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More Little Lies and Big Spin- Gains or Blips?

The FIM (Financial Infomercial Media) has gifted us with more nonsense today in the form of Pending Homes Sales data from the NAR (Realtors) and the Purchasing Managers Manufacturing Index from the ISM (Purchasing Managers).

Bloomberg was positively ecstatic about the housing data, proclaiming “The number of contracts to buy previously owned homes rose more than forecast in July and increased for a record sixth consecutive month, reinforcing signs that the housing market is steadying.”

Here’s what the NAR had to say. “Contract activity for pending home sales has risen for six straight months, a pattern not seen in the history of the index since it began in 2001.”

There’s just one problem. It’s all a lie. The rise was only due to seasonal adjustment factors. In fact, unadjusted pending home sales (sales contracts) were actually DOWN 7% month to month.

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True, that’s not as bad as last year when the index dove by 10%, but is this difference significant? Sales are higher than last year, but still below July 2007 when the housing recession was already under way. And last year there was no first time buyer tax credit. The question is where the market will be when this artificial prop is removed. Lawrence Yun of the Realtors admits as much. “Unless the tax credit is extended, no one should be surprised to see home sales drop in the first quarter of next year.”

As he knows, they are already dropping, and they will continue to drop well into the first quarter as they always do. At the same time, inventories are rising, contrary to Bloomberg’s claim that the data shows the sales recovery “helping to trim the property glut weighing on the economy.”

So the truth is that the news isn’t as bad as last year. Sales do appear to be at a higher level than last year. But are they?

Maybe not.


According to data from Zillow, which they say excludes REO sales, the downtrend in the rate of sales was still very much in force at the end of June. Current sales levels are well below those of last year at the same time. So, who to believe?

The Mortgage Bankers Association data on new purchase mortgage applications, which is featured in the  Wall Street Examiner Professional Edition Fed Reports (subscribers only),  is consistent with the Zillow data. The Realtors data may be overstating just how much the market is improving because it does include some bank REO sales. Whether those sales should be included to make the case that the market is improving is arguable. To the extent that many of these REO sales are to investors and speculators, that does not help the inventory overhang situation one iota.

One thing is not arguable, however. The market is getting help from the artificial stimulus of the first time home buyer credit, and that’s going away.

Continued below

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The only forces that will ultimately help the market are destruction of inventory and an increase in new household formation.  The latter is going in the wrong direction as singles double up and nuclear families expand to take in relatives. Recent data reported by the Commerce Department showed housing starts to be at a seasonally adjusted rate of 581,000 units which seems extremely low on a historical basis. But the Census Bureau reported new household formations dropped from an annual rate of 1.63 million in 2007  to just 772, 000 in 2008. The data isn’t out for 2009 yet, but the trend would suggest that there’s still no meaningful net reduction in the housing overhang.

The second little lie – big spin in the media today was the ISM PMI index.  Bloomberg reported that “Factories in the U.S. expanded in August for the first time in 19 months, helping lead the economy out of the worst recession since the 1930s.”  There wouldn’t be any overstatement there now, would there?

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The truth is that this index actually started turning up in January and it continued to rise rapidly as industrial production fell through the first quarter. An increasing number of  purchasing managers began reporting improving business early in the first quarter, and that trend accelerated in the second quarter.

The index is a diffusion index of several components including new orders, inventories, order backlog, and prices paid, among others, on a scale from 0 to 100 .  When the index is above 50 it means that more survey respondents are reporting expanding conditions than contracting.

The index turned up beginning in January which, by the way, was well ahead of the turn in the stock market. The ISM also preceded the stock market’s downturn in 2000. Industrial Prodution was concurrent. Both the ISM and industrial production led the stock market upturn in 2003 by turning up nearly a year in advance of stock prices. The weakness in the ISM throughout 2006 and 2007 was a harbinger of the trouble ahead in the market that began in 2007. The ISM again turned up ahead of stock prices at the lows this year.  So much for the stock market as a “discounting mechanism.” In fact, it is the exception for the market to lead the economy, rather than the norm, as is so fervently touted by the perpetrators of the great Wall Street fraud. So is the market guessing right this time?

The biggest part of the upturn this year in both the ISM and the stock market coincided exactly with the month the Fed began its massive pumping operations via its direct purchases of securities rather than by the targeted alphabet soup programs.  This again relates to content in the Wall Street Examiner Professional Edition Fed Reports. The evidence is clear that not only the market, but economic activity, responds instantly to direct Fed liquidity expansion.

Economists like to pretend that there’s a lag because they have no grasp of what’s really going on. It’s called “manipulation” and its carried out by central bankers. There is no lag between those machinations and economic and financial market responses. There may be differences in degree of response, but not of timing. When the Fed pumps via direct permanent open market operations, it’s like mainlining amphetamines into the bloodstream of the markets and the economy.  How they respond depends on how strung out they already are, but the fact that they do respond is not in question.

By the same token, Mr. Wizard Ben’s alphabet soup operations were an abject failure, only serving to hasten and exacerbate both the market’s and the economy’s collapse. Only the direct injections of cash via the Primary Dealers works. The Primary Dealers are the markets. The Primary Dealers are the economy.

Naturally, Bloomberg has it wrong. Industrial production turned up in July. August was not the first time factories expanded. Secondly, industrial production was also up slightly in October of 2008. But why quibble? These are just little lies, most likely the result of the typical lazy, sloppy reporting we get from the FIM on a regular basis, right? The reason we quibble is that because when the media gets away with so many little “errors”, then it’s not much of a leap when it comes time to promulgate the Big Lie. We make it easy for them by not taking them to task on their non existent journalistic standards.

The upturn in the ISM certainly looks impressive until you compare it with the actual turn in the Industrial Production Index.  The turn in that index is minuscule and does not come close to breaking the downtrend. We technicians would classify it as a dead cat bounce. Admittedly, this index is a month behind the ISM, so it will be interesting to see if it zooms higher for August.  Chances are that the big jump in the ISM survey is exaggerating the actual gains in production.  It’s like looking in a funhouse mirror. Things are not as big as they seem. So we must ask ourselves again, what happens when the artificial stimulus of government programs like cash for clunkers, and the Fed’s direct liquidity injections end. Will these “gains” be self sustaining?

Looking at the data touted by the media and the pundits as more evidence that the economy has bottomed, I’m just not impressed. Put the data up on a chart and compare it to something meaningful, and less biased, and the so called “gains”, ” evidence of a turn”, “evidence of stabilization”  look suspiciously like blips, blips caused by massive government support. Once that support is withdrawn, those blips should disappear.

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  1. CCG

    Dammit Lee. All those Forbes readers came here, had their blinders shot off in your inimitable style, and killed the bull market. Expect a 3am visit from Agent Smith soon.

  2. Stu

    An honest voice in the room… Kind of weird to see it, to be perfectly honest.

    If anyone thinks that they will get anything worthy from this administration and king Fraudbama then you are sadly mistaken.

    This is a bad and dangerous team we have in Washington right now… very, very BAD!!!

  3. Lee Adler

    No worse than the one before or the one to come. They all go by the same playbook. They all suffer from the same personality deviance.

    I don’t want to see this blog used as a place to vent frustrations toward one party or another, one administration or another. It’s a tired, pointless argument that goes on ad infinitum everywhere on the web. I don’t want to see the discussion here devolve into that.

    Face it. They all suck.

  4. KAM

    If there is life in the housing market it could be coming form the FHA as it seems they are picking up where subprime lenders stopped. The agency has seens it’s business jump 70% in the past year and market share going from 3% to 23% Borrowers can finance up to 96.5%.

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