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Talk about boring. On Monday, around 10:30 AM, the S&P 500 rose above 924. By 12:30 PM, it rose to 927.99. Ignore the first hour of trading (when the S&P 500 made a comparatively wild 8-point swing), and the S&P 500 was confined to a 4-point range for 5 ½ hours.
Days like this make watching paint dry sound exciting. And as I’m typing this note, it’s down about 1.3%.
And TradeMaster technical analyst Jason Cimpl tells me it could be like this all week as we head into a holiday weekend. If you want to catch a replay of his video that gives insights into this week’s market direction just visit HERE. (or go to trademasterstocks.com/videoreport)
Great. But that’s summer trading for you…
*****The Case-Shiller home price index, which measures home prices in 20 U.S. cities, showed that home prices fell 18.1% in April. And that was better than expected!
Of course, the index was only half a percentage point better, which most likely falls within the margin for error. Still, the results prompted the senior economist at Wachovia, Mark Vitner, to say "It is looking a bit better…[t]he largest declines are probably past."
And David Blitzer, chairman of the S&P index committee said, "While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions…"
*****At first glance, these comments might seem a little, um, out of touch with reality. After all, how can anyone think that an 18% decline in home values is good?
The reason is that its foreclosure sales that are driving the Case-Shiller Index lower. Close to 5 million seized homes may be sold this year. To add some color, according to Bloomberg, 73% of all home and condo sales in Las Vegas in May were foreclosure re-sales.
73% — that is an amazing number. And because these homes get sold at fire-sale prices, the affect on the overall housing market is dramatic.
*****That foreclosed homes are finding new owners is what’s prompting economists to say prices may be stabilizing. And once prices stabilize, then the erosion of household wealth stops. And, then, maybe consumer spending picks up.
At least that’s how the story goes…
There are some problems with this rosy scenario. Falling home and stock values claimed around $13.9 trillion in household wealth since 1997. That means there’s a long way to go just to get back to break even. But with unemployment expected to persist above 7% for the next couple of years, where is the buying pressure for homes and the earnings power for public companies going to come from?
It’s easy to imagine investors buying foreclosed property at discounted prices. But that doesn’t mean the same level of demand exists for regular home sales. In fact, I’d go so far as to say there’s no way demand for homes will be sustained beyond foreclosure sales.
*****Banks are taking losses as they clear bad mortgage loans from their books. That means banks will have room to make more loans – but will people want them?
Again, I suspect not.
That means banks will struggle to make up the losses and keep earnings growing. And with earnings season right around the corner (Alcoa (NYSE:AA) kicks earnings season off on July 7) investors should be on their toes.
P.S. A reader sent in an email yesterday asking about China and whether it’s a good time to get back in. After last year’s sell-off Chinese stocks are moving back up. If you missed the first China bull, this is your second chance. I’ve just finished a stock research report on 3 China-based stocks that every investor should have in his or her portfolio. Find out more HERE.