Are We There Yet?

I was asked a few mornings ago with some other colleagues from different asset classes, what we felt might be the biggest impediment to the rehabilitation of the economy and markets over the next number of months. My response and concern was based on the reality of a market that seems hell bent on reading the tea-leaves as being positive for the market at all times and with every piece of data.
This should worry pretty much everyone. In particular the idiotic blabbers at CNBC (though there are a few there that should be paid attention to including the Guru of the Pit _ Rick Santelli) and their desire to find positive headlines and put positive spin on pretty much anything.

The most recent example was Mondays "New Home Sale" figure, which came in as up 11%. Sure its a good number; but the reality is that the number has to be understood in context, and that context represents a number of things that should provide food for thought. First no mention was made of the fact that median prices had dropped by over $13,000 from May at $219K to June at$206K as the folks at Housing Bubble put it

***This is pure economics with prices falling you will expect new home sales to increase especially in the spring and summer months which are normally stronger.**** http://www.doctorhousingbubble.com

This is hardly about being pessimistic and more about realism and pragmatism. The same article points to the growing and largely forgotten Alt A and ARM's situation that's still ahead especially in California.

However a recent publication this week on ZeroHedge's website by Tyler Durden with David Rosenberg (he of ex-Merrill fame and now brightening the firmament at Glusken Sheff here in Toronto) should be read for a reality check. While the document seems long, it’s primarily graphical and makes some very salient and focused points on the economy. It produces data with a little more depth and insight and is sufficiently worrying to leave one floundering in that the overly upbeat prognostications from government and media alike should be taken with more than just a grain of salt.

Specifically in its introduction it shares the following

“We believe an aggressive “fact-finding” investigation into the true depths of the recession is critical due to increased pressure by members of the Mainstream Media and conflicted Investment Banks to present a myopic, unjustified opinion. Furthermore, opinions based on overoptimistic projections and “hope” is the primary reason the Credit Bubble persisted as long as it did.

- As there is an all too real threat of a relapse into the same kind of optimistic zeal and the resultant formation of yet another asset bubble, Zero Hedge is presenting the factual side of the story . We demand that readers question any and all assumptions presented herein (as well as everywhere else) on this most critical subject “ - ZeroHedge Article

Here are a couple of morsels for general consumption that I found particularly chilling.
UNEMPLOYMENT: People have been on unemployment insurance so long it has expired. Benefits exhaustion rate hit a record 50%. Americans are rolling into various extended benefits programs such as Emergency Claims and Extended Benefits, which surged by 170,000 in the last week alone. While “unemployment” is still below 10%, U-6, or the broader underemployment metric is at 16.8%, 6.5% higher from a year ago
HOUSING: NAHB housing market improved in July… To 17 from 15 the 8th worst print on record. Sales outlook is stuck at 26, and anything under 50 is a contraction RealtyTrac disclosed that Q2 foreclosure activity was the highest on record. 􀁠 1.9 million foreclosure filings in the first half of 2009, a 15% increase from the prior year period *June foreclosure filings of 336,173 were the fourth straight month exceeding 300,000 *One in 84 housing units received at least one foreclosure filing in the first half and all this is occurring on the backdrop of an industry-wide housing moratorium *According to Whitney Tilson, foreclosures have been temporarily cut by 66% through moratoria which reduce supply *At some point the banks will need to release the flood gates – watch out below as millions of units in shadow inventory are unleashed on the few buyers out there

The full document can be found at this URL http://zerohedge.blogspot.com/ It is worth the time and effort to give it the once over.


My personal take is that we are some ways along in the process of rehabilitation and that it’s definitely not a V; but looking more like the W.
The kind of percentage returns that we have seen this year in the equity markets and in the S&P in the last couple of weeks alone should suggest that they are hardly likely to continue.

Undoubtedly risk appetite is back markets are on a better footing and business is once again underway; nonetheless the amazing compression in corporate and high grade spreads experienced over the last few months seems over done and unsustainable. Driven by supply (or rather lack of) and demand factors, that do not necessarily reflect the reality of the underlying US economy.
Even as our own Governor at the Bank of Canada tells us that we will be out of recession in Q3, I wonder about his certainty. Maybe it’s the rainy weather that has me all afoul and in need of amore upbeat disposition this week.