A Preview of the Year End Numbers

The holiday shortened week started off on the downside as traders looked for the Christmas or year end rally. There was no news that caused the fall and the only good news for that first day of trading was that in the last half hour there was a spike up to trim the day’s losses. Still the downside move was not that dramatic as volatility seems to be coming off the spikes we had in October and November.

On Tuesday November housing numbers were released. It was not good nor was it all that bad; mostly it was expected. Existing housing sales fell and inventory rose slightly. The prices were still weak. For new homes the news was the same except that inventory fell slightly instead of increasing. These reports were for November and it wasn’t until after Thanksgiving that the Fed lowered rates dramatically so the impact of that move is not reflected in the numbers yet. We should see that impact in December. In a recent article in the Financial Times a problem was highlighted with the banks. They are having a home loan underwriting problem and it’s not what you think. It seems that applications for mortgages have increased in the most recent week 48%, which is good news, but the banking industry does not have enough people to process these new loans. This is a problem, but at least it is a good problem.

The question about housing is still one of, “Have we seen a bottom?” I think we are seeing slight hints that the bottom is approaching. The numbers are still poor but they always look the worst at or near a bottom. Foreclosures will continue to be the drag. They will continue to climb and will do so for one to two more years. That is not where one looks to find evidence of improvement. Look instead at inventory. The builders have finally gotten a handle on new projects. They have slowed new construction to such a degree that inventory is finally starting to show signs of stabilizing, if not improvement. However, the best place to look is interest rates, affordability of homes and the federal government’s effort through Freddie Mac and Fannie Mae to attract new buyers. The government has clearly stated that they are going to buy mortgages from banks to give them more liquidity. That alone will help housing. Housing will improve but it will be slow and it could be very slow.

Looking to 2009 the big news will be the massive Obama spending package. It is going to be big! Some say $800 billion and a few are saying it will reach $1 trillion. That will put people back to work at the same time the economy will start to improve late next year. At least that is the consensus view. Will that mark the bottom of the housing market? Will it be the absolute bottom? Probably not, but it certainly is close enough to attract buyers.

The market remained weak the rest of the week but with hints of stabilizing. I think traders are relieved to see a calming of most of the markets around the world.

Out on Wednesday were the durable goods sales report and retail sales numbers for November. Durable goods are those things that last for three years or longer and it was surprisingly better than expected. The top line number was still down by 1% whereas the expectations were for a fall of 3%. If you remove transportation, sales were up 1.2%. Normally, in this environment that would be good news though few will point to it as it does not fit the scenario of beating the bad news drum that the news outlets want to stress. Remember, newspaper and TV outlets are in the business to attract audiences, not in the business to provide the facts.

It appears the market wants to take a wait and see attitude. I think traders and investors want to see several things in the new year. Details of Obama’s stimulus package are key, but also interest rates and further unthawing of the banking system. They are looking for further signs of banks returning to a more normal banking environment. We have seen the first move to normalcy but it is a slow process.

For individuals they will be looking at a more personal change. Can they get a cheaper mortgage? Gasoline and food prices have fallen sharply putting more money in the pockets of consumers. Combine that with lower mortgage rates and you are looking at a consumer that has more money. The consumer and his spending are very important. So far all the government bail out money has done nothing to restore the health of the consumer. Maybe the works program Obama is planning and lower costs will finally arrive to help the little people instead of the banks, insurance companies and the auto industry. I don’t know about you but I am getting tired of these bailouts of the big companies and nothing for us.

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