Tuesday, February 27, 2007

Start of Something Big?

Robert Shiller published his book, "Irrational Exuberance" in March 2000. The book argued that stocks were overvalued. For those who may have forgotten, March 2000 is also the same exact month that the Nasdaq Composite peaked.

Today, the Dow lost over 400 points. The Nasdaq lost almost a 100. Maybe it is just coincidence, but today I also interviewed Shiller for my MoneyMasters video program. The Dow was down about 140 points when I left my office to go to our studio. After the interview, we went out for lunch. Sam Masucci, CEO of MacroMarkets, joined us. Fortunately, I wasn't aware the sell-off was getting worse; otherwise I might have had indigestion.

Why did the market fall so much today? The simple answer is that there were more sellers than buyers. No one knows for certain why. Perhaps it was the big sell-off in China. Perhaps it was the disappointing durable goods report that came out this morning. Perhaps it was Alan Greenspan's comments about a possible recession by year-end. Or perhaps, investors suddenly decided there really was no good reason for stocks to have rallied in the first place.

Earnings growth is slowing, oil prices are above $60, the housing market is struggling, and the Fed is unlikely to cut rates. Unlikely, that is, unless things get so bad that a rate cut becomes necessary to boost the economy regardless of what that means for inflation.

Although the second edition of "Irrational Exuberance" focuses on overvaluation in the housing market, Shiller told me he still thinks stocks are too expensive. I don't feel comfortable betting against him. My interview with Shiller will be posted on March 8.

Thursday, February 22, 2007

Housing Has Not Bottomed

Last Sunday I did a hit on MSNBC with Alex Witt about the housing market. This was partly prompted by remarks by Fed Chairman Ben Bernanke and former Fed Chairman Alan Greenspan that the housing market has bottomed.

My view is quite different. Just about every metric indicates a continuing deterioration. Whether you look at year-over-year sales, building permits, housing starts, orders, or cancellations, things are getting worse with no real evidence of a bottoming.

Let's look at some recent reports by major home builders. Toll Brothers (TOL), which caters to luxury home buyers, reported net income of $54.3 million for fiscal Q1. That's down from $163.9 million in the year earlier period. Much of the decline was due to writing down the book value of land the company owns. Yet even if write-downs were ignored, net income would have been only about $118 million. Signed contracts were down 34%. The company delivered fewer units and signed fewer contracts in every geographic region it serves. It also has significantly less backlog than it did a year ago.

Other home builders such as KB Homes (KBH) and Hovnanian Enterprises (HOV) are reporting similar problems. Indeed the entire housing market seems to be weakening by almost every conceivable measure. Even home prices are showing signs of trouble. Nationwide median prices haven't really fallen, but they have stopped going up. While there are pockets of falling prices all over the country, it seems like it's now just a matter of time before prices start falling in all geographic regions.

Optimists insist the worst is over. But pessimists appear to be more realistic at this time. Those who follow the housing market closely are betting on a continuing decline. Forbes columnist Gary Shilling remains extremely pessimistic. I plan to interview Robert Shiller of Yale University and MacroMarkets on Feb. 27 about his views on the housing market. Shiller recently announced a new home price index he is launching with Standard & Poor's and Fiserv. This index will track actual transaction prices for single-family homes only. I will ask Shiller about this and other issues in our interview, which we plan to post on MoneyMasters on March 8.

Wednesday, February 14, 2007

Is Bernanke Right?

Although I didn't make it to Disney World, I did spend a few days in Orlando last week. I took part in a panel discussion for the CFA Society of Orlando, and I participated in the World Money Show.

The CFA Society panel discussion focused on the outlook for the markets. It was moderated by Vinny Catalano. The other panelists were Kathleen Camilli, Chief Economist of Camilli Economics; Timothy Hayes, Chief Investment Strategist at Ned Davis Research; and Lee Schultheis, CEO and Chief Investment Strategist at Alternative Investment Partners, LLC.

Catalano pointed out that most strategists these days are bullish. So far, they've been right. Stocks continue to flirt with new highs. The Dow is closing in on 13,000. His concern is that there is too much consensus. I think he is right. A few concerns that came up during the discussion were the sub-prime mortgage markets and investor complacency when it comes to emerging markets.

I moved on to the World Money Show, which was filled with newsletter editors and money managers. There I took part in a panel discussion of several Forbes newsletter editors including Ken Kam, Jim Lowell, John Christy, Richard Lehmann, and James Stack. Interestingly, this group did not seem overly bullish. Caution was the rule of the day. One thing I pointed out in both discussions is that OPEC and other oil exporters have learned that the world can easily tolerate higher oil prices. They no longer fear causing recessions by restricting supply and raising prices. That's not very comforting.

Yet Ben Bernanke is pleased with moderating energy prices, which he says takes some heat off inflationary pressures. In other words, don't expect another rate hike. That's why stocks rallied today. But what if he's wrong and energy prices move higher. Oil is already up almost 20% since bottoming recently at $50 per barrel. And what if the housing market has not bottomed as many expect. Each day seems to bring more bad news about canceled orders and fewer homes being built. Yet investors are not giving up on the housing stocks. I think those who remain cautious are right to do so.

Tuesday, February 06, 2007

Oil Prices and Interest Rates Are Up Again

Oil prices, which had recently fallen to $50 per barrel a month ago, are once again approaching $60. Despite this 20% increase, gasoline prices have actually fallen 7% during the same time. Yet the average consumer seems convinced that when oil prices go up, gasoline prices go up more; and when oil prices fall, gasoline prices don't fall as much. There is no truth to this. The fact is that gasoline prices are less volatile than oil prices. That's because only 50% of the cost of gasoline depends upon the cost of oil. The other components are refining costs, taxes, marketing, and distribution.

In addition to rising oil prices, another growing risk is rising long-term interest rates. The 10-year bond was yielding less than 4.5% about a month ago. Now it's above 4.8%. Most investors focus on what the Fed might or might not do. But the Fed can only change short-term rates. It influences long-term rates only indirectly. And rising long-term rates are not usually good for stocks.