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From a story on Yahoo News.

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O’Shaughnessy told Reuters in an interview.

“I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally,” he said, in reference to Wednesday’s closing level for the S&P 500.

Does he realize that we started this year at 931?  And while I agree with him that we could have “a very nice rally” I don’t think this is the time to be buying.  There’s too much downside risk that isn’t priced into the market.

For example as I detailed a few days ago, Standard and Poors is still estimating 2009 earnings for the S&P 500 to come in at $64.37 – a whopping 31% increase over the 2008 earnings of $49.04.  I just don’t see that happening, so stock prices will adjust lower as the earnings estimates are eventually lowered.

I also disagree with his premise that we’re seeing “an improved housing market”.  Foreclosures have been held down artificially for the past few months as Fannie and Freddie had a foreclosure moratorium in place, as did some states and banks.  Those programs will be ending, and we’ll see the foreclosure rate skyrocket as Obama’s housing bill turns out to be ineffective.

I say it’ll be ineffective because the only thing that will heal the housing market is a bottom being established on prices. And that can not, and will not happen until foreclosures are allowed to go through to establish the true value of houses in each area.  Any government program is bound to fail, because they’re seeking to establish another artificial boom.  And that’s what caused this mess in the first place.

A rising savings rate IS a good thing, but that doesn’t “stimulate” the economy as fast as someone purchasing a new car or remodeling their home.  Savings bear fruit in years, not months.

“The problem with today is everybody’s fighting the ‘Where’s the bottom?’ fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out … From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

“Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

No doubt about it, “you get shouted out” if you talk about a 3 to 5 year time frame – because it’s wrong.  If you bought and held stocks anytime since 1997, you’ve lost money.  In many cases, a lot of money.  And that’s not an investment.

“The market is even more compelling than it was when we spoke at the beginning of the year.”  He is 100% correct on this – but anyone who listened to his self serving BS at the beginning of the year has lost more than 25% of their money.  Not a brilliant move, no matter how “compelling” the market appeared at the time.

As to making “the ultimate valuation more compelling” he’s correct – but that’s been the case forever.  Look back at the beginning of this blog, where I said Doug Kass was wrong when he said “Buy the Financials. Yes Buy.” back in January of 2008.   The S&P Financial index (XLF) was over $27 back then, and he said it was a good deal with good valuations.  Today XLF closed at $6.24.  That’s definitely a more compelling valuation, but you would’ve lost 77% of you money if you bought XLF because of it’s “compelling valuation” in January 2008.

Long term investors shouldn’t be trying to pick the bottom – leave that to day traders.  Long term (I’ll use the same 3 to 5 year time frame as O’Shaughnessy) you simply buy when the 75 day EMA crosses over the 200 day EMA.  And you sell when the 75 day crosses back below the 200 day.  It’s easy.  And virtually foolproof.

Check out a chart of the S&P 500 with these EMA’s here.  When the red line (the 75 day EMA) is higher than the green line (the 200 day EMA) stocks are trending higher.  You buy as soon as possible after that happens.  The reverse is true in a down trend like we’re in today.  And the distance between the 2 lines is not getting smaller yet, so long term investors shouldn’t be anywhere close to buying back in.

In short, if the earnings are down, the market will follow eventually.  And when earnings rise, the stock market will also eventually rise.  But that ain’t happening now, so stay on the sidelines.

gk

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Here are the top 10 news stories today from Reuters Business News as of 4:55 PM ET.  Notice a pattern?

• Wall St pulled lower by banks, S&P below 700 - 14 minutes agoStocks fell in volatile trading on Tuesday, with the S&P ending below 700 for the first time since October 1996 as persistent uncertainty about the amount of money needed to shore up the financial sys…
• U.S. auto sales plunge as recession deepens - 57 minutes agoU.S. auto sales dropped by more than 40 percent in February to the lowest level in almost three decades as Americans pulled back from taking on more debt.
• Bernanke defends AIG rescue, says U.S. had no choice - 3 hours agoU.S. Federal Reserve Chairman Ben Bernanke on Tuesday defended the government’s latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act cou…
• Blockbuster hires advisers for debt overhaul - 11 minutes agoTop U.S. movie rental chain Blockbuster (BBI.N) said on Tuesday it has enlisted lawyers to help it raise capital and refinance debt, but stressed it has no plans to file for bankruptcy.
• Ford February sales plunge 48 percent - 2 hours agoFord Motor Co (F.N) reported a 48 percent drop in February sales on Tuesday and outlined sharply lower production targets for the second quarter compared with a year ago in the face of a deep slump in…
• Geithner: will work with Congress on bailout costs - 1 hour agoAcknowledging that U.S. financial bailout costs may rise, Treasury Secretary Timothy Geithner on Tuesday said the Obama administration will work with Congress to determine the size and shape of future…
• U.S. home sales plumb record low in January - 4 hours agoSales of previously owned U.S. homes tumbled to a record low in January, reversing the prior month’s gains, according to a report on Tuesday that indicated the economy’s downward spiral was gathering …
• Oil rises nearly 4 percent on OPEC - 51 minutes agoOil prices rose nearly 4 percent on Tuesday on expectations producer group OPEC will cut output again and as stock markets traded higher.
• Bank of NY, Russia to discuss legal settlement - 3 hours agoThe Bank of New York Mellon (BK.N) said on Tuesday it will meet with the Russian government to discuss settlement of a $22.5 billion lawsuit Russia has leveled against it.
• Treasury, Fed launch loan program, eye expansion - 5 hours agoThe U.S. Federal Reserve and Treasury on Tuesday extended a new securities loan program to include equipment and vehicle fleet leases and said a future expansion to $1 trillion may also include some o…

There’s not a single bit of good news.  Everyone is ready to call a bottom to the recession, housing, financial crisis, and stock markets, but why?  There have to be at least a few positive signs that things are going to get better at some point, and I don’t see any signs of that.

Eventually, things will pick back up, but I don’t see it happening yet.  And I’m not buying stocks yet either.

gk

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The story is all over the news tonight.  Here’s the Washington Posts’ take.  A few choice quotes:

“But he (McCain)declined to embrace the kind of government intervention for individuals and institutions favored by Clinton and Obama, arguing that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

It’s about time someone said that the government shouldn’t bail out stupid people.  However, I don’t agree with McCain on who is deserving of being bailed out.  McCain also said “We have a responsibility to take action to help those among them who are deserving homeowners.”

Many (probably most) of those facing foreclosure were never “deserving homeowners”, they were idiots who lived beyond their means, they took out interest only or adjustable rate loans, and they somehow act surprised when the bill for their overspending comes due.  See my post earlier tonight for a prime example of this.

So obviously I disagree with McCain on the details, but at least he’s saying that not everyone should be bailed out.  On the other hand, Obama and Clinton seem to be in a contest to see who can give away more taxpayer money.

The same story attributes this to Clinton: ”McCain’s plan, she said, does virtually nothing to ease the credit or housing crisis. “It seems like if the phone were ringing, he would just let it ring and ring and ring,” she said.”

Cool – the less the government does to “ease” the credit and housing “crisis” the better I feel about it.

And – in what has to be one of the most futile efforts ever – Obama today “outlined what he called a second stimulus package that would cost about $30 billion and include assistance to individuals and areas hard hit by the housing crisis.”

Idiot. The Fed loaned $38 billion today, and is approaching $500 billion in new money give aways since September.  That much money hasn’t headed off the current credit and housing problems – and the $160 billion stimulus package coming soon to a mailbox near you won’t make a dent in it either – so why would Obama think $30 billion will have any impact?

Let’s put it this way:  All three major candidates are wrong on these issues.  The only consolation is that McCain is less wrong than Obama and Clinton.  But none of them have a clue, and I don’t see any hope that they’ll get smarter before election day.

gk

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I’ve seen this a couple of times over the past few days, but here’s CNN’s version of a story about “homeowners” simply walking away from their homes.  I say “homeowners” because most of these people put little or no money down, they took out teaser rate ARM’s, interest only – or even negative amortization loans - so they’ve never had any equity to speak of anyway.  They didn’t “own” their homes, they were renting them.

A couple of quotes from CNN’s story – here’s the headline:
Homeowners: Can’t pay? Just walk away
More and more borrowers are watching their house values sink while the cost of their loans skyrockets. What to do? Skip out on the mortgage all together.

Yeah, that’s a good plan.  Just “buy” a nice house which you can’t afford, then stay there for a year or two until your rate adjusts and you can no longer pay for it.  Then mail the keys to the bank (hence the term jingle mail) and walk away.   Next thing you know they’ll be wanting a bailout from the Fed’s…

Another quote: The Los Angeles-based writer bought two properties in Hancock Park, west of downtown, using no-down, interest-only mortgages in 2006. He paid just over $1 million for both.

Often they chose hybrid adjustable rate mortgages (ARMs) that came with low initial payments. After a few years, interest rates on these loans reset higher. But buyers thought they could count on the increased value of their homes to refinance into affordable, fixed-rate loans.

Question – If you couldn’t afford a fixed rate loan on a house 2 or 3 years ago when rates were at a 40 year low, why the hell did you think you’d be able to afford to refinance before the interest only or ARM reset?  Were you counting on a huge raise that never came through?  Or did you just get more house than you could afford on a 15 year fixed rate loan?  If so, you’re too stupid to be a homeowner anyway.

Go ahead and blame it on predatory lending practices, blame it on your real estate agent, blame the economy, blame the house pricing slump, blame your neighbor – just be sure you don’t take responsibility for your own decisions, because that would mean you’re an adult.  And if you did any of the things above, you’re not an adult. 

You’re also not a victim, you’re the cause of the current mess.  You’re the one walking away (or defaulting) on a mortgage that you promised to pay.  You’re the one who is causing banks to lose money because you lied about your income on your application.  And when those banks write down a loss on your loan and their stock price drops, you’re probably bitching the loudest because now it’s hitting your 401k and Roth accounts – although maybe I’m giving you too much credit – anyone who did the above loans is probably not bright enough to plan for their own retirement – you’re counting on Social Security. 

I normally don’t call people names, but if you fall into the category of the people above – you are stupid.

gk

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