A Melman Minute
By: Leonard Melman
July 29, 2008
Every so often, the markets move in a direction
which appears to defy reason and perhaps even sanity. This morning appears to be
one of those moments.
Two news events with potentially devastating impact on the American economy hit
the newswires and various financial websites this morning, yet the market's
reaction has been precisely in the opposite direction to that which might have
been anticipated.
First, the Standard & Poor's Case-Shiller 20-city home price index for May was
just released and it showed that not only are home prices in America continuing
to fall from already-devastatingly low levels, but the rate of decline is
accelerating. For the second consecutive month, all twenty cities intensely
covered by that index showed declines during May and the rate of decline
compared to year-earlier figures was 15.8%, the worst figure in the 21-year
history of the index. The cumulative decline from the peak reached in July, 2006
now stands at just under 20%.
On the same vein, we just received a report from the California Association of
Realtors (CAR) which shows how deep has been the collapse in many important area
of that most-populous state, one which is already reeling from massive budgetary
deficits. Simply put, the declines in California real estate values over the
past twelve months have been awesome, averaging an incredible 37.7% when median
sales figures for June, 2008 are compared to those of June, 2007. In raw
numbers, the median sales price received for a single-family, detached home in
June, 2008 was (all figures US$) $368,250 while in the previous June the number
was $591,280.
The huge declines have filtered down into even the most popular regions such as
the Napa Valley Wine Country as well as San Francisco, Monterey, Ventura, Los
Angeles, Riverside and San Bernardino Counties and even the seemingly-immune
Palm Springs area. Every one of these desirable and highly-populated regions has
suffered through declines of greater than one-quarter of their values in the
past twelve months.
That would to indicate to us that the stream of financial write-downs is going
to grow even larger and, given the new 'rescue' legislation just passed by the
House of Representatives, the future demands on the U.S. Treasury to save the
financial system are going to grow, perhaps uncontrollably.
(As we have noted previously and will surely discuss in the future, the impact
of these collapsing real estate values could wreck havoc on California's state
and municipal governments as property tax revenues shrink at the same time
expenditures are rising.)
But is the U.S. in financial shape to accomplish such a rescue?
Our second important story would cast serious doubt on such a suggestion.
According to a report just issued by the Bush White House, the anticipated
United States Federal Deficit for 2009 will reach an unprecedented $482 billion.
And, as an AP story notes, "...That figure is sure to rise after adding the tens
of billions of dollars in additional Iraq War funding it doesn't include." They
also added this little tidbit, "...and the total could be higher if the economy
fails to recover as the administration predicts." Interestingly enough, despite
the projected deficit figure, neither Presidential candidate seems willing to
alter their previous campaign promises. McCain continues to pledge his promised
reductions in tax revenue and Obama affirmed his plans for future huge increases
in medical care expenditures, education and many other federal spending
programs. Neither seemed willing to discuss how any of this was going to help
reduce the onrushing monumental deficit, as if it simply didn't matter. In our
opinion, however, it really does.
One other story making headlines this morning is a further fall in the price of
Crude, off another $3.50 this morning to near $121 per barrel - and it seems
apparent that the financial markets are focusing on the relief which will be
felt from falling oil prices, both in terms of increasing the ability of
consumers to purchase other products and from the easing of dollar creation to
purchase foreign oil.
America's financial markets have opened sharply higher with the Dow reversing
yesterday's sell-off and rallying by about 133 points as of 8:30 AM PDT, while
the Canadian TSX Index is close to unchanged, held back by falling crude prices
and weakness in the metals as gold is down by about $13 to the $917 level,
silver and platinum are down about 32 cents and $22 respectively and the base
metals, with the exception of lead, also down sharply.
Alluding to our earlier remark that sometimes the markets seem to act in a
manner which is the opposite of what might have been expected, despite being
confronted with news of further declines in housing (which will likely result in
even greater government rescue programs) and a massively expanded prediction of
coming deficits, the U.S. Dollar has been rising sharply this morning with the
DX Dollar Index up an impressive .65 to above the 73 level, the highest in
several sessions.
One last thought about petroleum prices. A great deal of optimism has been
generated from the 18% decline in crude prices from their high of about $147 per
barrel to the present figure of $121, as if this decline is proof that the real
and long-lasting peak in oil prices has now been set in.
However, one look at the historic chart of crude's price over the past
quarter-century shows that, to date, this present decline is not at all unusual
within the scope of the tremendous advance which crude prices have made since
their breakout above $40 in 2004. In order, we note the following declines:
-
late 2004: $56 to $40, or 28%
-
mid 2005: $70 to $55, or 21%
-
mid 2006: $76 to $50, or 34%
-
late 2007: $100 to $87, or 13%
-
mid 2008: $147 to $121, or 18%. (as
of this morning)
As can be readily noted, this decline has yet to
take on special significance and, of course, we will indeed follow the petroleum
markets closely to determine if an important, far-reaching change has taken
place. All we can note this morning is that, in our opinion, this recent decline
appears to be a correction within an ongoing bull market.
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