Recent surveys of economists for their predictions continue to be too optimistic. So much so that on several recent forecasts not one surveyed economist was sufficiently pessimistic to predict the correct result. For example on the new home sales number, forecasts ranged from 412,000 to 460,000 and the actual result was 402,000.
Thursday, we received the government's preliminary figures on third quarter GDP growth, 3.5%. The median economist forecast was 3.2%, so economists were pretty much on the money. We cannot dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but let's say about .5% of GDP growth was due to those programs. That gives us GDP growth of about 3% subtracting out the two governments sponsored programs. I would like to see the actual GDP growth figures minus the two programs.
After a seven month historical run up to the tune of 60% plus gains in the stock market. Let's look at 7 reasons why I think the next sustained market move will be down:
1) Home building by any standard has exceeded usual norms the last five years or so and we now have the inventory overhang, increasing unemployment, existing housing sales and foreclosures, and multiple other problems facing home builders. Plus shadow inventory, it is basically banks and homeowners who want to sell properties but are holding homes off the market till the market bounces. Some estimates of this shadow inventory are staggering.
2) Debt, debt and more debt. I refer you to one of my favorite blogs, Sudden Debt, which focuses on this issue. Under Greenspan and Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Boy is that a wakeup call. How is going to pay that bill when it comes due?
3) Commercial real estate. In the U.S. we have roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.
4) Adjustable rate mortgages (ARMs). Over 90% of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A ton of these will reset in 2010 through 2012 and beyond.
5) Shipping (Baltic dry index), trucking, port activity, shipping rates, are all pointing to economic activity being negative. Not diving like we were earlier this year, but not rebounding.
6) Unemployment is still increasing, not as fast but still increasing, and this has run on effects on retail spending, real estate and several other areas. No matter how the media spins it 500K initial unemployment claims per week is not a sign of a turn around.
7) Corporate profits, the bottom line improvements for companies this past quarter have been largely due to cost cutting (like layoffs) as opposed to increased sales and growth. This does signal a recovery and a new run away bull market. Bottom line fundamentals and the stock market are out of alignment.
