Thursday, March 26, 2009
Last week with the stock market having turned modestly higher, I asked if this turn could hold when so many other recent upturns have failed. I concluded that my answer was yes; not because the chart of the Dow Jones Industrial Average looked good, but because of the massive under girding of the economy by the various government programs that would shore up the banking industry, unfreeze consumer lending, and stimulate spending. I should have added something that I have been saying for months: the law of supply and demand. Sometimes I think the US media are the most economically illiterate people in the world. They simply have no idea of the power of the free market and the law of supply and demand. The free market (of course with proper regulation) is simply a marvel at setting price where the merchandise will sell. As we are all too familiar, the US has been in an incredible housing recession over the last two years, which has caused prices to fall by 25% and more in certain areas. Countless news media reports I have read have been saying that there was no end in sight. Prices and housing unit sales could only go lower. They were partly right. Prices are going lower, at least for a little while, but housing on a unit sales basis has had some very good news in recent days, and I believe it is one of the big reasons that the stock market has risen nearly 600 points since last Friday. Last week new building permits and housing starts were surprisingly strong, and this week new and existing home sales were much higher than expected. Home prices, indeed, have fallen and will continue to do so until excess inventory is worked off, but unit sales of homes appears to be turning up in many parts of the country. Importantly, if unit home sales have bottomed and are turning up, they will ultimately take home prices . . . and stock prices with them. I do not want to discount the good durable goods orders data this week, or the new program announced by Treasury Secretary Geithner to rid the banks of toxic loans. The latter particularly is vital to the health of the banks. Having said this, housing on a unit basis appears to be bottoming, and housing is the key to a sustained rally in stocks. The simple reason is this: housing got us into this mess, and I believe housing will have to get us out. As I write this, the market is pushing 8000 on the Dow. I would be a very surprised person if the recent upturn races right through 8000 and keeps going. If you look at the chart above, you will see that 8000 was an important level of support from October through November. There are plenty of sellers waiting at the 8000 level to sell out and get their money back. Thus, I would predict some back and forth sideways motion for a few weeks as we digest recent data and evaluate new housing statistics for a corroboration of the recent good news. If this is the bottom in housing unit sales, it has come the old fashion way: by prices falling to a point where the buyers were waiting, and the same goes for stocks. A bottom in housing unit sales would be welcomed news, but for a full turn around to begin in the economy, we need home prices to at least flatten out. That has not happened yet, so the stock market will remain on edge. But this was a very good week for stocks and lends credence to the notion that we have seen the bottom.