When It Rains, It Pours?
by Michael Panzner, Financial Armageddon. August 1, 2007
Despite reports of falling prices, housing was less affordable in June than in any other month this year, according to the National Association of Realtors. On Monday, the NAR announced that its composite homebuyer index fell to 104.4 from 110.4 in May, and remained below the levels last seen when property prices were on the upswing. Along with tighter lending standards, a change in psychology, and other factors, declining affordability helps explain why new and existing sales have remained under pressure, and signals that there is likely much more downside to come in the months ahead.
Interestingly, while the problems in the housing market have been both obvious and predictable -- even normally exuberant homebuilders have been harping on for months about how bad things are -- one supposedly informed group has remained steadfastly behind the curve: Wall Street analysts. According to data from Bloomberg, analysts at eight major sell-side firms have just two "sell" ratings between them on the five companies whose shares comprise the S&P 500 Homebuilding Index. What's more, throughout this year, analysts who follow the group have largely stuck with "buy" or "hold"-equivalent ratings, while the shares have cratered by more than 40%.
But it isn't only in the housing sector where mainstream analysts seem to be missing the boat. In terms of the economy, many sell-side forecasters have been insisting that prospects remain bright despite widespread upheaval in the global credit markets and reports that many industries, including transportation, are seeing evidence of a significant slowdown in activity. Some so-called strategists have also been suggesting that the recent steepening of the yield curve is a bullish sign for the U.S. economy. History suggests, however, that such a move, coming as it does following a span when long-term rates have been lower than short-term rates, usually takes place just before or as a recession gets underway.
As far as the equity market goes, the fact that June and July both ended lower could be a cause for concern if history is any guide. In looking back at what has happened over the past 30 years when the two summer months have finished in the red, one thing stands out: on four out of five occasions, the market was lower during the second half of the year. The lone exception: 1982, which happened to mark the beginning of a multi-decade bull market following a long period of dismal returns. Another reason, perhaps, why now may not be the time to be bullish on share prices.
|Year||June Returns||July Return||H2 Return|
Stocks ended higher after a day of see-saw trading as bargain hunting, vague talk of Fed rate cuts, and a late-session bear squeeze offset disappointing economic data, rumors of a potential bankruptcy filing at a major homebuilder, and nervousness over hedge fund blow-ups.
At the close, the Dow Jones Industrials Average was up 150.38 (1.14%) to 13,362.37. The S&P 500 index rose10.54 (0.72%) to 1465.81, and the Nasdaq Composite Index gained 7.60 (0.30%) to 2553.87.
Among the reports unsettling investors was news from the Institute for Supply Management that it’s factory index for June came in at 53.8, which was below expectations, and a weaker-than-forecast gain of 48,000 in the ADP National Employment report for July.
Treasury bond prices were essentially flat and gold drifted lower, with the December futures contract losing $3.40 to close at $675.90. Light sweet crude futures for September reversed early gains and finished down $1.71 per bbl, or 2.19%, at $76.74.
© 2007 Michael Panzner