February 28, 2003
Laying Off The Bubble Talk

“The notion of a [housing] bubble bursting and the whole price level coming down seems to me as far as a national nationwide phenomenon, is really quite unlikely.” Alan Greenspan.  February 27, 2003.

How does Mr. Greenspan, who previously argued that there was no way to tell if stocks were in a bubble, offer such firm opinion on housing prices?
 
You don’t need a ‘bubble’ to have a bust

The ‘US is in a housing bubble’ argument is largely a perceptual argument supported by comparing a weak economy with an exceptionally strong housing market. Yes, defaults and foreclosures are at or near record highs, but people are not likely to sell their home as they would their stocks.

Before throwing around the word ‘bubble’ some logical conclusions should be made.  First, mortgage rates have fallen from more than 8% to begin 2000 to less than 6% today (30-year fixed) and, second, apprehensions over further stock market losses have sent would be equity dollars into the presumably more stable real estate market.

That said, what has allowed the statistical housing bubble arguments to pop up over the last year is not a question of why the market it strong, but a question of sustainability. Look at it this way: median prices on new homes are up 61% from a bottom in 1992, and over the last two years Fannie and company have issued more than a trillion dollars in new mortgage-backed securities each year. Are these trends sustainable?


The main problem with making housing market projections is that interest rate fluctuations are unpredictable. Quite frankly, who can say that mortgage rates, which tend to mirror the trend of the 10-year Treasury yield, have hit an absolute bottom? Nevertheless, predicting even lower interest rates when the US government is willingly ringing in record deficits could be dangerous.  Such is why yesterday’s decline in new home sales and drop in home prices could presage the start of an ominous trend.


The Ominous Trend: The pace of refinancing schemes slows; either because interest rates stop declining or because home values stop escalating (cash-out (chart) refinancings give homeowners cash from the escalating value of their home). When this happens, for lack of a better term, it is lights out.

Bankrate reports that more than 3/4 of mortgage applications are currently applications to refinance, and almost on a weekly basis mortgage rates continue to hit record lows.  Quite frankly, the unsustainable bubble is seen in refinancing, not necessarily housing prices per se.


The SEC at Work

Once again, the SEC is trying to convince investors that they are looking out for their interests by verbally attacking corporate America.  This time, the SEC said they scoured the Annual Statements of Fortune 500 companies and flagged 350 companies, saying that that they will ‘selectively review future filings of these companies.’  The SEC was most upset by ‘Management's Discussion and Analysis’, pro forma financials, explanations of restructuring and impairment charges, and pension plan assumptions.

It is getting a little tiresome watching the SEC go on and on and on about how companies abuse ‘pro forma’ when they are the ones that allow it.  Levitt couldn’t stop pro forma, Pitt couldn’t stop pro forma, and when Donaldson does stop pro forma the SEC will spend the next decade trying to stop EBIDTA.

As for the other specifics the SEC mentioned, many of these problems are the SEC’s own doing: GAAP allow companies to report nearly every line of data differently than other companies and then offer vague explanations of what this data means.

New SEC boss Donaldson is expected to speak today. My money says he will say that he wants to be tough on companies and restore investor confidence (make some arrests to pad SEC lawyer pockets and keep the financials rigged in corporate America’s favor so prices don’t collapse). At the end of the day little has changed since Enron arrived…

Layoff the Data

Welcome back: The BLS is expected to start reporting layoff statistics again in the spring.

Without spending more time on what is commonly known – that the BLS employment figures are rigged - it should be pointed out that the methodology used by Challenger Gray and Christmas for their monthly layoff announcements is also suspect.  The firm states that they track any announcement they can get their hands on but not, according to John Challenger, ‘small business’. Given that CG&C says 132,000 people were laid off in January – up 42% from December – is it safe to assume that smaller business layoffs would add to this number?

Suffice it to say, the tendency of statistical gatherers is to only hunt for big game, and by doing so they sometimes miss what is happening at a local level.  Similarly, the national media covers market moving events, major economic reports, and aims to provide macro economic insights.

Tiny Layoffs Could Mean Big Economic Problems

When a couple of librarians get axed during a boom economy no economist is going to notice, much less comment that this is growing and worrisome trend. However, we are not in a boom economy. Rather, since the economy is in the doldrums the consumptive power or 2 security guards, 3 librarians, 10 education administrators, and 5 janitors is important.

Keep in mind, many States are currently trying to reduce spending and the layoff tally is about to grow.  For example, “more than 1,300 of the 35,000 state jobs in Minnesota could be eliminated by the end of June as part of Gov. Tim Pawlenty's plan to deal with a $4.2 billion projected budget deficit.” This trend of fighting deficits with layoffs is being emulated across the country, not only at the State level, but at the City and/or Town level as well.

In sum, more often than not it is the large layoff announcements that catch the headlines. In recent days these headlines have come from Micron and Fleming, or 2 companies that axed more than 1000 employees each. However, small layoff announcements also add up. In the links below – all of which are current for this week -- there is 1,920 jobs that could vanish (either announced layoffs or plans to layoff). These lost jobs highlight the fact that the US economy is not rebounding as planned; government revenues are expected to decline not rise, small businesses have to cut costs like big business, and these occurences could add up to further economic retrenchment. 

An economy supported by government deficits and home refinancings may not be a unsustainable bubble waiting to burst...then again, as Greenspan says, we will can only recognized bubbles in retrospect. Call it a bubble, call it economic nightmare.  It doesn’t matter.  The fact is that many people continue to contemplate their previous employment position

BWillett@fallstreet.com

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