively low expectations leave plenty of room for upside.

The Fed has remained a non-factor thus far this year and will likely continue to stay on the sidelines as long as inflation remains contained and economic data oscillates between an expanding and contracting economy. With GDP estimates of the Fed and Wall Street both north of 3.0% there seems little reason to be concerned about the Fed choking off growth and risking a recession. The Fed’s focus, rightfully so, will probably continue to be on inflation and how to best stave it off during an economy expanding at trendline with full employment. The market is always in a balance; right now that balance seems delicate because the inflation wind keeps blowing making investors nervous. I believe the nervous sentiment is healthy as it leads to a lack of complacency, making the opportunity for an extended sell-off unlikely.

Comments

[Malkiel:]

"risk-averse" is an apt description, and perhaps explanation, of the perma-bear phenomenon. Either these people are congenitally unable to bear any cognitive dissonance from the uncontrollable outside world, or they are geniuses who know how to make a living out of a niche--take your pick. Since the market has been down only 30% of the time since its inception, they surely aren't betting men.

2007 Feb 20 12:56 PM

[Thomas Phil...:]

I don't agree that the problems in housing are a simple short-term oversupply problem. The problem is really that in the last few years a lot of people who shouldn't have gotten home mortgages were able to get into them through the subprime lenders via a plethora of exotic loan instruments ( intrest only, negative amortization ARMs, for example). The default rates on these loans has been much higher than expected (hence the HSBC announcement of a couple of weeks ago that they were going to have to set aside a couple of $billion more for defaults than they expected). Since early December something like 22 subprime lenders have gone under. The investors in these shaky MBSs (mortgage backed securities) have gotten the jitters over this and now most lenders are tightening their qualification standards. In 2005-2006 close to 25% of all mortgages were subprime. Now going forward if we start to remove say 20% of the potential buyers from the market because they can no longer qualify for a mortgage it's going to cause more downward pressures on an already slow housing market. Add to that the foreclosures that are coming because $1.2Trillion in ARMs are resetting this year (some percentage of those folks won't be able to refi since they no longer qualify under the tighter lending standards) and I think we're in for a bit of a housing correction. Not a crash, but probably a healthy correction. Since prices rose so much faster than incomes most people are now priced out of the market; a 20 to 25% correction would be quite healthy for the housing market in the longrun.

Now in recent weeks it seems that the subprime jitters are spreading to the next higher teir of loans, the Alt-A category. It's too early yet to know how serious that might be.

The confluence of all of these factors ( ARMs resetting, credit tightening, higher foreclosures) is leading to much slower sales in most of the country and falling prices in many areas with California and Florida being particulary hard hit. The rise in NYC real estate that you mention is really an anomoly at this point and is most likely due to the large year-end bonuses paid out on Wall St. at the end of 2006. Not many markets are seeing that kind of cash infusion.

2007 Feb 20 05:01 PM

[Johnny Bitc...:]

"...it is becoming clearer every day that it is a supply demand problem and will likely be isolated to areas over built with supply"

well, gee, i guess you are pretty safe with this comment - how many people are going to argue that it's not based on supply and demand ?!

the real points of note without getting into a battle of forecasting the unknowable future are these:

1. Housing prices, generally speaking are in a downtrend, and the most serious problems seem to be in the major metropolitan areas on both coasts (though Seattle seems to be less of a problem).

2. The so-called doomsayers have more ammunition in their arguments today (housing prices, subprime implosion, etc.) than they did 6 months ago, 12 months ago, etc.

I am not sure what "is getting clearer every day" in your view, and i am certainly not going to argue against sophomoric supply-demand assertions, however, i do want to know what you are trying say:

1. Are you suggesting that all the news is positive, and that is what is getting clearer every day in your crystal clear world ?

or

2. Are you suggesting that if housing were going to be a problem, the housing stock prices would not have bounced to the degree they have ?

or

3. Are things just clearer to you every day just because you don't like dealing with murky data ?

Certainly there is plenty of murky data out there with respect to the housing market, and if things are clear to you, it may be because you are biased or delusional.

john.

2007 Feb 20 08:58 PM

[Johnny Bitc...:]

The other thing people are missing on the housing problem, which is slightly more nuanced than "just a temporary supply demand problem in a few markets is:

1. The whole game relies on a continual supply of people taking their equity and trading up, selling to the group below them.

2. Now, so many people have spent their equity, there are fewer folks able to trade up.

3. Furthermore, even the ones that have substantial equity are often at lower tax rates and a trade up also trades up to a new, much larger tax bill.

4. To make matters worse (or better) the green movement makes alot of people think twice about living in a large house that may not really be required.......

There are alot of reasons to believe there are serious structural problems with the housing market and it's inter-relationships with the economy and taxes.......

This is what's getting clearer every day...........

john.

2007 Feb 20 11:54 PM

[Aquater:]

The market is always a supply-demand situation regardless of up, down or sideways trends. So, to point this out for a bullish view is a vacuous comment at best. If the market has not heeded the bears so far and persistently, that adds to the market's overbought state rather than strengthens a more of the same view without anything special to add to the bullish case. A cautious view seems to be called for, rather than bears attacking bulls as perma-bulls and bulls making bears look like perma-bears. Name-calling concealed behind nice-looking words does not amount to an intellectual case on either side. Market is clearly extended and this is an understatement. If history is a guide, bulls need to be cautious and bears have a hopeful case. If one is long, one needs to hedge a bit. If you are short, you can hold but do not need to go overboard with bearishness. Bears do have a sllight edge, overall. Bullishness in face of an upmove that is already a fait accompli is a plain refusal to quit looking through the rear-view mirror.

2007 Feb 22 02:59 AM

[Johnny Bitc...:]

As the market does, in fact, falter.......

One wonders whether this cheeseball grinning phony thinks that wearing the glasses of a nerd make him a competent financial analyst.........

Just wondering....

john.

2007 Feb 28 12:22 AM

[Sonia Mirza:]

John, you're mean, but you do make good points here and there. If you want to dissect Caleb's argument, go ahead. No need to make fun of his glasses - frankly he's quite cute :P.

I guess the trick is not to take you too personally. what do you do when you're not reading/insulting the SA contributors? Are you an analyst?

just wondering...

2007 Mar 20 10:27 PM

[Johnny Bitc...:]

i only insult the arrogant contributors that don't back up their arguments......this guy's "arguments" looked more like veiled juvenile jabs at folks with a less optimistic perspective about the economy, rather than well-reasoned analysis.

for what it's worth, my belief about the housing stocks bounceback has everything to do with cash flow and little to do with earnings - business sucks so they aren't going to spend money on land, they are goind to cut staff, and they will build some houses at break-even in order to pull $50,000 in cash flow out of the lot.

i do not believe the bounceback from bottoms suggest that housing is healthy, as your cute friend that looks like an analyst, but reasons like a journalist seems to be saying.

john.

2007 Mar 29 07:35 PM

[Sonia Mirza:]

fair enough - always entertaining to read your take-downs - keep 'em coming.

Capex trimming and layoffs are to be expected. Failing that, you usually see companies offer up a sacrificial lamb along with a side of XXXmillion/billion in write-offs...you know the rest.

my "friend"??? Please - do NOT assume. I have no friends in this world, much less on this site! I was just coming to his defense as it appears he wasn't going to. LOL@"yourfriend"

Speaking of reasoning like a journalist - what is your take on all the cnbc folks and everyone else on TV who tells the general public what to buy and sell?

2007 Apr 05 10:23 PM

[Johnny Bitc...:]

pure entertainment. most pick up the lingo and pretend they know something about securities valuation and/or portfolio mgt.

the worst: Maria B. and Bob Pisani........talk about a couple of phonies that have learned to sling lingo.

Cramer: smart guy, often insightful, but thinks he's more skilled than he is........made his bucks as an optimist during a great bull market. If he had any ethics he wouldn't be luring idiots into believing they can make money trading stocks without serious education/understandin... it's sad.....he knows his audience ultimately gets chewed up by professionals, and yet he holds himself out as an educator. shameless. completely ridiculous that this guy has an opinion on stocks even as he acknowledges he's done no serious research on.

As far as money managers that grab the spotlight.....usually just talking there positions, sometimes insightful, sometimes deceptive.......so difficult to get any value.

Most of the folks posting here are more substantive, but still alot of crap......no real incentive to provide quality information, so usually folks just chattering about their loosely formed beliefs, and then patting themselves on the back when their beliefs seem to come to fruition......while of course, forgetting all their failures.

And of course, alot of them speak so vaguely as to sound smart without saying anything, such as Caleb's assertion that the Real Estate problem boils down to a supply-demand problem in markets that were overbuilt. Talk about a ridiculous statement that is both meaningless and unassailable.

One would presume from his remarks that he believed the worst was over for the homebuilders.......and the homebuilders subsequently fell 20% rapidly following his vague, bullish sentiments. Of course he will never admit this as a failure, because it still appears that the real estate problems are a supply demand problem !

completely ridiculous.

john.

2007 Apr 07 02:35 AM

[Sonia Mirza:]

"shameless. completely ridiculous that this guy has an opinion on stocks even as he acknowledges he's done no serious research on."

LOL LOL.

Needed to hear every word, that was sO refreshing. Thanks John! :)

2007 Apr 09 10:45 PM

[Johnny Bitc...:]

Is Seeking Alpha worthwhile for discussion ? Or just a place for analyst wannabe's to talk their positions and blather mindlessly ?

There's some decent info here. But let's take this guy Caleb for example......

he blather's about how the housing market is not a problem, using some kind of Economics for high school students explanation:

"just a minor problem with supply and demand in overbuilt markets....." bla, bla, bla, bla.........

Since Caleb's bla-bla-bla, each of the major nationwide homebuilders has fallen approximately 20%, housing inventories are ballooning, loan standards are tightening, etc.

Does Caleb have anything to say ? For example "my analysis sucked; i will try to do better in the future".

No. He's probably just collecting a commission for managing the money of fools, while blathering about things he doesn't understand !

If Caleb's analysis (wrt housing) were anywhere close to the mark, all builders would not be tanking 20% simultaneously. This strongly suggests that the housing problems are not isolated as he asserted (hoped ?) but are a widespread problem nationwide.

I won't go into my own beliefs in detail, but it's pretty worthless that folks like this guy can put on a pair of glasses, play investment analyst, and then when their documented "forecasts" are demonstrated to be questionable......just slink on to have another stupid opinion about a topic they don't understand.

Funny, isn't it ?

john

2007 Apr 11 02:04 PM