Negative Economic Convergence?, U.S. July 'Existing Home' Sales

Negative Economic Convergence?, U.S. July 'Existing Home' Sales

Negative Economic Convergence?

Rightly or wrongly, I am sensing a number of negative things starting to converge with respect to the U.S. economy, much like pieces of a bridge falling away, being patched up, falling away again - and with each event weakening the entire structure until it eventually falls down under its own weight. 

As I am sure you are well aware, we are less than 3 months away from the U.S. mid-term elections.  This is a time when I typically would expect a great deal of current U.S. Administration 'drum-beating' and 'spending' to ensure, as best it can, a good mid-term election result.  I remember August, 2008 particularly well (one month before 'Lehman' and its then aftermath). I had speculated a few months earlier on Dow 'Puts' with a January, 2009 expiry date. I sold those 'Puts' in mid-August, 2008 because at the time I sold I believed the then Bush Administration would do everything in its substantial power to  'prop up' the U.S. economy until after the November 4, 2008 election date - and if the Republicans were successful in being re-elected until the January 19, 2009 Inauguration Date.  Prior to the time I sold them I had been 'extremely offside' on them.  While I made a small profit on those Puts when I sold them, as you may know the leverage in such 'Puts' is enormous - either way.  To this day I don't regret selling because I still think my logic at the time with what I then knew made sense on the day I sold.  That said, after 'Lehman' (mid-September, 2008) those 'Puts' increased in price by over 3X between mid-August, 2008 and the November 4, 2008 election day.

So what would I do if I owned (i.e. had speculated on with money I could afford to lose) a few Dow 'Puts' today with a January 19, 2011 expiry date, given similar political timing with the mid-term elections fast approaching?  For sure I wouldn't sell them in mid-August, 2010 based on reasoning consistent with my August, 2008 reasoning.  What I would do based on my current intuitive 'negative economic convergence' view is take a profit or loss on those 'Puts' only after waiting to see at least August and perhaps September reported numbers for the U.S.:

·        'existing housing' sales, foreclosures, and new housing starts;

·        unemployment and government unemployment subsidization;

·        consumer price index;

·        Gross Domestic Product; and,

·        monthly net Trade Deficit,

and then see what my 'intuition tells me'.

And, believe it or not, if I owned such 'Dow Puts' today I would hope to be on the 'wrong end of the trade' on them - as I think to be on the 'right end of the trade' potentially will have broad ranging economic and potential social consequences far more dire than any 'trading loss' on a few Dow 'Puts'.  So, in summary, I sincerely hope my instincts with respect to current 'negative convergence' in the U.S. economy is 'flat wrong'.

Please note that I have used 'Dow Puts' in this commentary simply to make the point of my concern over possible 'negative convergence'.  I am not recommending any reader buy, sell, or otherwise trade in 'Dow Puts' currently or at any other time.  I believe that to participate/trade in 'Dow Puts' is highly speculative, and while leverage is high on the upside, so too is it high on the downside.  One of my 'Mantras' is:  'Never speculate with money you can't afford to lose'.

U.S. July 'Existing Home' Sales

Yesterday's report on U.S. July Existing Home Sales (27% fall against economist consensus estimate of 13%) was all over the news yesterday and again this morning.  July Existing Home Sales are said to be the lowest (in absolute numbers) since 1995.  In 1995 the U.S. Population was approximately 265 million.  The July, 2010 U.S. Population estimate is about 310 million (a 17% increase from 1995) - go figure.

A Wall Street Journal article titled 'Economists React: Home Sales 'Eye-Wateringly Weak' reports comments from five U.S. economists whose comments focus on the increase in 'existing homes inventory', 'lack of underlying improvement in 'existing home' sales, 'early 2010 positive sales that now appear driven by U.S. Government tax credits, lack of sales in the current very low mortgage interest environment, and a concern that U.S. house prices could go lower from here.

I suggest you read an article published this morning titled 'Things Are Only Going to Get Worse for Housing - reading time 5 minutes.  I commented on the article as follows:

Agreed, excellent analysis. But how can the U.S. Housing market be otherwise when the tax structure in the U.S. (mortgage deductibility for individual home owners) and a belief by U.S. homeowners that (1) house prices will be continuously inflated, and (2) houses are a form of investment and 'will never drop in price', together have encouraged a system where home owners seem to have no fear of mortgage debt as they continuously (until reality hit in 2008) borrowed against their houses to support their life styles.

The previous commenter apparently believes 'time will solve the problem'. For that to occur I believe it necessary to make a fundamental assumption that America will return to an environment of pre-2008 economic growth rates. I am not so sure this is something that will happen with any certainty. Here is a short Wall Street Journal article this morning titled 'Q&A: Prospects for Manufacturing Growth' you might want to read blogs.wsj.com/economic...

Here is a further article published today titled 'Housing and Jobs: The Underlying Problems Are Re-Emerging' that I think you ought to take the time to read - reading time 4 minutes.  And, finally, here is video interview of Lawrence Yun, Chief Economist for the U.S. National Association of Realtors titled 'Yun: "We Had a Solid Housing Recovery"'.  I recommend you take the time to watch and listen to this video - viewing time 4 mintues.

Finally, the U.S. July 'New Housing' Sales report was released only minutes ago.  Purchases of new homes were reported down 12% from June to 276,000, the weakest data since 1963 - see Bloomberg article.  As a point of reference, the U.S. population was approximately 190 million in 1963, almost 40% less than it is today.  It seems to me that statistic speaks volumes.

Country Economic/Political Commentary - Today's Featured StockResearchPortal.com Data Component

Linkedin Mining and Oil & Gas Stocks Groups

Consider joining the Mining Stocks and Oil & Gas Stocks Groups on Linkedin by clicking on one or both of the following images.

                       

*          *          *          *          *

Linkedin Investor Relations Executives Mining Group and Oil & Gas Groups

 

If you are an Employee of, or Investor Relations Consultant to, a Mining or Oil & Gas Company consider joining the applicable Linkedin Group by clicking on one of the following images.

                   
       
                    

*          *          *          *          *

 

As always, please forward ideas to me as to how we can improve StockResearchPortal.com at info@stockresearchportal.com.

 

Best Regards,

Ian R. Campbell

President

StockResearchPortal.com

Notes to Readers

This email and its content is in no way to be interpreted as an endorsement of one or more of the companies mentioned herein, a suggestion as to the future direction of the stock price of one or more of them, or a suggestion or recommendation to buy or sell the shares of one or more of them.  Rather this email is simply a short overview commentary and tutorial demonstrating the type of information available on StockResearchPortal.com and how to access it.

The owners of Stock Research DD Inc. (the owner of StockResearchPortal.com and StockResearchPortalBlog.com) or their families, entities in which they have ownership interests, and officers, directors, employees, agents, partners, affiliates and partners of Stock Research DD Inc. may beneficially own securities and participate in Private Placements of companies referenced in this E-mail. The fact that one or more companies are referenced or discussed in this E-mail should not be construed as an endorsement or investment recommendation with respect to those companies or their securities.