With home prices at the lowest point in 10 years, one cannot claim the a recovery will be built on the back of the housing industry. Many key economist believe that the recovery of the United States will be based on the housing aspect of our economy. These experts fail to realize the effects that the housing bubble had on the consumer side of the market, the bubble has popped and even those able Americans that can afford a home won’t buy one. For the U.S. recovery to be fueled by housing, prices need to increase, not decrease. Putting the housing bubbles in different terms that are much easier to understand, lets consider Netflix. After seeing Netflix rise to its high over $300 and fall to $70, would anyone buy today thinking it will once again go back to $300 tomorrow? No, after a bubble pops a consolidation period is needed and prices will reestablish in a more realistic area, and those prices may be closer to the bottom then the top. With prices at these levels for housing, a full fledged housing recovery is out of the question. Yes profits can be made, but the expectations for this sector are outlandish.
Looking at the recovery from a less intuitive aspect and more of a numbers standpoint, things are not much better. Existing home sales were revised down last month. This speaks volumes, the existing home sales is not a straight increase and is not as rosy as was first perceived. We have also been at these levels before, and also gone back the other way. Investors should be leery of what is yet to come. Not only that but MBA purchase applications were down as well. The markets once again shrugged off this negative news, though in fact things are not looking so picturesque.
Now that the true picture of the housing industry has been established, it must be explained why the recovery cannot be build on the back of the housing industry. The key point mentioned this morning was that home prices were at a 10 year low. This means that if any contractor wanted to build a new home his margins would compressed dramatically. The only way he could combat that problem being that all his cost are fixed (land, lumber, etc.) would be to decrease his labor cost. Though he may be able to squeeze cost elsewhere the contractor would see the best results via employing less people or cutting wages. Those looking for the housing industry as the source of the american recovery will have to look elsewhere. The idea that the housing industry will fuel the recovery comes based on the idea that it will help put america back to work, but with home prices at the levels they are, it may put your neighbor back to work, but you are still on unemployment.
“Sometimes your best investments are the ones you don’t make.” – Donald Trump
Looking at the disappointing numbers out of Walmart, one tries to piece the story together. The economy may well be recovering, but is the improvement substantial enough to see Walmart shopper move up to premium retailers? Obviously the answer is a no, the economy may be looking better from an investor standpoint, but with increasing fuel cost Walmart customers are still pinching pennies. The information provided this morning by the company gives insight into what may be happening. Looking at the numbers Walmart 4th quarter profits took a beating and the company warned investors that they should expect margin declines in the future. this leads one to wonder, why is Walmart not excelling in current market conditions? The two word answer, is Dollar General.
Above is a graph depicting the stock performance between Dollar General and Walmart over the past year. The chart makes obvious the story this article is attempting to make a point of. Dollar general due to its limited square footage and fewer employees can offer lower prices. This by no means suggests that the Walmart business plan is failing, it is merely bringing light to the fact that consumers are truly pinching pennies. As gas prices continue to speed higher, consumers will continue to look for way to save money. Dollar General gives shoppers the benefit of not only better prices, but allows the to avoid the headaches of the Walmart superstores. The graph above tells it all and today not only continues to reaffirm the struggling consumer but suggest that they are being even more frugal than was expected.
“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” – Sam Walton
Facebook recently filed its S1 for its IPO sometime in the coming year. The enthusiasm about Facebook could be seen throughout the financial markets, particularly with money pouring into Zynga. Facebook has been and will be the most anticipated IPO of 2012. Similarly, Zynga was the most anticipated in 2011 and we all know how that traded on its first day. Facebook will likely be a different story, with retail and institution investors battling to get shares. Price action on Facebook will be very exciting on the first day of trading, and will likely bring back the movements not seen since the tech bubble. The point that investors should pay attention to is the recent price action in Zynga. Zynga’s recent fluctuations can be used as a signal what is in the future for Facebook. Below is a graph of Zynga since its IPO with a few highlighted points to be discussed.
As obvious through the chart, the sentiment when the stock went public and for some time thereafter was negative. This sentiment changed dramatically when talk of Facebook raised enthusiasm for the stock. As arrow 1 shows, the stock reached new highs on Facebook optimism. Investors could not trade Facebook so they played the second best option. What does this mean? This means that investors are dying to get in Facebook and will do so in any shape or form. In reference to Facebook, this suggests exciting price action in the future. Observing arrow 2, we see a dramatic drop in the stock occurred. Understanding the deep drop gives us a hint of what to expect with Facebook. Arrow 2 reflects bad earnings by a company that was expected to perform well (they value my time on Facebook at over $100, a laughable idea being that I have never clicked on an advertisement). Those that get into the stock pre-earnings will likely loose there pants, until we see a stronger revenue machine. This was followed by arrow 3, which represents renewed enthusiasm once again for Zynga. Facebook will likely follow the same trend described above in Zynga. The stock will trade on optimism and make big moves that investors will not want to miss. At the same time it will be extremely over valued and the numbers will fail to support the valuations. Most likely investors will not care and as arrow three shows will continue to get back in the stock even after bad news. Use Zynga as an omen of Facebook and take notes because when the price action happens in Facebook it will happen fast.
“Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected. Simply put: we don’t build services to make money; we make money to build better services.” – Mark Zuckerberg
As the indices climb to newer and newer highs on better worldly economic news it is always good practice to observe the true barometers of global growth. One of the companies that captures the global growth story (or lack of one as this article will point out), is General Electric. General Electric operates many subsidiaries throughout the world and when it recently reported its quarterly earning had analyst looking at it to gauge the global growth story. With GE telling the markets that global growth was lacking by missing on the revenue line. The image below shows GE’s massive sell off since the financial crisis in 2008 and its massive recovery back to those levels……
What should raise true concerns is the graph below comparing General Electric to S&P over a five year period. The discrepancies seem obvious through the graph. Would one not expect GE to be a contributing factor, if not a leading element of the recent rally if the growth story home and abroad where true?
What should strike fear in the global growth bulls was GE’s profit from home and business solutions dropping a whopping 41 percent. That statistic in itself speaks mounds, saying that the growth many in expected is just not present. If Americans are not building houses and not renovating houses, then they in fact not spending money where it needs to be spent for a recovery. General Electric in the current quarter is looking for growth abroad and excluding a recessionary Europe which they see weakness in. General Electric admits their is a problem in Europe, when will the financial markets? Many claim Europe has not had an effect on our markets, but it already has. Comparing the concerns raised by GE to those raised in the Export To Where? article, the earnings that about global growth should raise questions.
“Face reality as it is, not as it was or as you wish it to be.” – Jack Welch
The Greece debt issues have been shaping investors and traders daily routines for quite some time. With the shift in focus from the U.S. economic issues to that of Europe many have forgotten about our countries own dire financial situation. Talking down another countries economic decisions and dire positions comes with ease. As we in the U.S. claim we will not make the Greece mistake, we fail to realize that we are in the midst of making that mistake. The welfare state of Greece has many striking similarities to that of the great United State. The issue that should strike fear in the minds of all of us is that the U.S. does not have a lender of last resort like the Greeks. The concern that the debt ceiling struck in the financial markets in the last year will likely resurface in the future as it becomes election season. When the national debt comes to the forefront in the coming months, the situation will look much dire, because in fact it is. This also can be related to Greece, proving that throwing money at the issue does not merely solve it, but may in fact be a hindrance down the road. Below is Rick Santelli putting our national debt in a simplified household debt form and putting the realistic perspective on the dire predicament.
“The time to repair the roof is when the sun is shining.” – John F. Kennedy