E-piphany

The headlines claim that the rally today was due to improving earnings and earnings guidance. Hogwash. No doubt, there were some positive earnings and spin, but to say that prices would skyrocket on a couple of earnings numbers (Caterpillar being one of them) is nuts.

Initial Claims were somewhat weaker-than-expected but still in a period fraught with difficult-to-adjust seasonality. Existing Home Sales were somewhat stronger-than-expected, although not to say “strong.” Still, we can infer from the fact that Existing Home Sales are holding up reasonably well while New Home Sales are looking awful, along with the fact that the inventory of New Homes is also incredibly low, that consumers are substituting to existing homes that may be distressed sales rather than buying new models. This is good news for the economy, although the overhang of homes is awesome. The invisible hand is slowly clearing the market (and it bears noting that the visible fist of the government has been a complete failure, according to the special inspector general for the financial bailouts (link), who said yesterday that the efforts to help homeowners avoid foreclosure hasn’t “put an appreciable dent in foreclosure filings”).

What is perhaps even more significant is that the median existing home sales price has now exceeded the highs from 2009, and on a year-on-year basis  (see Chart, source Bloomberg) home prices have been reasonably stable  for seven months now and the smoother RPX index confirms this reading. Remember, declining home prices (specifically, declining rents, which lag home price changes) are the main thing keeping inflation “contained” – actually, disguised – right now. By early next year, core inflation will be heading higher…right about the time the Fed begins QE II (Bernanke is begging for a continuation of the Bush tax cuts so as to alleviate the Fed’s burden when it comes time to goose the economy, but I wouldn’t hold my breath).

Home prices are stable again! For how long remains to be seen of course.

But all of this doesn’t amount to sufficient reason, in my book, for a 2.2% jump in the S&P at the opening bell (2.3% by the close). The market was sharply higher overnight. I believe that it is in anticipation of the imminent release of the European “stress tests” that we all know won’t be very stressful. Of the 91 banks being tested, speculation seems to be that 10 or so will be found wanting. Although I think it will be less than that, if it were only 10 and the tests were stringent it would indeed be cause for celebration. But we already know that generous haircuts (meaning, not much) are being applied to the sovereign bond portfolios. And the behavior of funding markets seems to suggest that market participants feel that the true number is somewhat over 10. If we’re lucky, we’ll never know how many banks are actually insolvent. But then, when have we been lucky over the last couple of years?

Well, I wanted better placement for a short, and I got it.

Tomorrow, at 6p.m. Brussels time specifically (noon Eastern), the results of the stress tests will be released, and that is the main event for Friday. I don’t know how the market will react to the results, but I expect that since there will only be a few hours to analyze the results, stocks will trade heavy into the close – the real nuts and bolts of the analysis will be done over the weekend.

In Case You Missed It

In case you missed it, here is one little nugget from the financial reform bill. One of the definitions of an “accredited investor” under the Securities Act of 1933 has been changed. Previously (and this change is effective immediately), you were an accredited investor if you had a net worth of $1mm, including your residence. As of now, the residence no longer counts towards your net worth so to be accredited under this definition you need $1mm in addition to your home.

So if you were an accredited investor on Monday, and able to invest in many of those things that Uncle Sam says only wealthy people should get to invest in, you might no longer be one today. Bad luck. Sorry. Hope you don’t mind, “but it’s for your own good.”

And Now A Word From Our Sponsor

A quick personal note. We have been trying for the last year to launch an investment boutique focused on creative inflation-linked investments (such as Education inflation hedges, which is a concept we were inexplicably unable to sell to any mutual fund company or 529 plan sponsor). We are currently re-purposing the firm to offer consulting on inflation-related topics. I think our insights would be valuable especially to pension and endowment funds and to family offices. If you have interest in discussing what we can add, or know of someone who may, please contact me through our web form at http://www.enduringinvestments.com. Thanks!