Among the posts this past week were entries about why he's getting shorter and the latest housing numbers.
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Why I Am Growing Shorter
Originally published on Thursday, July 25 at 10:33 a.m. EDT.
Below are some of the reasons why I am getting shorter now:
- Market looks tired and appears to be rolling over.
- Arguably better economic news (which I view, by contrast, as mixed) has been discounted and so has a modest acceleration in third-quarter domestic economic growth.
- Over there, too much has been made of better eurozone economic data. As discussed yesterday, the data only suggests +0.2% real GDP growth in third quarter 2013.
- I am convinced that revenue and profits will be disappointing in the second half of the year.
- Tapering will likely start in September.
- Interest rates will continue to climb.
- The housing recovery will pause.
- Uncertainty regarding the next Fed chairman.
There's Realogy -- Then There's Reality
Originally published on Wednesday, July 24 at 12:53 p.m. EDT.
His comments were wrong on several fronts.
First, the traditional way of indexing affordability does not take into account changing mortgage credit standards.
Let me explain.
In the mid-2000s, a borrower could get a non-amortizing mortgage loan that paid interest only, was not documented and at 100% (or more) loan-to-value.
As a result of the overextension and rampant speculation in mortgage loans in the last cycle, credit standards today are dramatically different.
Higher home deposits and lower loan-to-equity values, full documentation and more conventional old-fashioned mortgage loans rule the day in 2013.
As a result, today it costs the same to carry a $350,000 house as it did six or seven years ago to carry a mortgage on a $550,000 house.
On top of this, higher mortgage rates (+125 basis points over the last few months) and climbing home prices have served to reduce affordability by almost 25% year-to-date.
At the time of original publication, Kass had no positions in the stock mentioned.
The Pause in Housing
Originally published on Wednesday, July 24 at 9:20 a.m. EDT.
Housing, the straw that stirs the drink of the domestic economy, appears ripe to stall now.
The mortgage data released this morning are supportive of my view.
New purchase applications have weakened over the last month or so, and refinancings have collapsed.
Already, as mentioned earlier in the week, existing-home sales have begun to disappoint. The ISI homebuilders survey has weakened for the last two months. Finally, a combination of higher home prices and rising mortgage rates is adversely impacting affordability.
The pause I see in housing is within the context of a likely multiyear recovery, but it will negatively impact nominal and real GDP in the second half.
As I wrote, the Fed's and the market's optimistic economic forecasts seem destined to be wrong.
Refinancings dropped by -0.7% week over week last week, the lowest print in two years. The index has now dropped in 10 of the last 11 weeks. When refinancings decline, household cash flows are adversely impacted, and I continue to see a rocky retail sales outlook ahead. This, coupled with rising gasoline prices and a five-year low in the savings rate, should be significant headwinds to consensus growth forecasts over the next two quarters.
New mortgage applications declined by -2.1% last week, the weakest print since the middle of March. Applications are down in four of the last five weeks -- this signals a moderation in housing demand.
Slow nominal GDP growth will set the stage for a more challenging top and bottom line for most large U.S. corporations. (Note: Excluding financials and buybacks, second-quarter 2013 EPS (year over year) should be only about +1%.)
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