By any yardstick, last week measures up as chock full of exciting events. The Middle East continued to erupt in a half-dozen or so places. Iran decided it would like to take a look at the Suez Canal, so it sent a couple of warships to Syria via the canal, and Israel—who would have guessed?—didn't cotton to the idea. Egypt revived in a somewhat different context the old Abbott and Costello routine about who's on first (just leave out the "on").
President Obama unveiled his budget proposal, which drew tepid cheers from Democrats and screaming derision from knife-wielding Republicans, a splendid example of bipartisanship in action. Colorado banned welfare cards at strip clubs, which holds grave implications for naked shorts, one of Wall Street's favorite illicit sports. New York City found $2 billion it didn't know it had—somebody must have put it back.
Ben Bernanke flew off to Paris for a meeting of the Gang of 20 as much as anything to get away from his congressional tormentors, not a few of whom are after his scalp (they better hurry, the poor guy seems to be losing his hair fast). But wouldn't you know, no sooner did he set foot in Gay Paree than he was scolded by the gaggle of mucky-mucks from other nations in the G-20 about our nation's feckless financial ways. They couldn't wait to queue up to voice their complaint about QE1 and QE2 serving as a covert devaluation of the precious greenback.
Lest we give you the impression the week was filled with cacophony and uprisings and that sort of unsettling stuff, there were some quite positive happenings as well. We discovered that all the talk of America's decline, as evidenced in the apparent end of the nation's technological superiority, is just so bunk.
What opened our eyes to that bracing insight was a brochure we received from a company describing its ground-breaking invention: a video tombstone starring the deceased. It enables the viewer to see and hear him as he actually was while still alive. Literally—a voice from the grave and a face to go with it.
We've been saving the best for last: Equities extended their gaudy winning streak, blithely ignoring such trivia as disappointing retail sales and intimations that inflation's demise has been greatly exaggerated. This has been the most resilient market we've ever had the pleasure of witnessing. Enjoy it, by all means, as long as it lasts. You won't lack for company, as pros and the public are piling in, but keep in mind that an excess of bullishness, as manifestly exists today, has been know to lead to a fall.
PLEASE DON'T TELL WIKILEAKS, if only because they don't know how to keep a secret. It concerns housing. Everyone knows, of course, that it's in the pits. Considerably less well known is just how deep those pits really are.
Which explains our squeamishness about the news getting around, as it might temper—and we stress might—the irrational exuberance (the pithy phrase may be Alan Greenspan's most enduring legacy from his many years running the Fed) that has rocketed the stock market to 32-month highs and climbing.
Conceivably, the revelation we're about to share with you could put at least a temporary pall over hopes for the long-awaited and often prematurely heralded housing recovery, and the very last thing we want to do is make investors or plain old civilians unhappy. For most people, their house, be it ever so humble, is their largest single investment. (And all these years we've been suffering under the delusion that a house was, pure and simple, to live in. It came to wear an "investment" label during the wild years of the last decade, when it was viewed as an ATM and an asset that could only appreciate in value.)
As Stephanie Pomboy in her always lively MacroMavens dispatch points out, the acrid aftermath of the big bust in housing has failed to dissipate and adamantly hangs on. The average homeowner with a mortgage, she notes, has a scant 2.6% equity in his house, and the already towering delinquency and foreclosure rates seem headed for a new thrust upward, with interest rates creeping up and jobs remaining anything but easy to come by.
Hardly surprising, then, that demand for mortgages has sagged to a 27-month low, an evil omen for something even vaguely resembling a decent recovery in housing.
What's more, if CoreLogic is right, things are a heck of a lot worse than most of us dreamed. CoreLogic, in case you wondered, is a demon data collector of, among other things, property and mortgage info that it peddles to business and Uncle Sam. Last week, it released a report that expresses grave doubts as to the accuracy of the widely followed calculations of home sales and other critical items by the National Association of Realtors, claiming they are seriously flawed, tending to understate the bad news, while inflating not-so-bad by 15% to 20%.
By way of example, according to the Realtors' reckoning, existing-home sales last year declined 5%, to 4.9 million. By CoreLogic's count, however, existing-home sales totaled a meager 3.6 million, a drop of 12% from the '09 total. The disparity between the two is also graphically evident in their respective gauges of the size of the inventory of unsold houses. The Realtors figure the overhang is around nine months worth of supply, but CoreLogic counts the visible inventory of homes with a "for sale" out in the front yard at 16 months. Normal is six or seven months.
CoreLogic suggests the wide spread between itself and the Realtors is possibly explained by the difference in how the two gather the data and by out-of-date benchmarks (which the Realtors say they aim to recalibrate). The Realtors canvass multiple listing services and large brokerages. CoreLogic compiles its data from publicly available records stored in courthouses. Historically, CoreLogic adds, its survey pretty much agreed with 85% to 90% of the Realtors' count, but began to diverge in earnest about 2006, when the housing market was smoking.
Home prices, meanwhile, have been caught in another downward spiral, reflecting a lack of demand and a huge supply, the bitter fruit of the great bust that followed the wild and woolly boom and a prime victim of the jobless recovery in the economy at large. If current trends persist, those already sharply lower prices, CoreLogic predicts, by spring will be down more than 10% from last year's comparable stretch.
It's too early, perhaps years too early, to sound the all-clear for housing and obviously, the bedraggled home builders.
So far as we know, there never has been a vibrant economy that was saddled with the housing sector in extremis. Maybe this is the one time it's different.
But don't bet on it.
ONE BIG WINNER IN THE FIERCE RALLY of the last five months or so has been the chip companies. A peek at the chart of the Philadelphia Semiconductor Index shows an almost perpendicular rise, from around 300 in September to around 470 last we looked.
Sparking this brisk run, you won't be shocked to learn, is the flood of new electronic gadgets—smartphones, tablets and a whole roster of new and (to some people, exciting) products, all of which translate into demand for chips.
In his latest edition of the High-Tech Strategist, Fred Hickey, whose presence also graces the Roundtable, has some kind words for Intel (ticker: INTC), No. 1 in semiconductors. The company, he notes, reported a bang-up fourth quarter and strong guidance for the present three months.
Like Microsoft, he goes on, the stock remains unloved for reasons beyond his ken. Intel shares are selling at only 10.5 times earnings; the company has boosted its dividend and plans to increase its share-buyback program by $10 billion and this year's capital spending by a whopping $9 billion. As Fred drily remarks, "These are not actions typically taken by a management worried about its future."
He takes care to separate the wheat from the chaff among the chip companies. He also alludes to a surplus of inventory built up last year.
A research study released last week by IHS iSuppli, which specializes in tech services, warns swollen chip inventories could prove a problem. Global stocks of chips held by suppliers, it estimates, were at their highest level since the second quarter of 2008—just before the chip makers took gas.
IHS reckons semiconductor revenue growth of 5.6% in 2011, down sharply from last year's 31.8%, but thinks that if growth actually comes in as forecast, "the current inventory level should be manageable." Strikes us as an ambiguous attempt at reassurance, since it is unclear what "manageable" connotes.
Much less equivocal is what IHS sees as the consequences if growth is less than predicted. Then, those bloated inventories become a headache, are dumped on the market, causing chip prices to tumble faster than usual. This could "amplify the size and duration" of a downturn or even a significant slowdown in semiconductors.
Won't be great for their stocks, either.
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