About a week ago, the cover story of Newsweek magazine dispensed happy talk to its readers, namely a firm declaration that the recession was over.
On Wednesday, more happy media talk as the front pages of the New York Times, the Wall Street Journal and USA Today proclaimed to its readers that the three-year housing horror show appeared to be over.
Maybe so, but it seems unlikely that the army of 14.7 million unemployed Americans, and counting, and the former owners of an estimated 2 million foreclosed and abandoned homes, and counting, will share their exuberance.
"Media madness" is the reaction of one top Morgan Stanley trader, who contends the economic facts of life are suddenly being replaced with economic fiction. "It reminds me of the lyrics from an old Johnny Mercer song," he says; "you've got to accentuate the positive, eliminate the negative." And that's what the media is doing, he says. "First, they accentuated the negative, and now they're eliminating it."
Charles Biderman, the 62-year-old skipper of West Coast liquidity tracker TrimTabs Investment Research, which is partially owned by Goldman Sachs and boasts among its readership many of the country's top hedge fund managers. seems to agree, ridiculing what he characterizes as the media's current bullish nonsense. "The Newsweek cover," he predicts, "will become an historical cover as a contrary indicator."
A one time Barron's reporter, Biderman has frequently taken pot shots at the press, knocking it for what he regards as its excessively rosy views of both the economy and the stock market. In effect, he's suggesting that the media's desire to want things to be better may be clouding its editorial judgment. One example may well be its mounting characterization of economic data as "less bad" when, in fact, it's still downright negative.
Biderman's thinking on this score should not be pooh-poohed. I've seen a number of examples where some in the media have gone off half cocked in their ultra-sunny economic market assessments. And then a day or week later, lo and behold, they turn out to be totally wrong. A recent example of the preposterous can be seen in the comments from one talking head on the usually reliable Fox Business Network, who told viewers that both the Bush and Obama administrations deserved a pat on the back for their economic actions. That's utterly absurd since under watch of the current and previous administrations--blame whichever party you'd like or both--we've experienced the worst economic downturn since the Great Depression, with the national debt, the budget deficit, bankruptcies and unemployment going through the roof.
Uncle Sam just reported that the economy, turned in better than expected numbers, shrinking at only a 1% pace in the latest quarter. Biderman is not impressed. It's not a year-over-year number, he points out, but sequential, quarter over quarter. Further, he notes, the number is only a very preliminary estimate, which in the past has been so dramatically revised that it has become meaningless.
Meanwhile, Biderman seems to offer some compelling arguments that the media's housing and economic bulls could be skydiving without a parachute. Recently, there has been good news on the housing front. Namely, new home sales in June rose 11%, while existing home sales for the month rose for the third consecutive month. More recently and considered even more relevant, a survey of 20 metropolitan areas by the well regarded Case-Shiller folks showed that home prices rose in 8 cities in May, versus 4 in April.
In response, Biderman notes "the bulls are putting lipstick on the housing pig and it won't work." The reason, he says: the bad news on the housing front outweighs the good. For starters, he points out that as of the end of May, 11.3% of the 41 million total U.S. mortgagesoutstanding were delinquent, up from 8.5% or 3.5 million at the end of January. Likewise, he calls attention to some 5 million home owners who are no longer making their mortgage payments. As for the Case-Shiller news, he notes that on a seasonally adjusted basis, using month over month comparisons, home prices actually declined in June. He also argues that the housing bulls are ignoring a potential tidal wave of failures in option ARM and Alt-A mortgages.
(Option ARM mortgages are adjustable rate mortgages that allow you to choose among several payment options each month. Alt-A mortgages, more risky than conventional mortgages, are something of a step below loans for people who have better credit than sub-prime borrowers, but credit which may not qualify them for the best loans and lower rates.)
With job losses continuing to rise -- Biderman projects they'll top 400,000 in July--he sees a new downleg in housing starting in the fourth quarter or in early 2010, spurred by an additional wave of foreclosures, chiefly among higher-priced homes. "How are people expected to pay their mortgages if they lose their jobs?," he asks. "The answer," he says, "is they can't."
One of the damaging offshoots of the continued housing slump, as he sees it: "Banks will be hit with a tremendous increase in non-performing loans."
Lately, Biderman has been negative on the stock market and he's been decidedly wrong, given the robust resumption of the March-June rally. To make matters worse, his model portfolio has been recommending a number of short sales (a bet stock prices will go lower).
"The rally has been painful," he says, but he's convinced "it's fake and unsustainable." For the past 35 years, he notes, money managers have convinced themselves you buy stocks on dips, and it has worked. But that game, he believes, will come to an end because reality should soon come home to roost.
On the liquidity side, he notes that buying by corporate insiders is way down, while insider selling is way up. In addition, there are virtually no corporate stock buybacks.
"You have unemployment going up, wages and salaries dropping more than expected, falling consumer confidence, and many people have stopped paying their mortgages," Biderman says. "The only real improvement is in the stock market, and common sense tells you it can't last."
The economy, he predicts, will get worse, not better, and he believes the Dow Industrials, currently at around 9150, should return to their March low (6547).
Accordingly, says our bear, investors should now be aggressive sellers of stocks. Or put another way, when it comes to the market, it's a good time to be a wimp.
Email Dan Dorfman at Dandordan@aol.com .
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