Dow up one per cent. We're back and so is Wall Street's appetite

Will Newtonian physics prevail? Or the ghost of Audrey II? Photo: Terror Dave's

WASHINGTON, May 28, 2013 — Unexpectedly, at least for the Market Maven, stocks surged Tuesday after reports hit the wires that U.S. home prices rose the most in seven years and consumer confidence reached a five-year high. House prices are allegedly surging. But, as was the catastrophic real estate decline that commenced circa 2007, those roaring real estate price comebacks depend on where you happen to live or invest, past or present tense.

The Maven is a living example of this. His own DC Metro area home is now valued on Zillow at a higher price point than it’s ever seen, given that this is a humble, stick-built townhouse dating from the early 1980s. The successive price jumps here in recent months, after years of declining to flat prices here could be due in part to the serendipitous location of this particular development close to the new temporary endpoint of the Washington Metro rail system’s new Silver Line to Virginia, allegedly set to open this December or January. (We shall see.)

On the other hand, much of the recent increases in home prices here may simply be due to the ever-expanding Federal presence that has become part and parcel of Obamanation. Good housing in the DC area is once again becoming a bit scarcer, driving prices up significantly. And much of this pressure is likely due to the relentless growth of the Federal government under this Administration, which is paying for it largely through borrowings and via money extractions from the U.S. hinterlands.

Fair or not, this is driving real estate prices close to resuming their pre-2007 frenzy, at least here. But on the other hand, the fiscal fun of this new bubble is not being shared by the Maven’s real estate rental investments which are situated in a semi-rural college town perhaps a three or four hour drive from DC. Prices of investor-owned student rentals out here have continued to plummet even as prices in trendier areas have increased. It’s a paradox. And yet what goes around comes around.

The prices in this college town and its environs were actually the last to start taking a hit during the apparently now-ending real estate crash, actually not peaking until nearly 2011, appearing initially to defy the downward trend that gripped the nation. Having finally started its long, sharp decline, housing prices in this town are waterfalling back down to what look to be pre-2005 prices.

Fortunately for the Maven, the area seems at last to be leveling out, which is cold comfort but at least something to weakly cheer about. But given the time lag, recovery for these markets might not occur until close to 2020 now. Or never, if the party-happy, house-destroying student party boys and girls ever figure out what they’re getting from their minimal college education, which, these days, seems to be precisely nothing. But that’s another economic story.


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The Maven mostly plans to ride this out, although he may try to shuck one of the underperformers over the next year or so, just to make the old balance sheet look a bit happier. Although paying 2006-2007 interest rates for these properties—un-refinanceable because banks will only make these kinds of loans now to Warren Buffett and Donald Trump—is an added burden, it can be dealt with because the Maven, for better or worse, put 20 per cent down on all of the houses, assuming the liar loans of the time combined with zero equity would come home to roost with a vengeance, which it did. But not for the Maven, thanks to the down payment cushion.

Will Audrey II return to devour investors? Photo from Indiana community theater production of “Little Shop of Horrors.” (Credit: Terror Dave’s)

So we’re down but not out on these houses for now which is pretty much what one has to expect in any kind of investment scenario. So no whimpering here, although the Maven is considerably irritated and the banks and the Feds for conspiring to keep loans away from where they’re really needed, not just for the Maven but for every other little guy out there who could use a break and who wonders why the fat cats have never taken a real hit for this even as they continue to extract unrealistic interest rates from the rest of us.

And the fat cats who own real estate seem to be doing quite well. CNBC reported today that summer rental prices in the Hamptons (where Jay Gatsby and the Buchanans used to romp) are reported to be around a cool $1 million for the season. According to Robert Frank, “Brokers say there are now at least a half dozen homes and estates in the Hamptons that are renting for around $1 million—just for the summer. That works out to $9,803 per day, or $408 an hour. And the $1 million lease doesn’t include utility bills or other charges, which can run in the tens of thousands.”


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Nice work if you can get it. Maybe the owners would stoop to sell us shares of this action.

On the whole, the recovery in the housing market has been an important factor driving the stock market to record highs this year. That rally appeared to falter last week after the Dow Jones industrial average and the Standard & Poor’s 500 index logged their first weekly losses in four weeks. There may still be downside surprises in store later in the week as well, after end-of-month portfolio adjustments/chicanery are completed by hedge fund managers and other Wall Street tricksters whose antics continue to be ignored by the SEC.

Home builder stocks rose early Tuesday after the Standard & Poor’s/Case-Shiller survey found that U.S. home prices rose 10.9 percent in March, the most since April 2006. A growing number of buyers are bidding on a tight supply of homes. The survey was released before the stock market opened.

Along with this morning’s action in stocks, Newtonian monetary physics hit treasurys, which followed the laws of gravity as U.S. government bond prices fell. As a result, investors continue to move money out of safe assets and into riskier ones, something they’ve been doing since at least the beginning of 2013, which is precisely what the Fed clearly wants.

The yield on the 10-year Treasury note has climbed its highest level in more than a year, jumping to 2.11 percent from 2.01 percent late Friday. Markets were closed yesterday for the designated Memorial Day.

Meanwhile, back on Wall Street, the Dow Jones industrial average climbed as high as 210 points during this morning’s trading as traders returned from the Memorial Day holiday. This follows a gloomy lead-up to this popular getaway opportunity on Wall Street last week.

Stocks extended their gains after the Conference Board reported at 10 a.m. that its measure of consumer confidence rose in May to its highest level since February 2008.

The Dow was up 192 points, or 1.3 percent, to 15,494 as of 11 a.m. Eastern Daylight Time. The S&P 500 index rose 19 points, or 1.2 percent, to 1,669.

Traders were also encouraged by gains in overseas markets

The Dow has advanced 18.2 percent this year and the S&P 500 index in 17 percent higher as investors have piled into stocks. The Nasdaq composite index climbed 44 points, or 1.6 percent, to 3,514.

In addition to the housing market recovery, stocks are also rising this year because of optimism that the economy is gathering strength as hiring picks up. Record company earnings and stimulus from the Federal Reserve have also helped send stocks higher.

We continue to remain nervous in spite of the fact we’re also beginning to look rather foolish as the Fed continues to feed the stock market which is devouring the free cash at a more impressive pace than Audrey II can lap up the blood and guts of her hapless victims, all of whom grossly underestimate the voraciousness of The Plant That Will Not Die.

We’ll keep all our blood—and most of our cash—on the side now. Maybe if the market pops up even higher on June 1, we’ll throw in the towel on our bearish inclinations and stop fighting the Fed, which the late Marty Zweig always taught us to do. But until then….

     —AP contributed to this report

Today’s trades

No specific recommendations today, except this one. Reluctantly, we’re lightening up considerably on our beloved, high-yielding mortgage REITs. They’ve been under attack for some time now, and there’s no point in sustaining capital losses just for the high yields.

These yields clearly will trend lower over time, but not tomorrow, largely due to the combined effects of mortgage refinancings and new mortgages at dramatically lower rates. Both will combine to bring down yields over time.

On one hand, there’s no hurry to get out here. But, on the other, since the fat cats have obviously decided now to chase capital gains potential rather than enjoy relative yield certainty, we need to get out of their way before we get stomped, though we will likely re-enter later at lower prices when all this nonsense has been completed.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17

 


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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