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The Independent Investor: 'Bottom' Not Same As Recovery
Every summer for the last three years, economists have announced that the housing market has finally bottomed. But in the same breath, they talk about a recovery they expect in the months and years ahead. I agree that the bottom is in but there is little sign of that promised recovery.In a recent Wall Street Journal poll of 44 economists, all but three were convinced that housing has hit bottom. To back up their contention, one need only review the data in that sector over the last few months. In May, as just one example, 10 percent more existing homes were sold than in the same month last year. Builders also started on 26 percent more single-family homes that month than the depressed levels of last spring.
In June, housing starts rose 6.9 percent to a seasonally adjusted annual rate of 760,000 units, which is the highest rate since October 2008. But new permits for building homes dropped 3.7 percent and pending home sales actually decreased by 1.4 percent. In a bottoming process, however, conflicting numbers are to be expected. In an actual recovery, one should expect a consistent string of stronger data points month after month. That has failed to occur.
For the past several years, good news in the spring and summer (the traditional season for home buying) was followed by disappointing data in the fall and winter. We need to see more robust numbers throughout the year and a broadening out of this trend before a housing recovery becomes a reality.
Zillow, a research organization that measures home values, said on Tuesday that the U.S. market has turned the corner after a five-year slump. They point to the fact that home values have risen for four consecutive months. Yet, when the data is examined closely, we find that the biggest price gains are in the markets that saw the largest drops during the real estate crash. California, Arizona, Florida and Nevada have seen higher prices but from a very low base. Whereas places like St. Louis, Chicago and Philadelphia saw price declines.
It could be that the markets that saw the largest gains were simply correcting an oversold condition that was not sustainable. In other words, prices were too cheap, even under these market conditions, and buyers recognized this. If we are in a true recovery, we should see a continuation in price increases in these markets with a flattening out of prices in declining markets.
Many economists argue that this time around a declining supply of houses will bolster the real estate market's recovery. Here again, I look at the level of homes for sale with a jaundiced eye. The level of housing inventory that is being held "off market" concerns me. First, there is the large pool of foreclosed properties that the banks are holding and can't wait to get off their books.
In addition, roughly one-third of all homeowners are underwater on their mortgages. Many of these owners are hoping for a recovery in prices before selling. Finally, a substantial portion of existing home sales have been purchased for cash by buyers who intend on renting out these properties until the market turns and then selling them at a profit.
If I'm correct, that represents an awful lot of potential homes for sale that are not being counted in the nation's housing supply by those who argue that a recovery is under way. About the best that can be said for housing is, if a bottom has occurred, then the housing sector will no longer be a drag on the economy overall. It may also mean that prices will stabilize at last at a lower level, although how long it will be before prices increase is a function of how much inventory there is left to be sold.
In my opinion, it could take several more years before that existing stock of houses is sold off and another generation of homebuyers actually begins the process of bidding up home prices once again. For prices to return to their pre-crash level, we would need to see the economy come roaring back and the jobless rate drop precipitously.
In the meantime, if you are in the market for a place to live, focus on the attractions of owning rather than renting a home to live in rather than as an investment. Unless something changes radically in this country, it could take a long time before you actually see a recovery in housing.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The Drought of 2012
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Naturally, those who farm for a living would beg to differ since they are watching their livelihood shrivel on the stalk or vine daily and if the dry spell keeps up they too will join the ranks of a growing list of U.S. counties (over a thousand today) that are applying for federal disaster relief.
Over 60 percent of the country is in the grip of the worst drought "since the late 1950s," as the media is billing this weather event. And as droughts go, "you ain't seen nothin' yet." In the '50s, for example, the state of Texas suffered a seven-year dry spell that was so bad that children born in 1951 grew up with no knowledge of rain. Dust storms that turned day into night were so powerful that they stripped the paint off of license plates.
Of course, nothing in modern-day American history compares to the drought of the 1930s. As the new decade began, the country was still grabbling with the aftermath of the 1929 stock market crash. At the same time, the U.S. experienced two dry years in a row in 1930-31, especially in the East. As the economy faltered so did the rain and by 1934, 80 percent of the country was in a drought and a depression.
Anyone who has read Steinbeck's "Grapes of Wrath" has a general idea of how bad a drought can get. Scientists believe the period of 1933-1940 was the worst drought in North America in 300 years. Dust storms, especially in the Great Plains, were daily events and by 1934 it was estimated that 100 million acres of farmland had lost most or all of the topsoil to the winds.
It was at that time, after weeks of storms that the mother of all dust storms hit the nation (Black Sunday, April 14, 1935). Sixty mph winds spread the grit and dust from the Great Plains all the way to Washington, D.C. The term "Dust Bowl" was coined a day later by the Associated Press to describe conditions in the Great Plains. I provide this history lesson for a reason.
History often rhymes. There are some similarities in both the economy and the weather today compared to the 1930s. We experienced a crash in the markets in 2008-2009 brought about by speculation and a credit crisis and are still struggling with the aftermath just like we did in 1929-1930. Today, like then, we worry over this country's huge deficit, out-of-control spending, high unemployment rate and slowing economy. Events are eerily similar to what transpired in the U.S. in the early '30s.
Droughts cause dislocations in the economy whenever they occur. They exasperate existing economic conditions. In this country if you look at the pattern of 20th-century droughts, they normally occur every 20 years, so we are overdue for this dry season. Aside from the predictable impact on food prices, droughts create a chain of cascading secondary effects from lost agricultural jobs and businesses to higher utility costs and other industry costs in the developed world to population displacements and political unrest in emerging markets.
If one looks at just the price of corn in the United States, which has increased in price by 38 percent since June 1, it is not hard to predict increases in processed food prices by the winter. Since other staples, like soybeans and wheat, are also wilting in the heat there could be a domino effect across the board for all kinds of agricultural products.
It might surprise you, however, that the prices of beef, poultry and pork might actually decline in the short term. That's because livestock producers would rather send their herds to slaughter now than face the increased costs of feeding them in the future. Out West, (today's potential Dust Bowl) many ranchers have simply run out of range land that could support their herds. As this new supply of livestock is dumped on the market, prices should ease a bit before heading up, so plan accordingly. The best strategy would be to stock up now and freeze for the future.
I guess the best that can be said of this drought is that it has a way to run before it can compare to the worst that Mother Nature has thrown at us in the last century. It will most certainly cause more drag on the economy, increase the deficit through federal relief assistance to farmers and put pressure on the unemployment rate.
Under that scenario, is it any wonder that the markets are expecting more stimulus from the Fed? Barring that, I guess we should all brush up on our rain dancing.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The Dollars & Sense of Losing Weight
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The statistics are some of the most accurate in the American medical community. Overall, 35.7 percent of the adult population and 16.9 percent of our children are obese. If you add in those Americans who are merely overweight, then two-thirds of this nation are on the road to higher health costs, a shorter life and a miserable life style.
Obesity-related illnesses cost us $179 billion annually, with obese Americans spending 42 percent more per year for medical care than the non-obese to treat everything from Type II diabetes to heart disease. Breaking that down into individual dollars and cents, it costs $4,879 for women and $2,646 for men every year in various costs associated with being overweight or obese.
It means that obese women pay nine times more and obese men pay six times more in associated costs than do individuals at a healthy wright. Besides the obvious individual health costs associated with this American epidemic, there are also work-related costs that you may not realize.
A study by Duke University concluded that it is costing business $73.1 billion annually in absenteeism, work productivity and other costs for obese, full-time employees. Lost productivity alone is costing us $12.1 billion a year, which is twice as much as the medical costs. It works out that it is costing business $16,900 per capita for females and $15,500 for men in the 100 pounds overweight category of worker.
Other non-medical costs include wage loss, higher premiums for life insurance, short-term disability and disability pension insurance, sick leave (obese men miss two more days of work than healthy men) and early mortality.
Much of the statistical data on how many of us are overweight or worse is derived from measuring the Body Mass Index, a cheap and simple formula to determine a rough estimate of body fat. You use your weight and height to compute a score. Those over a certain score are considered overweight and as your score increases so does the obesity factor.
Let's take me for example, for most of my adult life my weight fluctuated between 185-190 pounds. At six-foot, two, I smoked and worked out like a fiend (love those contradictions). Seven years ago, I quit smoking, stopped exercising, and subsequently ballooned in weight to 255 pounds. My BMI soared from 24 to 33. I avoided standing on the scale and hated getting my yearly physical for obvious reasons. What I didn’t know, won't kill me (yep, another contradiction).
In the meantime, my brother, who is three years younger than I and about the same height and weight, came down with Type II diabetes because of his weight. It was only a question of time before my added pounds was going to show up as serous health issues. I started back to the gym but continued to eat what I wanted. I gained even more. It was at that point, I realized that I had been kidding myself. I wasn't overweight, I was officially obese.
Almost 55 pounds later (and lighter), the years seem to have have fled and I feel better than I have in a decade. The point to this "true confessions" is that although I knew all the obesity statistics, I never considered myself anything but overweight. I suspect we are all the same until something happens that allows us to take a bite out of reality.
There is good news and bad news about the obesity epidemic in this country. The Centers for Disease Control and Prevention announced that after two decades of steady increases, obesity rates in adults and children in the U.S. have remained unchanged during the last 12 years. Either we have reached the saturation level in the population where everyone that is prone to gaining weight has done so, or that the constant drum beat of public education on the dangers of obesity has made an impact. That's the good news.
The bad news is that a recent study by the New York University School of Medicine indicates that obesity in America might be far worse than we think. The culprit is the same BMI that we all use to determine obesity. Although the BMI is cheap and the starting point for measuring a weight problem is also one of the least accurate medical tests in existence. The study concluded that the number of obese Americans may actually be much higher than we think.
The researchers believe the problem with the BMI is that it estimates rather than measures body fat. The study used two other measures along with BMI — the amount of leptin, a protein which regulates the body's metabolism and Dual Energy X-Ray Absorptiometry that tests body fat, muscle mass and bone density. Thirty-nine percent of those patients in the study who were classified as overweight were actually obese.
The bottom line is that we are killing ourselves. Our children are entering adulthood heavier than they've ever been at any time in human history. The way our food is processed, American's addiction to fast food, our increasingly sedentary life style, an aversion to pain or discipline — all have been offered as reasons for this state of the nation. It doesn't matter who or what is to blame, in my opinion. Fat is fat and until each of us understands and takes responsibility for his or her own part in this epidemic there is little anyone can do outside of food rationing. My advice is get on the scale. And take it from there.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: July Begins With a Bang
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But no market goes straight up, so I think investors should expect a "two steps forward, one step back" kind of market. I would use any pullbacks to add to positions.
In my last column "Germany Blinks," I explained some of the reasons I expected the rally to continue. Here it is just a few days later and some of the stimulus I expected from governments around the world is already occurring. On Thursday, three major central banks announced easing measures. The Bank of England announced another 50 billion pounds of quantitative easing to spur growth in Great Britain. The European Central Bank cut interest rates for the same reason and the People's Bank of China also did an aggressive easing.
In one week we have seen three of the largest central banks in the world pump billions into their faltering economies. Now all eyes will be on our Federal Reserve. Investors are expecting that sometime soon the Fed will join the aggressive easing party.
"I don't get it," said a client from Great Barrington on Thursday, "after all these bad economic numbers, this week's unemployment data was a big positive surprise and yet the markets sold off."
Yesterday, I addressed this issue in my column "Bad news Is Good News." In a nutshell, the worst the economic data becomes in the United States, the greater the chance that the Federal Reserve would be forced to come in and rescue our economy from recession once again. In the past, that has caused substantial gains in the stock market.
Conversely, the better the data the less likely it is that our central bank will need to intervene. So it was interesting to see the market's reactions on Thursday to the positive data on jobs and hiring. The number of Americans filing new claims for jobless benefits fell by the largest amount in two months while employers in the private sector added 176,000 new workers, according to the ADP National Employment report. Yet, the markets sold off.
Since keeping unemployment low is one of the two main briefs of the Federal Reserve Bank (the other is controlling inflation) the good jobless numbers were an excuse to take profits in a market that has seen some good gains since my buy recommendation.
From a technical point of view, the S&P 500 Index broke out of that 1,353-1,357 range and if it should fall back to that level or even below it, I would not worry too much. I warned readers last week that in the short term the markets will remain quite volatile and be prepared for some ups and downs.
I recommend that you ignore those bumps in the road and keep your eye on the fall. I am not sure who will win in the November elections, but I do expect that markets will rally this summer.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Bad News Is Good News
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Over the past year the financial problems of Europe have been well publicized. Starting with Greece, most of the southern tier of European Union countries have been mired in recession, high debt and declining exports. Those problems have infected the entire continent, resulting in an EU-wide recession, but that is old news.
Over in Asia the story is the same. China, the economic engine of that region, has also experienced slowing growth, reducing the prospects for all its neighbors in the process. And now these problems are coming home to roost here in the United States.
Factory orders in the U.S. declined in June for the first time since 2009. The nation's manufacturing output has been one of the drivers of our own recovery but weakening demand from overseas, coupled with declining currencies in our export markets have resulted in a slowdown in U.S. output and exports.
It is not just manufacturing, overall economic numbers coming out of most sectors of our economy have shown a gradual slowdown. Investors are not only taking this bad news in stride but are actually bidding up the stock market because of it.
Readers only have to look back over the last few years to see the same kind of phenomena occurring over and over again. It usually occurs during the summer months and has a decidedly positive impact on the stock market. The answer lies in the continued government interventions in the private sector economy we have seen since the financial crisis.
Investors are now conditioned to expect governments to intercede when economies begin to slow down. There was a time in our country (as well as overseas) when periods of economic growth, interrupted by recession, was the normal give and take of free-market economies, but no more.
Today the private and public sectors are intimately joined at the hip. The Federal Reserve here at home and central banks abroad have made it their responsibility to keep their countries' economies afloat with every means at their disposal. After several such interventions, stock market investors are conditioned to view bad news as good news when it comes to the economy.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Market participants fully expect the Fed will save them once again this summer. The economy only needs to slow enough to threaten a recession, investors believe, before the Fed will take action. Like crack addicts, we have all become addicted to these moves by the Fed. Unfortunately, their efforts, while probably keeping the economy out of recession, have done little to grow the economy.
What it has done is shift the seat of financial power to Washington and makes irrelevant the traditional tools for analyzing companies and markets. And along the way it has transformed the stock market into one of those roller-coaster rides usually seen only in amusement parks.
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