Three predictions on stocks, the Fed and housing
Why stocks won't move up further before December 11
Friday started with a morning market rally based on Bernanke's remarks on Thursday that seemed to concede further rate cuts after November's credit crunch induced market slide, and on a subprime bailout program. However, traders realize that if the markets move too high and seem healthy, the Fed won't cut rates on December 11 as is currently expected. Therefore, traders will sell on any bad news just to maintain conditions for rate cut momentum... today, the hint that the economy is tanking brought down the morning rally from DJIA +160 to zero at about 3:00pm EST before rebounding a bit.
On and after December 11, the market will respond to whatever rate cut the Fed delivers, but it would be no surprise if the market eventually begins to wither in order to induce further rate cuts during the winter.
Why the dollar may not crash like all the gloomers say
Gloomers posit that more rate cuts will consequently devalue the dollar, and induce a vicious death spiral of rate cut > dollar crash > higher inflation > worsening economy > more rate cuts, etc. However, the Europeans are also pushing their Central Bank (EC
to drop rates to stem the same type of credit crisis
Americans are now facing. Currency valuation is relative to their respective rates... the dollar will maintain its value vis-a-vis the Euro and
other global currencies if all rates are also dropping. I've
stated repeatedly since the summer that the global Central Banks won't
allow the dollar to crash, and consequently trigger inflationary pressures that causes global recessions.Today's market stats bear out this paradox - Bernanke implied further rate cuts (which usually will induce dollar devaluation and elevate inflation risk) but the dollar jumps and oil prices drop today. The only reason I could find is the extension of the credit squeeze overseas which supports ECB rate lowering action.
Why the housing market will pick up in the spring in cities and neighborhoods with low foreclosure activity
With the media spinning every worse case scenario for subprime and alt-A foreclosures and monitoring housing price drops monthly, the consumer has been spooked. Nobody buys when waiting for the other shoe to drop. However, most of the inventory overhang is concentrated in certain areas hit by subprime loan activity... unfortunately, the light at the end of this tunnel may be years away.
The housing market will turn around on a change in consumer perception. Three things will happen: 1) lower interest rates will stimulate demand for housing stock not affected by subprime, 2) lenders will start lending again, after all it is their business model (now, it's harder for consumers to qualify for loans due to problems with the credit market, not their individual credit quality), and 3) pent up buyer demand - consumers realize that they want to live in Palo Alto where inventory is tight and schools are good, and not in a Sacramento suburb still littered with empty houses.
The normal winter freeze on the residential real estate business wil be much worse this year. But your comments are right on. Somewhat optimistic, however.
Keep up your great work. Bill
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I liked the way you broke down the possible positive implications, and used a couple sentences in a quote on my site. I hope the longer than normal quote is OK
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I do somewhat agree with where consumers would like to live but on my blog I posted an article earlier this week outlining where consumers ARE buying houses. My experience last mont is that consumers are looking for a "deal" In the Sacramento market I attended a Auction by Hudson and Marshall. There was over 1,000 home buyers there.
My money still stays in the bay as I like to say!
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