Tuesday, July 28, 2009

It's Just Seasonality Stupid

The economic headlines continue to distort reality to my amusement. If you can't find any actual real growth out there in the economy, you can just try to find a seasonal signal and then claim that it is real growth. Simply forget the fact that year over year something is down 20%, when you report a 2% month over month gain. Forget the fact that housing starts tend to improve in the summer (when the weather is seasonally better), that housing sales tend to spike in the summer (when families prefer to move to minimize disruption), and that housing prices tend to rise in the summer as well (because of the increased demand). Call it Dennis Kneale accounting or whatever you want. So we get a couple of normal, seasonal, month to month gains in housing prices, housing starts, and houses sold, and every douchebag, idiot on TV claims the recession is over and we have a housing bottom. Sorry, but it does not quite work that way. All three measures continue to be around 20% down year over year. Until that number shrinks down to closer to flat, you can't really be calling a bottom.

If you look at that past two major recessions (early 80s and 90s), housing prices did not rise until 2 to 4 years after the unemployment rate peaked. Both of those recessions may end up being milder and have quicker recoveries than this one. Unemployment is not expected to peak until sometime next year, so realistically we are looking at 3-5 years or more before housing prices start to improve. Between now and then we will find a bottom, but we are not there yet by any real measure. A bottom would mean that year over year prices are flattening, which they are not doing now.

I have been playing the market a bit lately, because it really wants to rally, but has no where to go. It is pretty easy to ride it up until it exhausts itself (where it is about now), and then get out and wait for it to drift back down and catch it's breath. I think the latest rally is the market pricing in the positive of health care not passing. Any negative shock, or sign that the health care package may still have legs should send the market right back down at this point. Q2 GDP numbers are due Friday, and its hard for me to imagine that they will not surprise to the negative side. Tax revenues are down about 25% this year, but GDP only about 4% officially so far. Seems like the GDP numbers have some catching up to do with the horrible economy as indicated by tax receipts, and that may include some negative revisions to earlier quarters. Be prepared to get out quick when things go south.

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