Charles Lieberman

David Rosenberg: The Recession May Have Ended, But the Depression Has Not

If the market +60% from its low is overpriced, as suggested by Rosenberg, then he presumably thinks it was more accurately valued in March 2009. However, in March 2009, investors must have recognized there was some risk of a total meltdown in the financial system that would greatly undermine the economy. That's the fear that was triggered in September 2008 when Lehman failed and credit markets disintegrated, which caused a weak economy to turn into a precipitously declining economy. By March 2009, we had one full quarter of -6% GDP growth and a second quarter of -6% was also almost done. So, at the point, the risk of a depression was real.

However, markets (unlike Rosenberg) recognized that all of the various Treasury and Federal Reserve programs were likely to put a floor under the economy and, in time, promote a recovery. If the prospect for recovery is on the horizon, then the extreme pricing of the markets in March 2009 was now totally inappropriate. That's the basis for the strong stock market rally since March 2009. To suggest otherwise is to assert that the economy is not about to experience an economic recovery. I think that's actually what Rosenberg believes, as reinforced by his forecast of a peak unemployment rate in excess of 13% on a recent Bloomberg interview. Well, if you believe the economy is still headed down, then it makes sense to think the stock market rally makes no sense. But, such a view requires an extremely selective review of the data. It requires that we ignore the rise in Q3 GDP, the rise in virtually every measure in the housing sector from prices, sales of existing homes, sales of new homes, a rise in construction, and the fall in inventories; it requires ignoring the rebound in industrial activity; it requires ignoring the rise in consumer spending, the rise in car sales even after the expiration of cash for clunkers, and the fall in initial unemployment claims; it requires ignoring the rebound in global trade; and I could keep going. I don't want to argue the glass is full. But there are plenty of positives and Rosenberg can't ignore them, as much as he tries. And as long as he ignores these positives, he will fail to understand why the stock market rally occurred and why it is likely to continue rising, albeit at a more moderate pace.

Meredith Whitney's Crystal Ball Fogs Up

Great article because it points out the inconsistencies in Whitney's forecasts. At heart, she appears to be a perma-bear, so she will forecast banking collapse until and unless the market forces her to retreat. With commercial mortgage loans likely to show significant defaults over the coming quarters, take Crescent as the latest example, she will continue to be able to maintain her bearish stance, even if it costs listeners money as banks work their way higher.

I think the only thing worse than Whitney's bank forecasts are her economic ones. She's also become a macro economist who has forecast a dire economic outlook, partly on the same thesis that bank loans will continue to default, so banks won't be able to lend. This is also the Roubini forecast. Peter Schiff has been a stopped clock for at least a decade already. I think all these people are basking in their notoriety by selling Chicken Little extremism. It must work in selling something, since they continue on the same path with the same forecast. But this is a sad commentary on what sells in our society.

Debunking Policy and Economic Myths

Thank you for the compliment. No, I don't think FHA could undermine the housing recovery because the Treasury needs FHA to keep lending, so they won't even take the chance. The key is that FHA lends mostly to lower income groups and Congress understands that if FHA doesn't make the loan, the banks sure won't after their sub-prime experience. So, they put more money into FHA, but also, quite likely, by charging higher fees, which further insures that FHA lends only to people who can't get loans from banks.


On Nov 18 03:42 PM optionsgirl wrote:

> Dear Charles:
> Your update is very reassuring. So far, you've pegged everything
> right. I have a question regarding housing, however. It is this Bloomberg
> report, that quotes Toll stating FHA is in seriously bad shape.
> Do you think that FHA could sink the economic advances since last
> March? www.bloomberg.com/apps...;sid=arqAG5n7wEVw&...

Chance of a Depression Now 5 Percent

The timing of this article off base. The risk of a repeat of the Great Depression and your time to reassess your judgment that the risk was zero surely should have come a year ago, when credit markets had seized up, some had become totally disfunctional, and discretionary spending by consumers and business was collapsing. In November 2008, the risk of depression was far greater than 5%. But as of November 2009, the risk of depression has declined dramatically compared to November 2008. While the data will remain uneven for the near-term, I think the risk of a depression is now back closer to zero.

Nothing Much Changed on the Unemployment Front

Nothing much has changed? This seems like the same perspective provided by the lobster who has been put into a tub of water, which is gradually getting warmer and warmer and he thinks not much has changed. From your graphs, initial claims have topped out and are now headed down. Must claims fall below some threshold before you think things have changed?

Besides, you're looking backwards. Unsold inventories of homes have fallen sharply, suggesting that an uptick must lie ahead. In fact, new construction activity has increased sharply in recent months. And much, much more is coming because of the mismatch between population and construction trends. So looking forwards, housing is going to become a significant contributor to growth even if it isn't obvious by looking backwards. The same can be said more broadly because of inventory liquidation in the manufacturing sector. The recession is over. NBER's declaration won't come for some months, but it is already obvious in the data.

Master Limited Partnerships for Your Portfolio: Three Key Questions and Answers

Your figures on the managements fees seem exceptionally high. Where do you get those numbers?


On Aug 30 10:21 PM GlobalTrekker wrote:

> CEF MLPs are not generally a good investment, IMHO, and you pay a
> premium above NAV for the tax simplification. They also have onerous
> management fees on top of the management fees that each underlying
> MLP charges (e.g., Symbol/Premium/mgmt.fee: FMO/+23.00%/3.6%; FEN/+11.40%/4.8%;
> KYN/+11.71%/5.9%; SRV/+16.50%/7.7%). They also have equally egregious
> incentive schemes for their owners. There is a reason you cannot
> borrow any shares to short these fellows. Full disclosure: I short
> them every chance I get.

Was Paulson Right?

Paulson certainly knew what he was doing in lending money to banks that he pushed to the edge of failure. So after helping to drive down the value of those major businesses, he could lock in some calls on those companies at severely depressed values. Yes, that was extremely profitable for the government. If anyoine else did that, it would be unambiguously manipulative and they would be in jail. Oddly, it is interesting that Paulson never claimed the government would make money on those deals, even though he should have known that they would be extremely lucrative, since he placed the government ahead of all other creditors. (Nothing like being able to barge to the front of the line.) Also, he gave money to a number of institutions that didn't want it and also didn't need it, which was another way to lock in profits.

Lastly, for all the hue and outcry over how Paulson contributed to the credit crisis by letting Lehman fail, I don't think he has taken even half the heat he deserves. He wanted to actively punish stock investors because the companies took too much risk and he wanted the investors to suffer because of it, the moral hazard argument. But his focus on moral hazard came at a huge price, the near death experience of the entire financial system of the U.S. Paulson's message was don't expect the government to bail you out if your company can't survive in the marketplace and he contributed to that fear of failure. His handling of Bear Stearns clearly sent that message. And then he reinforced it by destroying the preferred shares of Fannie and Freddie, not just the common share investors. And who owned the preferreds? Banks. So he undermined capital in the banking sector at the very time banks were having difficulty raising capital. And he also contributed to the collapse of the entire preferred market, precluding any financial firm from being able to raise capital via preferred share issuance. Letting Lehman fail was just the icing on the cake of a string of policy decisions that greatly worsened the credit crisis. Despite the many billions in profits that I expect to come from the government's lending activity, Paulson's decisions made a bad situation much worse and allowed the financial system to approach collapse when it was all avoidable. Bernanke and Geithner have both distanced themselves from some of these decisions and for good reason. Paulson may have been one of the worst Treasury Secretaries ever.

Housing: Strong Recovery Ahead

I first started forecasting a rebound in housing early this year and wrote a lengthy piece in March after reviewing the inventory data, which I thought made a compelling case for a recovery within 3 to 6 months. I also thought economic conditions were falling into place for a recovery, which was a necessary part and parcel of a recovery in housing. It was hard to see one without the other.

I find it really interesting how much flak is generated in response to each post on the developing housing recovery. For each person who thinks I am providing some insight, there are at least one or two who think I must be from another planet. For example, this piece from two days ago generated mostly negative comments, with very little commentary on the arguments I presented.

Here we are two days later and: Robert Shiller admits to being surprised by the rise in housing prices measured by his index (but still thinks housing has further to decline) and housing "might" be turning around, while Karl Case, the other member of that team thinks housing is already in recovery. The latest new homes sales data reinforces my analysis. Today it was reported that sales continue rising, while inventories continue falling. At 281,000 units, new housing inventory is at the lowest level of the past 18 years. Month's supply has plunged by more than two months from 9.7 months to 7.5 months in just two months. (How is this possible? Answer: inventories fell at the same time sales rose, so the ratio improved from both sides.) Those readers who insist on focusing only on foreclosures, futures resets, and such data are clearly missing the turnaround in housing, which I believe is already clearly underway for the reasons provided. As suggested above, it is already locked into place that housing will contribute to growth in GDP no later than Q4.

Disclosure: We remain long various housing and housing related stocks like HD, LOW, NVR, and others.

The Market Bubble Is About to Pop

If the economy does badly, then how can commodities do well? That makes little sense. Commodities have rallied because investors expect demand from China and other buyers of commodities to continue buying, which can happen only if the global economy recovers. Also, it makes little sense to get into emerging markets, if you think the U.S. economy will do poorly. The de-coupling argument was disproven last year. If the U.S. economy lapses into recession, it will take down demand for exports from emerging markets, which are also highly vulnerable to credit market conditions. Emerging markets will do well only on the premise of a global economic recovery.

Housing Is Bottoming, Along with the Economy

I see the same thing in my region, lower valued houses moving well and progressively less well as you move up the price scale. I also hear exactly the same from realtors, wherever in the country they may live. But if this accurately describes the housing market, then I would infer this is strong evidence of a bottoming in housing taking place right now.

The comments you offer on jumbo mortgages also fits the comments on home sales. One of the reasons (hardly the only one) that expensive homes are selling less well is that jumbo mortgage financing is significantly more expensive than conventional financing. That excess cost should continue to decline over time, as the credit markets continue to recover.

Last, the new home sales data reported for May showed a slight decline in sales and the media cited the slight decline in month's supply. I didn't see any reference to the ongoing decline in housing supply, which feel for the 27th consecutive month to just 292,000 units nationally. (Also, home sales fell 8.5% in the South, but rose everywhere else.) So this also brings us closer to consistent gains in housing.


On Jun 25 12:30 AM Westcoaster wrote:

> A divided market is what I see. Strength in the lower priced homes
> 250 to 350 in my region. Slowly sales starting back up in the 500-600K
> range and still pretty dead in the 800-1.5 range.
>
> I think the worst is starting to get behind us though. The FDIC
> is allowing the banks to unwind their crap at 25 to 35% loss rate
> from the loan value. This process takes a really long time but price
> discovery is happening.
>
> And since all banks in this area have to do this the FDIC is starting
> to just compare all the banks to one another, not to some mythical
> perfect ideally capitalized bank. The bank shareholders posted capital
> and are now being allowed to loose it. Thank you FDIC, that is what
> the capital was intended to be used for.
>
> Other commenters are correct the JUMBOs are not out there, and we
> will not reach bubble prices on the 1-3 million dollar homes again
> for many many years. Why aren't clever hedge funds using the TALF
> to issue government guaranteed Jumbo loans?
>
> Also interest rates are not sky high, since when has a 5.5% 30 year
> fixed rate been sky high. I don't see any big money coming in yet
> and picking up the big sub-divisions or empty condo projects. I
> am waiting to see that still.

Housing Is Bottoming, Along with the Economy

You make many points and I will try to address them in sequence.

Responses to my points, which make reference to data, must also be more than you are full of it. That doesn't quite qualify as a well articulated citation of data.

You may prefer a source other than the NAR--national association of realtors--but they are the best source of data for sales of existing homes and that's who everyone relies on. Census collects data for new home sales, because those often do not involve a realtor, so Census must collect that data on its own.

Falling prices, especially year over year, are not very useful. Year over year data are most valuable when the underlying data are not seasonally adjusted, for example, corporate earnings reports. The problem with year over year data is that you might need to wait for a full year after a turnaround to see it clearly. Think about two sides of V-shaped data that spans one year. It isn't until the middle of the second half of the year before the year over year comparison turns positive. With seasonally adjusted data, if the adjustment is correct, you can see a turnaround clearly within a few months. This problem is very evident in housing price data, which suffers from a host of other serious problems. Since houses are different and unique, price data may capture something entirely different than what we need to know. For example, there are many anecdotal reports indicating that it is the bottom end of the housing market that is recovering first, while more expensive homes languish. That's also very plausible. But it also means the average selling price may be artificially low and misleading. What if lower priced homes are selling better and those prices have started to rise, but they also make up a larger fraction of all sales, so average selling prices are lower? You'd miss that evidence of the beginning of the turnaround. In fact, many housing experts, including Karl Case of Case Shiller believes this is exactly what's happening.

Perhaps you did not review my data sources carefully. The new home sales report--a Census report--shows 26 consecutive months of decline in inventory. If you went further back, as I did, you'd see that the current inventory, now below 300,000 units as of April and surely lower as of May's impending report--is one of the lowest levels of stock in 40 years, despite a U.S. population that has doubled. So relative to population, the stock is really very low. That's nothing other than a direct reading of the data I cited.

You make the point that sales can be elevated artificially when the price is reduced. That's true. But this point is also less compelling than it sounds. GDP is also adjusted for inflation. So when prices are reduced, we see stronger GDP because actual sales of units goes up. We think that's good because it requires more production to replenish inventory. In housing, that's also good because it unloads inventory and brings us closer to the day new construction must rise.

Yes, price stability today does not assure us of price stability tomorrow. But if inventory is falling and has already fallen so much, I anticipate price increases tomorrow. If you still expect prices to resume falling, we will see who is right in due course as more data come in.

Lastly, I've done some extensive work on housing inventories and you can read the full analysis at seekingalpha.com/artic...
In March, in a piece I published on Seeking Alpha and elsewhere, I projected a bottom to the housing market this summer, along with the data and the logic behind the forecast. I'm still comfortable with that forecast.

Lastly, I did not forecast a bottom to home prices, but rather a bottom to the housing market, meaning sales AND new construction. At the time, I thought prices would lag. I've since reconsidered that question and because builders must be able to make money by selling new construction, I'd expect home values to also rise, at least at the bottom end of the market.


On Jun 23 05:03 PM Russ Wetherill wrote:

> Charles, I appreciate the effort in making your articles brief and
> to the point, but could you sprinkle in some facts and analysis in
> addition to your conclusions? Even a 1L knows that they have to cite
> to their authority -- the burden of proof lies with the one making
> the claim not with the one opposing it.
>
> Reviewing the cited sources, I don't see strong support for your
> conclusions. Setting aside the fact that you cited to the NAR industry
> website instead of an independent source, the NAR data hardly indicates
> a house price bottom. A bottom will be seen when there is some price
> support level where sales prices can be increased without losing
> sales. What we have seen so far is increasing sales volume resulting
> from sharply reduced sales prices, coupled with the usual seasonal
> sales volume increase. In the western region, the NAR data indicates
> that the YOY prices have dropped from $285K to 198K. Not too surprising
> that volume has increased, is it? But does this show price stability?
>
>
> A corresponding rise in volume with a sharp price decrease only shows
> that market forces are at work. You can always generate a lot of
> sales when you give something away for free, or nearly free.
>
> We are also going through a period of changing economic conditions.
> Price stability today does not necessarily mean price stability next
> month or next year. Many factors may result in further price decreases
> including: increasing unemployment, higher mortgage rates, foreclosures
> spreading to prime areas, higher tax rates to pay for deficit spending,
> etc.
>
> Interesting that you cite to the housing affordability index. This
> index purports to show that at prevailing 30yrFRM interest rates
> a median household income can afford the median priced home with
> a 25% debt level, and 20% down. Three problems with this: 1) this
> chart fails to show that homes are overpriced or have reached a bottom
> (according to the NAR homes were still affordable in 2005 at the
> peak of the market, so what?) 2) few buyers have 20% down, thus the
> spike in FHA market share with their 3% down requirement (does not
> help the jumbo loan market in CA for $1M+ homes which is the next
> foreclosure wave), and 3) this is a nationwide chart, and is of no
> use to any buyer in making an affordability calculation or property
> valuation in their local market (this is an NAR industry chart used
> to deceive buyers into making poor financial decisions).
>
> The balance of information just doesn't support a conclusion that
> home prices have stabilized and will remain stable in the future.
> So the question is: Why are you making this claim that home prices
> have stabilized? Why not wait until there is sufficient data to support
> this conclusion? Positive year-over-year same-sales price appreciation,
> for example, would show that prices are the same today as they were
> a year ago. Why not wait a year to make sure prices have actually
> stabilized before rushing into a thirty year mortgage?

Housing Is Bottoming, Along with the Economy

I write my newsletter so as to be brief, direct and to the point. The data I mentioned are readily available to those who want to look for it. For those who require being spoon fed, here's where to go. New home sales and the 26 month consecutive decline in new housing inventory (through the month of April--May becomes available in another day) are available at the following URL
www.census.gov/const/n...

Existing homes sales and inventories are at:
www.realtor.org/resear...

Housing starts through May is located at:
www.census.gov/const/w...

Housing affordability it at an all-time record high and the data is at:
www.realtor.org/resear...

I was listening to a Bloomberg interview of Jan Hatzius of Goldman Sachs this morning. He's a relative bear on the economy, yet when pressed, conceded that housing activity is likely now at the bottom. Oddly, he still expects housing prices to fall another 10%. (After all, he's still a bear.) But construction will not--can not--pick up unless builders can make money and for that to occur, housing prices must begin to rebound. Recent articles--within the past couple of days in the WSJ--indicate that prices are already firming in a number of areas, including Santa Clara County in California.

I think it's actually a clean sweep insofar as the data are concerned. All the housing data I'm aware of shows flat performance for several months or some improvement, with the possible exception of the Case Shiller index, and Karl Case has stated publicly he thinks the housing market is bottoming.


On Jun 22 07:50 PM John Lounsbury wrote:

> Charles - - -
>
> You said in your comment, "Interesting, almost universal negative
> views of the housing market, yet none of the comments cited the data.
> Over the next few days, new monthly reports will be released for
> existing and new home sales."
>
> First, these negative comments are showing as much data as you did
> in the article. Your assertions may be correct, but the amount of
> data you present is insufficient to prove then (the assertions).
>
>
> Second, I am waiting for the latest data next week to try to assess
> where I think the housing market is at the present time.
>
> May I suggest that a couple of grahic data displays could greatly
> help you make your point?

Housing Is Bottoming, Along with the Economy

Interesting, almost universal negative views of the housing market, yet none of the comments cited the data. Over the next few days, new monthly reports will be released for existing and new home sales. Both measures have been flat for several months. Inventories for both have been in decline for a while. For new homes, there have been 26 months consecutively of declines in inventories. Yet no one disputed my comments on this data, except for a few people who believe the data is fabricated. You almost need to believe the data is fabricated because I don't know how else you can construct the unfavorable view of the housing market that most people seem to believe. (A few people seem to prefer to rely on the number of homes for sales they see in their neighborhood.) By the way, if construction falls dramatically, say from 2.2 million units at an annual rate to about 500,000 at an annual rate, shouldn't that have some beneficial impact on reducing the housing inventory overhang? How could it not? I just don't get the logic of believing that housing will continue to fall without any regard for the data.

What if the Chinese Sell Treasuries?

U.S. consumers are tapped out? Then how do account for the ongoing high level of imports from China? Yes, our buying is reduced because we're in recession. That's a cyclical event. But the Chinese can be confident we will continue to buy from them. We're not talking about light switches that are either on or off.

Regarding the long-term correction of the trade imbalance, China's efforts to hold down the value of the reminbi will eventually fail. As they buy more dollar assets they will become ever more reluctant to continue. So, they will eventually, probably gradually, allow the reminbi to rise in value. Also, as China's middle class develops and living standards improve, they will also become more tolerant of slower growth. As the dollar weakens, our net exports will improve and the trade imbalance will decline. The timing for this is impossible to predict. It could happen within a few years, but more likely, it will occur over many years and be spread out so it doesn't happen as a shock (to either economy).


On Jun 17 03:26 AM HaavBline wrote:

> Exccelent question. Instead of finding reasons that China has limited
> options now, how about also explain what may happen 5, 10 years from
> now.
>
> Will China find better options when they realize US consumers are
> already tapped out? What if China become its own most important
> customer?
>
>

What if the Chinese Sell Treasuries?

They actually talk out of both sides of their mouths, sometimes almost simultaneously, because they engage in wishful thinking as well as some international (or domestic) politics. They'd like to have an alternative to the dollar. But they can't come up with one, so they mostly complain. Except, they sometimes acknowledge the truth, like yesterday when Putin of Russia stated that the dollar was fine, U.S. policy was appropriate, and he was comfortable with dollar assets.


On Jun 16 09:16 AM swaps wrote:

> Good timing. I read where Russia, China, possibly India, and other
> Asian countries are meeting this week or next to discuss how they
> can handle transactions without having to use the dollar, which they
> argue represents the empirical U. S. strategies to rule the world
> with what they deem to be incompetent and unsustainable economic
> formulae.
> The U. S. was pointedly told they could not invite themselves to
> the meeting, but should not worry about what will be discussed.