U.S.S. Obamacare Sails On

In March 2000, I cursed myself as I watched the SP500 cross the 1500 mark for the first time. Almost a year earlier, I had given in to my conservative instincts and paid off the mortgage with some savings. In 1999, my choice had been partially driven by a suspicion that the stock market was a bit overvalued. In 2000, I could see I was wrong; that I just didn’t understand the new economy. Had I invested the money in the stock market, I would have made 15% in less than a year.

When I set the time machine to election day 2016, I see that the index stood at about 2130, 40% higher than the 2000 benchmark. But wait. An asset is only worth what I can trade it for. Year by year, inflation erodes the real value of that asset. When I compare real values (BLS inflation calculator), the SP500 index on election day was almost exactly what it was in March 2000.

As the year 2000 passed into 2001 and the stock market fell from its heights, my decision to invest in real estate exemplified a golden word in investing: diversify.

Since the election, the SP500 has risen about 10%, as investors speculated that Republicans will usher in a new era of de-regulation and lower taxes. By mid-March, banking stocks had shot up over 25%. This past Monday, the 20th, the Freedom Caucus confirmed that they had the “no” votes necessary to block Thursday’s scheduled House vote on the Republican health care bill, AHCA. Banking and financial stocks, thought to be the biggest beneficiaries of less regulation, higher interest rates, and infrastructure spending, lost 5% over several days.

The Freedom Caucus is a group of 30-40 Republican House members who came to office in 2010 on the Tea Party wave. Led by North Carolina Representative Mark Meadows, the Caucus adheres strongly to conservative principles as they define them. They are chiefly responsible for driving out the former House Speaker, John Boehner. While strict adherence to principle – “my way or no way” – worked well as an opposition movement when Obama was President, the Caucus’ unwillingness to compromise is problematic under the current one-party rule. Can Republicans govern?

Paul Ryan, the current Speaker of the House, delayed the vote until Friday. House leadership and the White House tried to come to some compromise that would bring the Freedom Caucus on board without alienating the more moderate Republican members. With no support from Democrats, the additional no votes from the Freedom Caucus meant that Ryan could not muster the majority needed to pass the bill. Shortly before the scheduled vote at 4 PM on Friday, Ryan called off the vote.

The stock market is a herd attempt to predict and price what the world will be like in six months. As events catch up with forecasts, stock prices correct. Passage of the bill was supposed to be a key step toward tax reform if the Republicans want to pass a tax bill using Reconciliation rules, which require only a majority in the Senate.

With more than a half hour left in the trading day, the market had time to sell off 2 – 3%. And? Nothing. Did the bulls and bears cancel each other out in a flurry of trading? Nope. There was no unusual surge of volume in stocks. Either the market had already priced in the defeat of the AHCA, or buyers and sellers were left undecided.

Investors take a “risk off” approach during periods of uncertainty, moving toward gold (GLD) and long dated treasuries (TLT). Both have risen a few percent in the past two weeks but each is short of their January and February highs. Since mid-March, the SP500 (SPY) has lost a few percent. This tells me that investors had already adopted a more cautious stance.

President Trump has indicated that he wants to move on to tax reform and an infrastructure bill as well as the building of some type of defense perimeter on the border with Mexico. Perhaps investors hope that the lack of cohesion among Republicans on the health care bill will not sidetrack them from passage of these other bills.
The defeat of this bill is sure to empower the Freedom Caucus on further legislation. They were a thorn in John Boehner’s side and will no doubt frustrate Paul Ryan as well.


Existing Home Sales

We had a warm February in most of the country. Realtors reported good foot traffic but, but, but…a lack of affordable housing has turned away many first time home buyers. Home prices have been rising at double the growth in wages. While Feb’s numbers declined from a strong January, YTD existing home sales are more than 5% ahead of last year’s pace.

Regional declines varied: the northeast at -14% and the midwest at -7% led the list. The decline in the west was almost -4% but cities in California and Colorado report the fastest turnaround times from listing to sale. The San Jose region reported an average of 23 days.

Here’s February’s report from the National Assn of Realtors

Housing Boom

An August 2005 NY Times article reported Robert Shiller’s – the Shiller in the Case-Shiller housing index – clarion call that the housing boom would soon bust. Since we are now in the future, we know how that prediction turned out. What interested me was Shiller’s brief 400 year history of housing prices.

Housing Crisis Causes

A wide array of suspects have been lined up as the causes of the mortgage crisis in this country. They include subprime borrowers, poor underwriting standards, adjustable rate mortgages that lured buyers with low teaser rates then reset at unaffordable rates several years after the initiation of the mortgage.

A professor of economics, Stan Liebowitz, analyzed data from 30 million mortgages and states his findings in an 7/3/09 WSJ op-ed. The chief culprit, the Darth Vader of the meltdown, is an ancient villian familiar to anyone in the business of providing credit. When customers have none of their own money in a purchase, no “skin in the game”, they are more likely to default on a loan.

The fault for this practice is the lender’s. When a lender is asked why they would do something that they have been told will surely put the loan at risk, they answer with a variety of reasons: “I wanted to make the sale”, “I thought they were good for it”, and “the competition was doing it so I had no choice” are some of the more common.

Prof. Liebowitz cites a simple statistic for home foreclosures in the 2nd half of 2008: “although only 12% of homes had negative equity, they comprised 47% of all foreclosures.” His analysis found that “interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points.”

Following negative equity as the prime culprit in foreclosures, unemployment had the second greatest impact. Prof. Liebowitz concludes that “a significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising”.

Government efforts to reduce interest rates spur refinancing but not home purchases and it is purchases, not refinancing, that stabilizes home prices. Government programs to inflate home ownership rates only threaten to recreate the housing bubble that led to this crisis. Mortgage payments that were greater than the 31% target level of the “Making Homes Affordable” plan had so significant contribution to foreclosures and the author doubts that this program will have much effect in reducing foreclosures.

As housing prices are approaching their long term inflation adjusted levels, the author predicts a natural stabilization of prices without any government interference. We can only hope that our political leaders will know when to stop “helping”.


Everything is uh, well, normal. That is the point that Jack Hough makes in his Stock Screen article in the April 2009 Smart Money magazine. Well, this economy doesn’t feel normal. But Jack presents some data that may surprise many of us.

House prices are down 25% from their 2006 peak. But Jack quotes a survey by Moody’s, one of the rating companies, that shows the cost of a house today averages about 20 years worth of what they might rent for. “From 1983 to 1999 … most houses cost 13 to 15 years worth of rent.” By 2006, housing prices had gotten so high that they were priced at an average of 25 years worth of rent.

We read that American consumers contribute 70% to the overall economy and alarm bells have been sounding because the American consumer is not spending that 70% now. They are, in fact, spending closer to the 80 year average of 65%. What we are seeing is a return to the average from the abnormally high spending of the past decade. This spending was fueled by abnormally high housing prices.

We’re starting to get the point now. This is not economic Armageddon. It is a return to average. We’ve just gotten used to above average in the past decade.

The S&P500 index is about half of what it was in August 2007. But it trades at the 100 year long historical average of 15 times corporate earnings. Those earnings estimates have sunk 30%. But (we’re getting used to this ‘but’ by now) “in 2006, corporate profits were 26% above their long-term average as a percent of gross domestic income.”

This return to average hurts. The unemployment rate is expected to top 8% when the Bureau of Labor Statistics (BLS) issues their weekly update of new claims. The historical average is 5.6%.

The BLS recently reported a 0.4 percent in productivity in the nonfarm business sector in fourth-quarter 2008, as output fell faster than hours.

Unemployment up + productivity down = not good. Is the mattress the safest place for savings?

The steep decline in stock prices may have caused some to give up on stocks altogether. Jack looked at the twelve worst 10 year rolling periods and found that they are inevitably followed by 10 year periods where the average return is almost 11% per year.