The Rude Awakening
Wall Street, New York
Wednesday, November 15, 2006 ------------------------- - Night has barely fallen on the housing market...and
dawn may be a long, long way off yet,
- Rude's favorite whipping boy, ex Fed-head Greenspan,
weighs in with some words of...er...wisdom (?),
- Your contrarian counter-punch from the good Doctor,
don't forget about tomorrow, traders wanted and
plenty more...
------------------------- Eric Fry, watching the sun slip into the Pacific ocean,
reports... The housing bust is over, according to Alan Greenspan,
former Federal Reserve Chairman and asset-bubble
connoisseur. "Most of the negatives in housing are probably behind us,"
he assures. "The fourth quarter should be reasonably good,
certainly better than the third quarter." If Greenspan isn't worried, we probably should be. However
literate the former Fed chairman may be, he cannot read
tomorrow's paper. In fact, he sometimes seems to have
trouble reading today's newspapers...or at least
understanding what they mean. "A lot of people are going to lose their homes," he says.
"It's a family tragedy. It's not an economic -- or
macroeconomic -- tragedy." Perhaps, but neither is it a comedy. Let's call it an
unfolding drama...with a surprise ending. This particular
drama will likely feature declining home sales and falling
prices. Will home prices tumble low enough to qualify as a
Greenspan-defined "macro-economic tragedy?" We do not know,
but we would not rule out the possibility. Bursting bubbles
tend to produce more tears than belly laughs. What issues DO trouble the former Fed chairman, you may be
wondering? "Our problems are perhaps best measured," says he, "by the
fact that the average age of our scientists is rising."
Um...right. The rising age of the scientific community is certainly an
incalculable tragedy. But we are not certain that graying
scientists presents a more serious problem than eroding
home values...and disappearing bank accounts. (Indeed, we
would argue that the rising average age of scientists is
much less tragic than the rising average age of the Rude
Awakening editorial team). But rather than fret about the inevitability of aging,
let's examine the near-inevitability of falling home
prices... We were terrified about the housing market, even before
Greenspan tried to calm us down. But we are more terrified
now, thanks to Greenspan's well-documented history as a
contrarian indicator. The former chairman isn't ALWAYS wrong, of course. But who
could forget his infamous "Irrational exuberance" remark of
December 5, 1996, when he fretted aloud about the frothy
stock market. Over the ensuing three years, the Nasdaq
Composite Index quadrupled. But instead of worrying even
more about the frothy stock market, the Chairman started
worrying LESS. Then, on March 6, 2000, Greenspan informed a Boston College
conference on the "New Economy" that the Internet-based
economy would continue to foster productivity, technology
innovation and enduring wealth creation. "I see nothing to suggest that these opportunities will
peter out anytime soon," Greenspan predicted. "Indeed, many
argue that the pace of innovation will continue to quicken
in the next few years as companies exploit the still
largely untapped potential for e-commerce..." Alas, the Nasdaq topped out almost immediately after
Greenspan stepped away from the podium. Greenspan's calm assurances about the housing market,
therefore, impart neither calm nor assurance. ------ Special Report ------
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By Eric J. Fry Even if it is always darkest before the dawn, it is also
pretty dark around midnight. Differentiating between shades
of black is more guesswork than science. Alan Greenspan
says the dawn of recovering will soon pierce the darkness
enshrouding the U.S. housing market. But we aren't so sure.
We're still hunkering down for a long night. Didn't the sun just set on the nation's majestic housing
bubble? And didn't the long shadows of falling home prices
just begin stretching across the nation's real estate
market? How then could the sun be rising already? Night rarely passes quickly...except when one is gazing
into Swedish eyes during a June evening in Stockholm...or
so we would imagine. During a recent meeting in Baltimore, many of your editor's
colleagues discussed the likelihood of a "second wave" of
the housing bust. "A second wave is coming," warned Mike "Mish" Shedlock,
contributing editor of Whiskey and Gunpowder, "and it's
gonna be a lot worse than the first wave. The second wave
will wash over the entire economy. We won't just see home
prices falling; we'll see lots of people losing their jobs
and lots of empty shopping malls and lots of bankruptcies.
It'll be bad. "But haven't the housing stocks been rallying?" another
editor protested. "Yeah," Mish continued, "that's 'cause investors are
already looking for a bottom in this sector, but they'll be
disappointed. This kind of thing always happens when booms
go bust. People assume the worst is over, even when the
worst hasn't even begun. "Right," another editor agreed. "Bubble markets almost
always crash in waves. There's usually a big bounce after
the initial collapse. But this bounce usually fades and
leads to even deeper declines. That's what happened after
the U.S. stock market crashed in 1929. It staged a big
rally into the spring of 1930, then rolled over and tumbled
some more. Japan's Nikkei did the same thing after it
crashed in 1990. In fact, it bounced several times before
hitting its ultimate low 13 years later." 
"The housing bust is far from over," Mish warned, "and its
gonna get ugly." Ironically, Mish uttered these words at the identical hour
that Greenspan was uttered the remark, "Most of the
negatives in housing are probably behind us." We don't know if Mish is right, but we fear the Greenspan
is close to being entirely wrong. A terrific report by two
analysts at JMP Securities makes the case that the housing
"recovery" is no better than a faint hope. "Based on our field work," write analysts Alex Barron and
James F. Wilson, "we do not believe the worst news [on
housing] is out yet. We continue to see that the level of
discounting to sell homes is rising sharply, in particular
to move cancelled and unsold spec homes. And yet, despite
the high level of discounting, buyers are still reluctant
to buy." The bearish duo issued their grim prognosis early last
month – well before the Census Bureau announced a stunning
9.7% drop in new home prices during September. New home
prices had never fallen this sharply in one year since
December 1970, when prices tumbled 11.2%. 
"A little over a year ago, buyers couldn't wait to sign
contracts to purchase homes," a Wall Street Journal
headline recently observed. "Now, many can't wait to get
out of them...New-home builders are taking a big hit from
record numbers of contract cancellations, or 'kickouts.'
Fort Worth, Texas-based D.R. Horton Inc., the nation's
biggest developer, says its cancellation rate is currently
40%, compared with 29% a year ago. Meritage Homes Corp., in
Scottsdale, Ariz., is reporting a 37% kickout rate,
compared with 21% a year ago. And Standard Pacific Corp.
says that 50% of its contracts fell through in the third
quarter of this year, compared with 18% for the same period
last year." But these troubling facts have not dissuaded Alan Greenspan
and other economic cheerleaders from predicting a recovery
in the housing market. "The worst is behind us as far as a market correction,"
declares David Lereah, NAR's Chief economist. "This is
likely the trough for sales. When consumers recognize that
home sales are stabilizing, we'll see the buyers who've
been on the sidelines get back into the market, and sales
will be at more normal levels..." Analysts Barron and Wilson disagree. The prognosis for the
housing market remains very poor, they contend, and it
remains particularly grim for the builders of new homes. "The housing market is landing harder than most people
realize," they warn. "As we study the number of listings
versus homes sold across various price ranges, what we find
is major disconnect between the prices where the majority
of the listings are and the prices where the majority of
the sales are transacting. For example, in Phoenix,
Arizona, 63% of the sales and 46% of the listings in July
were for prices under $300,000, resulting in a 4-6.5
months' supply of homes in this price range. However, for
prices over $300,000, which is where most builders had been
building last year, the months' supply is 9.5-14 months."
From the perspective of publicly traded homebuilders,
therefore, the housing market may be even worse that it
appears to be on the surface. And clearly, signs of a
bottom remain elusive. "We continue to look for signs that a recovery is
imminent," Toll Bros. CEO, Robert Toll, remarked last week,
"but can't say that one is in sight." Donald Tomnitz, CEO of D.R. Horton, the nation's largest
homebuilder by revenues, agrees with his counterpart at
Toll Bros. Just yesterday, Tomnitz remarked, "As we look
forward to 2007 we will have a more challenging year." 
And yet, despite these cautious remarks from the leaders of
the homebuilding industry, investors are throwing caution
to the wind. Homebuilding stocks bounced nearly 6%
yesterday – punctuating a rally that has lifted the sector
more than 20% since mid-July. But analysts Barron and
Wilson would advise against bottom-fishing among the
homebuilding stocks. 
"Historically, we see that speculative excesses generally
take longer than one year to work themselves off. So far,
the housing stocks seem to be closely tracking the Nasdaq
decline after it peaked in March 2000. Thirteen months
after the peak, the Nasdaq was down 60%. This was followed
by a brief rebound that lasted three months and took the
index up 17% from its lows. Subsequent to this brief rally
the Nasdaq fell another 30% over the next three months to a
lower low. The Nasdaq eventually bottomed out three years
from the peak in March 2003, 75% below its all-time high.
The homebuilding index peaked in July 2005 and then fell
50% 12 months later. [But, over the last three months, the
index is up 21%]. We believe the housing stocks are likely
to re-test their lows in the coming months and perhaps go
below them before we see the ultimate bottom." Our advice: Wait for rays of sunshine to appear before
heralding the dawn [Joel's Note: The housing bubble wasn't the only thing the
world's most notable classical economist predicted way
ahead of time – the wilting U.S. dollar and a plummeting
savings rate has lead Dr. Richebacher to some other ghastly
conclusions regarding current U.S. economic trajectory. The
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the impending Rude facelift but, if you haven't read about
it yet, you ought to be aware that the Rude Awakening is
changing its name...but not much else. The Rude Awakening becomes - Tomorrow in Review: Daily
Insights for Forward-Looking Investors While your senior editor promises to continue offering his
awakening insights and your junior editor swears his rude
behavior will not be curtailed, we feel the new name is
more inline with our overall philosophy. The Rude Awakening
has always endeavored to examine the trends and phenomena
that will produce valuable investment opportunities. As
such, your editors do not attempt to read the future before
it occurs, but merely to prepare for the profitable
opportunities the future will likely provide. If your mind is harboring any Rude thoughts – be they ab
out the housing market or not – please send them along to
your gallivanting managing editor at:
aussiejoel@the-rude-awakening.com Please continue to enjoy your regular Rude reading and keep
an eye out for the new Tomorrow in Review logo. Cheers, jOEL --------------------------------- 
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