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July 26, 2007 - 5:20 PM
Bear Rumblings And Housing Rubble
Subprime tensions have spread, the M&A machine is broken, the U.S. housing market seems to be entering a death roll, and fear has returned - albeit perhaps briefly - to equities. Is this the long belated start to the U.S. bear market?
In my opinion what is required to paint a more convincing bear outlook is some follow through selling; the type of selling that really agitates managers who placed capital into large caps because there was nothing else to do; the type of selling that makes even cogent bottom dwellers speculate that the fundamental outlook for their hidden gems is no longer in place because falling stock prices themselves have changed the fundamental outlook.
Whether or not this brand of selling arrives tomorrow, next week, or perhaps later this year, I have no idea. What I do know is that it is next to impossible to continue to argue that the fallout in the U.S. housing market is ‘contained’ (astonishingly, Paulson continues to try). Rather, the subprime debacles have already scared institutional investors away from hedge funds, made countless takeovers unfundable, and (again, perhaps briefly) helped turn many equity chasers gun-shy. Talk all you want about secretive hedge funds and novel financial products helping to ‘spread the subprime risk’, but what is happening right now is that these things are helping to spread the uncertainty.
Why have I reiterated the term ‘perhaps briefly’ with regards to the decline in equities? Because not only is there a lot of money that may be willing to chase stock prices higher for lack of something better to do (i.e. a lot of managers are starting to realize they must perform now or risk being out of a job), but there is also the Fed waiting in the wings with a lot of rate cut ammo. Forced to follow the Greenspan doctrine of trying to cushion the blow from every asset bubble pop, policy makers will not stand idly by if U.S. stock prices and housing prices start plunging in unison.
And although the Fed is clearly not readying for a cut right away unless crisis strikes, that Wall Street knows the Fed is watching every tick lower in the markets is, for some traders, reason enough to buy for the bounce...
Paulson chairs the inter-agency President's Working Group on Financial Markets that monitors market conditions. There was no indication it had met on Thursday but Paulson, a Wall Street veteran, turned aside a question whether he feared a "credit crunch" might develop.
"It's my job to be vigilant" Reuters
Equities/Housing Divergence Narrows
As the slowdown in the U.S. housing market began to take root in late 2006 Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., released a chart that suggested stocks were headed for trouble. As Fortune noted at the time, the chart was so scary that Sonders ‘was hesitant to show it to investors’.
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While a downturn in homebuilder confidence has historically had a negative, albeit delayed, impact on stocks, in recent months it is as if what goes on in the U.S. housing market means nothing at all to stock prices. An update of Sonders’ chart will suffice:
Today it was announced that new homes sales declined sharply (and previous months were revised lower), and that the median price of a new home sold last month dropped by 2.2% from a year ago. Also today, the Dow and S&P 500 dropped by 2.3%, the second worst sell off year-to-date.
The equities/housing divergence narrowed, if only for a day.
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