The Daily Reckoning - Housing's Last Hurrah?

verfasst von Firmian, 03.09.2003, 09:30

-->Housing's Last Hurrah?

The Daily Reckoning

Bonn, Germany

Tuesday, 2 September 2003

---------------------

*** September, 1939... the latest headlines... Warsaw
falls... Minsk falls... Cracow falls... but don't mention the
war...

*** Gold up, stocks up: a new global fashion...

*** U.S. incomes fall! What kind of a recovery is this?

---------------------

We have come to Germany on the anniversary of the beginning
of WWII to show off our Daily Reckoning. The DR is already
published in German; our German friends want to know more.

"Don't mention the war," was Addison's advice. But then,
the subject just came up:

"Everything looks so new, compared to Paris," said Addison
to the taxi driver as we drove through Cologne.

"Yah... the city was destroyed in the war, everything except
the cathedral. And that was badly damaged."

Nothing much happened on Wall Street yesterday... so we
bring you the news from 64 years ago:

It was this week in 1939 that the Germans and Russians
ganged up on the Poles and took over the country. It was
mad, of course... but the whole world seemed to go mad in
the early 20th century. Mussolini had invaded Ethiopia.
Franco had invaded his own country, Spain. Hitler had
already asserted his claim to German speaking parts of
Europe and now was beginning his drang nach osten. Oswald
Mosley was strutting around East London, looking comical,
with his blackshirts. The Japanese were on the march,
too... down the east rim of the Pacific Basin... toward
Singapore and Bataan. Stalin, Hitler, Mussolini,
Tojo... each had his own special nonsense. But nonsense was
in a major bull market in the 1930s.

Refugees flooded into New York, bringing nutty isms with
them as if they were infectious diseases. In art, cubism,
minimalism, dadaism, fauvism and abstract expressionism
enjoyed the spotlight. Isms, ideas about how things should
be, were big in politics, too - socialism, communism,
syndicalism, anarchism, nationalism. In philosophy, there
was nihilism, existentialism and God knows what; in
economics there was Keynesianism. There was an ism for
every fool with a mouth to spout it!

And soon, isms were big in the U.S., too. American artists,
architects, writers, politicians and philosophers snapped
up the latest imports and showed them off. In a few years,
ugly stalinesque bauhausian public buildings were replacing
the graceful old neo-classical relics... artists were
throwing paint against their canvases... and Roosevelt had
introduced nearly all the faddish isms of Europe - a
national retirement system, wage and hour rules, union
privileges, and a whole new bureaucracy to pry and probe
into every detail of daily life.

Why would the Germans waste their time and energy by
marching into the desolation of White Russia, when they
could have been enjoying their beer and frauleins on the
banks of the Rhine or Unter den Linden? What was wrong with
our parents and grandparents, anyway? What could they have
been thinking?

It was all mad.

Thank God those days are over. We're all so much
smarter... so much nicer... so much better informed and
better behaved today. Now, we know better, right?

Maybe, in the space of the last half-century, the species
has evolved into a new animal. Maybe Yardeni was right
after all... In this New Era, maybe there is a New Man to go
along with it...

.. or maybe we are just in the midst of a new madness, and
cannot see it?

Over to you Eric... in New York:

------------

Eric Fry in the Big Apple...

- Yesterday, the U.S. financial markets closed down for
Labor Day, but the foreign markets continued laboring... and
fruitfully so. Japan's Nikkei Index surged 3.2%, South
Korea's KOSPI Index jumped to a new 14-month high and
Thailand's SET Index soared to a fresh four-year high. Most
European bourses also added to their sizeable gains of
2003. Meanwhile, the gold price continued climbing, as spot
gold jumped nearly 1% to a six-month high of $378.80 an
ounce.

- Evidently, stock-buying is not just a trendy New York
thing; it's a global fashion. But how much longer will this
fashion continue? When will stock-selling become the new
financial craze? Stocks are expensive, but they've been
expensive for some time... and still they rise.
Nevertheless, expensive stocks are especially vulnerable to
bouts of selling, especially in the month of September.

-"The calendar bodes ill for U.S. stocks," Bloomberg News
ominously observes."September has been the S&P 500's worst
month of the year during the past half century, according
to Ned Davis Research Inc."

- The month of October is, of course, the most notorious
month in U.S. stock market history. October played host to
both the 1929 stock market crash and the 1987 crash, when
the Dow Jones Industrial Average's plunged 23% to record
the biggest one-day percentage loss ever. But it is
September that packs the biggest wallop. The Dow has fallen
in 30 out of 51 Septembers since 1952. And over the past
century, the blue chip index has fallen an average of 1.2%
in the month.

- Despite the ominous precedent of Septembers past, the
stock market heads into this particular September with a
considerable head of steam... sort of. The S&P 500 and Dow
have advanced for six straight months and the Nasdaq has
gained for seven consecutive months. The S&P 500's winning
streak has propelled the index to a hefty 26% gain from its
March lows. But the benchmark index still languishes just
below the highs it achieved last June.

-"The market as measured by the Standard & Poor's 500 has
hardly budged since the start of lawn-party season,"
observes Barron's Michael Santoli,"with the index
traveling in the same narrow 6% channel since early
June... The S&P first touched the 1000 mark on June 6..."

- In other words, the S&P 500 is spinning its wheels. But
wheel-spinning isn't the worst-case scenario for the U.S.
stock market. Indeed, over the next few months, wheel-
spinning could be the BEST-case scenario. That's because
several sub-sectors of the S&P 500 are performing
heroically, without which the overall index would be well
below its current level. Therefore, additional index gains
will require additional acts of heroism.

- Consider, for example, that the semiconductor sector has
rocketed nearly 60% year-to-date, or more than triple the
S&P 500's gains. Intel's stock is the biggest gainer in the
Dow Jones Industrial Average this year, thanks to its
sparkling 84% advance. As a result, the stock now sells for
about 40 times estimated 2003 earnings. Intel shares could
certainly continue soaring, but why should they?

- These and many other weighty questions we contemplated
yesterday, while stoking the coals of our bar-b-cues. While
most folks were enjoying a respite from their toils, the
Daily Reckoning staff continued its tedious reckoning. We
reckoned silently about the strange juxtaposition of our
feeble economy and our muscle-bound stock market. We also
contemplated the economic trends that may begin to unfold
as the nation's workers return to their labors this week -
contributing the national GDP from their offices, schools,
coal mines and strip clubs.

- Will this socio-economic melting pot resume spending more
than it earns? And will it resume paying too much for
stocks and bonds that yield too little? Or will it repent
of its spendthrift ways and cavalier investment habits to
begin stuffing dollar bills - or gold ingots - under the
mattress?

- Reckon as we will, we do not know the answers to these
weighty macro-economic questions. Happily, our ignorance
does not preclude offering an opinion. And it is our
opinion that the S&P 500, the U.S. dollar and the 10-year
U.S. Treasury note are all investments that offer more risk
than reward. It is also our opinion that gold is likely to
perform better than the S&P 500 over the coming months and
years.

- But we recognize that wheat grows among the tares - the
stock market contains both excellent investments and
horrendous investments. And we endeavor, as always, to find
many of the former and few of the latter... thus the
reckoning continues... daily.

------------

Bill Bonner, back in Bonn...

*** Some recovery. Last week's Herald Tribune told us that
Americans took few vacations this summer - because they
were overworked, looking for jobs or worried about losing
the jobs they had.

Now comes further disappointment.

"American workers are feeling stressed and shaky," reports
today's Herald Tribune,"because the United States
continues to register month after month of job losses and
wages are rising more slowly than inflation."

How about that? The average person is losing real income.
Can you believe it, dear reader? During the recession, the
average person got poorer - his assets and his earnings
went down - but he kept spending money, thanks to the bait
of lower interest rates offered by Greenspan's Fed. Now, we
are in an economic recovery; all the papers say so. But the
average person's real income is still going down!

Question: What kind of recovery is it in which people earn
less money?

Answer: A phony one. A fraud. An imposter. A charlatan. A
mountebank... a bounder... a flimflam... recovery.

Question: Could you give us more details?

Answer: Yes, 2.7 million jobs have been lost since the
downturn began 3 years ago. But the slump supposedly ended
in November of 2001. Since then, 1 million jobs have been
lost. The average unemployed person spends 19 weeks looking
for a new job, longer than at any time in 20 years. Plus,
there are almost 2 million people who have been jobless
more than 26 weeks - three times the number when the
recession was said to have ended.

Question: Has the nation ever seen anything like this?

Answer: Yes, during the Great Depression.

Question: So what's the cause?

Answer: It's the wages of sin; it's the result of Nixon's
Dollar Standard system. In short, Americans stopped saving
and started buying. They became 'the world's mouth,' ready
to consume all that it produced. But you don't get rich by
consuming. You get rich by saving. Of course, when you
switch from saving to spending you feel rich at first -
because your standard of living goes up. But eventually you
have to pay the money back. And it's hard, because your
businesses - lacking real savings and investment - are no
longer able to compete; their profits have gone down, too.
And they can't afford to increase wages. Average earnings
stagnate in nominal terms and fall in real ones. Note that
business profits as a percentage of GDP, as well as wages
in the manufacturing sector, have been flat or falling
since the Dollar Standard system came into existence.

There is no reason why an American worker is innately more
productive - or deserves to earn more - than say, a worker
in India or China. The only reason he has earned more in
the past is that the U.S. has more capital (including
skills, know-how, customs, work ethics, and so forth)
available. But the perverse pleasure of the Dollar Standard
system was that it allowed Americans to feel rich, without
saving... while actually transferring capital ownership
overseas.

Question: Will it get worse?

Answer: Just wait until the dollar falls. Measured in gold
or foreign currencies, U.S. wages will go way down. On the
other hand, Americans will stop spending, begin
saving... and eventually make a comeback, though perhaps not
in our lifetimes. In fact, compared to the rest of the
world, Americans may never again be so rich.

*** As the release of our new book approaches, we stand
back and marvel at the bubblish turns the economy - guided
by our fearless leader, Mr. Greenspan - has taken since we
completed our tome. Especially glaring is the bubble in the
housing market. But it is not as though we didn't see it
coming...

"As [Financial Reckoning Day] demonstrates, writes Jimmy
Rodgers in our introduction,"artificially low interest
rates and rapid credit creation policies set by Alan
Greenspan and the Federal Reserve caused the bubble in U.S.
stocks of the late '90s. Now, policies being pursued at the
Fed are making the bubble worse. They are changing it from
a stock market bubble to a consumption and housing bubble.

"And when those bubbles burst, it's going to be worse than
the stock market bubble, because there are a lot more
people that are involved in consumption and housing. When
all these people find out that house prices don't go up
forever, with very high credit card debt, there are going
to be a lot of angry people."

Last June, the bond market reversed its rally, sending
mortgage rates skyward... and triggering a rush to buy
houses before it was 'too late'. Prospective buyers may
continue to apply for loans, but fewer can now qualify;
even if they do, their money affords them less house than
before. Those fortunate enough already to possess a home
will find the market values their equity less
favorably... and those who financed using adjustable rates
are feeling the heat.

There does not seem to be much room left for air in this
bubble; its pin looms dangerously near."[The 'pop'] hasn't
happened yet," Addison wrote to you recently."But when it
does, there are going to be a lot of angry people."

Some, however, seem to see the pin father off in the
distance than we do (more from Dr. Steve Sjuggerud, below).
How much farther can this bubble stretch? We don't know,
dear reader.

But we will find out.

---------------------

The Daily Reckoning PRESENTS: With the troubles at Freddie
Mac and interest rates taking a front seat in the financial
press of late, we here at the Daily Reckoning have opined
that top may be in for the housing market. Yet one of our
most trusted contributors disagrees... in spades. On the
contrary,"the bull market in housing," writes Dr. Steve
Sjuggerud,"has just begun." Read on...


HOUSING'S LAST HURRAH?
By Steve Sjuggerud


"We have 1,000 buyers for every 10 homes we have to sell.
We have raised prices by $15,000 at each phase release and
over the past 30 days not one person has come in here and
not bought a home." - Sales manager at an entry-level new
homes community in San Diego

"People are buying like crazy." - Sales manager at a move-
up level new home community in the East Bay/San Francisco
area.

"It seems as if everyone who comes in is a serious buyer.
It's great!" - Austin entry-level community sales manager

"We're going gangbusters here" - A Tampa move-up community
sales manager


It's the most powerful bull market for new homes in
recorded history. And the surprising part is, we are only
just getting started...

Think of it like 1997 in stock prices, and you'll
understand the investment potential.

Talk about a bull market. According to the latest numbers
from the National Association of Realtors, real estate
prices in every single metropolitan area in the entire
country were up over the last 12 months. That's 126
markets! This marks the first time in recorded history that
has ever happened. Nationwide, home prices increased by
7.4%, a large increase by historical standards - but home
prices in nearly a third of the metropolitan areas in the
country posted extraordinary double-digit gains.

When you hear numbers like those, you may think"we've got
to be near the end of this boom." I can't fault you for
thinking that. However, be careful, that's what everyone
else thinks. Just last week, Money Magazine published an
article called"Housing's Last Hurrah" saying"the headiest
days of the housing market are near an end." But then, this
is the same Money Magazine that has consistently told you
to keep buying stocks over the last three-and-a-half years
- stocks that have lost two-thirds of their value in that
time.

Now you might think"maybe I've already missed it..." Oh,
boy, we are only on the front end of this big move... You
haven't missed a thing...

Right now, prices have been rising in part because the
supply of new homes is at its lowest levels in recorded
history. When the supply of new homes gets very tight,
falling below 5 months of supply, a boom in housing prices
begins. And when there's a glut of new homes just sitting
there (when supply is at 8 months or more), then housing
prices level off.

Based on the current shortage in the new home supply, it
looks like the price of new homes can continue to power
higher. But the shortage also has another, more obvious
implication: America is in need of more new homes. Hard to
believe, isn't it? But it's true.

While most people think home prices have risen to crazy
levels, the truth is, people buying homes today aren't
crazy at all. In fact, housing is more affordable today
than at any time since the 1970s. Here's why.

People make the decision to buy a house based on their
income and their mortgage payment, not on price. Based on
these factors, housing is very affordable - even at these
higher prices. In other words, the rise in incomes over the
last few years and the fall in mortgage rates over the last
few years have more than offset the rise in home prices.

The folks who are negative on housing often hang their hats
on what they see as the inevitability of higher mortgage
rates."As soon as rates rise by a full percentage point or
more, that's it for the housing boom," they say. Oh really?
Let's ask the sales managers - the guys in the trenches
selling homes - for their take again:

"The recent rise in rates hasn't stopped people from
buying, it has done just the opposite. People want to buy
now because they figure interest rates have bottomed." -
Phoenix entry-level community sales manager

"Prices are so low compared to existing homes that... it's
going to take quite a bit of time for the rate increase to
make an impact." - Riverside/San Bern, CA entry level
community sales manager

"I don't think the higher rates have had any impact. In
fact we sold 3 [in our community] this past weekend." -
Orlando move-up community sales manager

Or forget about what people are saying. Let's look at
what's really happening out there. Whether it was on
purpose or by accident, a major homebuilder recently let
the cat out of the bag in its July 25, 2003 conference call
with analysts...

In the Question and Answer period of the call, this
homebuilder said that orders are up about 100% year-on-year
for the month of July - and the month of July wasn't even
over yet. So much for the 'higher rates will kill the boom'
theory. The company sold 180 homes in Phoenix alone in
July, for example, versus 64 homes in Phoenix last July.
Remember - this is the same month of July that saw mortgage
rates rise by over a full percentage point.

It all comes back to supply and demand. There's a ton of
demand, and there ain't no supply. With such a staggering
imbalance at play, we're going to need more new homes.
Who's going to meet this extraordinary demand? The
homebuilders... and they're set to make extraordinary
profits for at least a few years in the process.


Best wishes,

Steve Sjuggerud,
for the Daily Reckoning

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• The Daily Reckoning - Housing's Last Hurrah? - Firmian, 03.09.2003, 09:30