Housing Liquity - from seekingalpha.com

The following post is from seekingalpha.com
James Eckler author

The baby boomers are reaching the age where they need to decide between asset ownership and liquidity. A growing percentage of this group will use up their savings “between jobs” after age 50 and before retirement. They will go through the process of liquidating their assets at prices that are much lower than a few years ago in order to add to future monthly income.

With over 75 million baby boomers looking ahead at uncertainty, more job shortages for older people, and a largely unfunded Social Security and Medicare system (especially Medicare), they will begin to consider how to get liquidity from their hardest to liquidate assets – their houses. Social Security checks now average about $1100, and for a large percentage of these people this is what they will have to live on.

Sustainability of the existing financial lifestyle among the boomer group will probably be restricted to about 10-20% of the overall group. The rest will need to liquidate assets, especially aging houses, to pay monthly expenses and cover rising healthcare premiums.

The biggest decision for most will be WHEN they sell their houses if they are homeowners. This could easily lead to a large increase in the number of listed homes over the next decade where, unlike before, the seller is not the buyer of another home. It could also lead to many who do have assets (the top 20% probably have around $800,000 in assets) selling second homes and not replacing these homes.

The impact of these changes in homeownership and income will be a big increase in demand for low cost rental housing (under $600 per month with utilities and taxes), a portion of the market that is largely unavailable today.

Since 2000, according to reports created by the former Comptroller of the United States, David Walker, the total liabilities of the U.S. have grown from $20 trillion to $53 trillion by 2007. This number can’t be paid, so the issue that faces the investment community in the U.S. is how to react to what amounts to undisclosed future cuts that will have to be made in programs. Most of these liabilities are for unfunded Social Security and Medicare (especially Medicare). Medicare reached “Warning Status” recently, which requires the new President to make changes to make the program solvent in 2009.

If taxes are raised, it will slow the economy. If benefits are cut, a large portion of the population will have to raise their savings rate, sell assets, and cut spending. Which will be chosen, or will it be a combination?

The Peterson G. Peterson Foundation web site, where David Walker is now CEO, has a great citizens guide for those readers who really understand the scope of the debt issues confronting the U.S. and its financial markets.

The way this issue is resolved will have a big impact on the housing business for the next decade, and on our economy for an even longer period.

Valuations Falling

The deep sell-off in stocks in 2008, as well as the rally in bonds, has resulted in historically low valuations in such metrics as the Fed model. Other valuation measures are more mixed. For example, the S&P 500 P/E ratio could be a low 11 or a more normal 13, depending on which EPS forecast is being used. On a trailing P/E basis, the ratio is higher, at 17. The price/sales ratio is signaling value – but far from a historical low. To calculate this ratio, we use Corporate Equity market values from the Fed’s Flow of Funds report and Real GDP. In the post-WWII period, the ratio has ranged from a low of 0.40, in the early 1970s, to 1.9 during the peak of the tech bull market. Last year, the ratio was high at 1.44. The onset of the bear market in 2008 has pushed the current ratio to 0.68, below the historical average of 0.80 but not at the depths we recorded in the bear markets of the early 1970s and 1980s.


source: Argus Research Market Watch, November 24, 2008

Headline Financial News

Paulson flip-flops on TARP reserve. As recently as last week, Treasury's Henry Paulson said he wouldn't use the $410B of remaining TARP funds, preferring to save the money for unforeseen emergencies and to allow the new administration flexibility. Apparently, things have changed since then, as Paulson is now considering a more active role for his final weeks in office and may use the second half of the TARP funds to roll out new programs after all. Sources say that as market conditions deteriorate, Paulson is looking for ways to stem foreclosures and to make it easier for households to borrow money. A Treasury spokesman confirmed "we're looking at a variety of programs to support the market and we'll implement them as soon as they're ready," and said Paulson had never ruled out tapping the remaining funds. The Treasury is also considering another capital-injection program aimed at financial institutions beyond banks.

Obama's oh-so-big stimulus plan. President-elect Obama is crafting an aggressive economic stimulus plan that could see $500B-$700B in federal spending and tax cuts over the next two years, according to several of his senior aides. Lawrence Summers, a recent addition to Obama's economic team, indicated a stimulus of that magnitude was indeed possible, adding any stimulus will need to be "speedy, substantial, and sustained." He also warned that "we're going to need impetus for the economy for two to three years." Democrats are hoping to rush a stimulus bill through Congress after New Year's so Obama can sign the bill immediately after his January 20 inauguration. Obama is expected to release more details of his plan during a press conference later today to introduce Tim Geithner as his choice for Treasury Secretary.

Builders ask for billions. Automakers struck out, but that hasn't deterred home builders from trying to get government rescue money. The builders' lobby is pushing for a $250B stimulus package it calls "Fix Housing First," arguing financial markets won't recover until housing markets stabilize. The package includes tax credits for home purchases and a federal subsidy on mortgage rates. Critics say the proposal is too expensive and overemphasizes home purchases vs. loan modifications, and warn that any government intervention will have to find a way to stimulate housing demand without artificially propping up property values.

Baltic Dry Index Collapses

Unprecedented demand for commodities, heavily congested ports and the aftereffects of the Chinese earthquake sent shipping costs through the roof this past summer. Over the last eight years, the Baltic Dry Index had jumped ten-fold, and at its peak this summer was more than 150% higher than in January 2007. The surge was driven by demand for coal, grains and iron ore. Global demand — especially in and out of China ahead of the Olympics – for agricultural products like grains and metals also boosted shipping costs of dry bulk commodities. This placed a greater pressure on the general price level. The Baltic Dry Index, the benchmark of dry bulk shipping costs and a fairly accurate gauge of global economic health, has since tumbled below 1,000 for the first time in six years amid global economic uncertainty. It is just another in a series of indicators signaling recession.

source: Argus Research Market Watch, November 19, 2008

Market Factors

The market remains starved for leadership. The number of stocks making new lows currently holds a 50-to-1 advantage over the number of stocks making new 52-week
highs. Declining stocks continue to swamp advancing issues. On the rare rally days, volume is thin. The 10-day trend in market volumes on the NYSE and the Nasdaq has
been ascending during the market’s recent struggles.

In the absence of leadership, the percentage of stocks trading above their 200-day moving averages is stuck in single digits. In fact, the percentage of stocks trading above their 200-day moving averages has been below 10% since October 7. The 10-day average in this series is under 5%; and the current absolute level is 3%.

In desperate need of silver linings, some investors are pointing to the last time this index tracked at meaningfully low levels. That was a quick touch-down to the low teens in July 2002, followed by a month-long trade in the low teens in December 2002. Within three months, of course, the market embarked on the great 2003 rally, rising 30% in about eight months.

The greater danger is that the market makes a lower high, then follows with a lower low – perhaps below the mid-October intra-day low of 819.

Argus Research

Import Prices Tumble

Blame it on slower global economic growth, the skyrocketing value for the U.S. dollar, or the free-fall in the price of crude oil — but the value of U.S. imports has fallen precipitously in recent months. In October, total import prices fell 6.7% — the biggest monthly decline since 1988 when the indicator was first calculated. The 12-month pace of import inflation stands at 6.7%. Import prices of petroleum products plunged 16.7% in October, which followed equally steep declines of 10.2% in September and 9.7% in August. Meanwhile, non-petroleum import prices fell 0.9% last month, bringing the annual pace of core import inflation to 5.0%. Agricultural export prices fell 8.7% in October amid an outright collapse in commodity prices. We expect this downward trend to continue as oil and commodity prices slide lower over the next few months.

source: Argus Research Market Watch, November 18, 2008

G 20 Statement

G20 statement: Against this background of deteriorating economic conditions worldwide, ... a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. --> Further policy steps to include Monetary policy support as appropriate for domestic conditions, fiscal measures to stimulate domestic demand, while maintaining a policy framework conducive to fiscal sustainability. Increased transparency of financial sector, regulation of rating agencies, avoiding pro-cyclical regulation, increased information sharing between national authorities, expanding the FSF to include emerging economies and ensuring that IMF and other multilateral institutions to have sufficient resources to support emerging economies capital needs

IPO INVESTORS DISAPPEAR

In another sign that the capital markets have dried up, initial public offering activity on a monthly basis has dwindled to zero since Labor Day. Meanwhile, companies appear all-too-eager to withdraw previous applications to go public. According to Renaissance Capital, the market may stir a bit next week if Grand Canyon Education, which is seeking to raise $175 million, goes through with its planned launch. Though the timing may not be right for IPOs, Argus Analyst Jackson Turner has argued that the economic and market problems are driving students back to school, including to for-profit programs. More broadly, we look for the IPO market to rebound at the same time longterm corporate yields fall from their double-digit perch. With Ford and GM teetering on the brink of bankruptcy, this turnaround may be a mid-2009 event at best.


Source: Argus Research Market Watch, November 12, 2008

STILL TOO HIGH
Analysts remain too optimistic about corporate earnings growth into 2009, and upcoming downward revisions will likely cap near-term rallies even more so than economic reports. According to Standard & Poor’s, S&P 500 earnings are expected to climb 29% next year to more than $93. That compares to our forecast of an 11% decline to $70. Drilling down to sectors, we think forecasts for double-digit gains in Technology, Telecom and Utilities, in particular, will be reduced. The wild card is Financial Services. The enormous write-offs through 2H07 and 2008 have made comparisons in the group meaningless. If the government’s programs — ranging from increased deposit insurance to the second phase of TARP — take hold into next year, Financial Services could get back on track and deliver an upside surprise. This potential boost could turn around the negative corporate EPS profit trend that has triggered the Bear Market since 3Q07.

Source: Argus Research Market Watch, November 10, 2008

Economy Sheds 240,000 Jobs

The surge of job cuts came a month earlier than we had anticipated. The U.S. economy eliminated 240,000 nonfarm payroll jobs last month, which followed a downwardly revised 284,000 lost jobs in September. There have been 10 consecutive monthly declines in nonfarm payrolls, totaling 1.2 million workers this year. In no big surprise, the biggest losses came from manufacturing (90,000), construction (49,000) and business services (45,000). We suspect that this weakness is consistent with our expectation of a fourthquarter recession, and a profound 2.6% decline in the overall pace of economic activity. Another equally disturbing statistic was the unemployment rate — which climbed to 6.5% in October from 6.1% in September. Unemployment now stands at the highest level in 14 years. We suspect labor market conditions will worsen before they get better, with unemployment peaking in the second quarter of 2009 somewhere around 7.25%.


source: Argus Research Market Watch, November 7, 2008

Market News

Some investors view the post-election-day market
decline as a warning about trends related to the new
administration. But perhaps it is plain and simple profit
taking, borne of the pre-election run-up. Consider that the
S&P 500 rallied by 18.5% from its close on October 27
through the close on November 4. That said, the S&P also
lost momentum right after it broke above the 1000 mark
(closing at 1005.75 on election day).