More Positives on the Economy and Treasury/FRB Programs

Green Shoots On The General Economy? Yes!  On Housing?  More like Don't Shoot!

Much has been made about the green shoots.  There certainly are many more reasons today to believe the bottoming process, and stabilization of the general economy continue to make strides. We continue to see mounting signs: The Index of Leading Economic Indicators rose for the first time in seven months;   The continuing improvement in the domestic Purchasing Managers Index;  The thawing of our Credit Markets and the early signs of stabilization in our Financial Institutions.    All have been helped to a significant degree by the programs initiated by the Treasury and Federal Reserve.   The list of acronyms is many, but the last initiative may prove to be the most important.  The TALF and PPIP.   

The TALF is allowing the velocity with which credit flows, do so more freely again in the Auto Receivables and Credit Card Receivables arenas.   More work needs to be done with the aforementioned along with SBA Loans and equally important Commercial Mortgage Backed Securities (CMBS).   The latter will be tested on June 2nd when the Federal Reserve holds its' CMBS operations utilizing 5 year terms.    This may be the equivalent of building the flood wall before the hurricane hits.  The CMBS market is virtually still frozen.    To re-liquify this market they will need to free up capital at the banks as well.  Thus the importance can't be underscored for the success of the PPIP.    If successful, a functioning active market is created where buyers pay reasonable prices and sellers take a haircut, but aren't scalped,  billions of dollars can and should be released from balance sheets for redeployment and reinvestment.   

Housing prices continued the troubling trend lower, falling 18.7% in the 20 city index.   The supply of homes on the market remains stubbornly high, above 10 months.   That takes into account only homes that are listed for sale.  There remains the 'shadow' market supply which takes a bit of creativity to total.  The Shadow supply takes into account sellers who may have been unsuccessful selling their homes and have since taken it off the market.  It also includes bank foreclosures that are sitting on balance sheets of institutions unwilling to sell at such depressed prices.  The one commonality of the two, should real estate pricing firm up, they both would become willing sellers thus immediately adding to available supply.   Some estimates have the combined inventory coming in closer to 3 years not 10+ months.   

Around the times of a turn I adhere to "keeping some powder dry" and "not wasting all of your bullets". So, while I clearly see the landscape of an economic bottoming taking shape and abundant investment opportunities, when I hear pundits cry out the early cyclical play is to be investing in the home builders, I have to shout, "Don't Shoot"!   

Yours well armed with powder dry.