Nomadic Stocks In Search of Recovery

The markets produced little more than white noise yesterday. Major indexes in the US closed within a fraction of a percent from where they began.

Stocks have been lollygagging for most of this year, wandering hither and thither like a donkey in the desert, without so much as a map or a compass to guide them. On the one hand, they have the interventionalists – whose very careers depend on a faux recovery magically morphing into something tangible, something buyable – pulling them in one direction. Then, on the other hand, they have the unrelenting natural forces of the market, pushing down on prices and squeezing the bejeezus out of growth potential. One gets the feeling that, if something doesn’t give way soon, this ass is going to die of thirst.

So what gives? Where is the recovery we were hearing so very much about until just a few weeks ago?

The papers tell us that investors are simply sitting on their hands, calmly awaiting the results of earnings season. Some outfits will miss forecasts by a penny and dive into the red. Others, craftier in the art of mainstream press prestidigitation, will beat expectations by the thinnest of margins and rocket into the evening news. In the grand scheme of things, however, even those numbers may still be considered noise. Companies can fiddle the digits to make them appear as they wish. Cut a few thousand employees and all of a sudden profits look a lot more impressive. Move a few other expenses off balance sheet…hire a crack PR team to put a positive spin on a dismal outlook…conveniently forget to foreclose on a bunch of bad loans…extend and pretend, as they say.

Unless you’re really looking at the fine print, and unless you have a reliable source giving you the real scoop, it’s almost impossible to pick a winner on this racetrack. And even if you do, who’s to say some Wall Street heavy hitter won’t be forced to unwind a sizable position on short notice, sending a good stock straight off to the glue factory?

But there are larger trends afoot, fellow reckoner. Real estate in the US, for instance, is still trying to find a market-clearing price. Inventories are swelling, including the ominous-sounding “shadow inventory” – properties that would-be sellers are holding back from the market in the hope they’ll fetch a better price down the road. And now we learn that the aftershocks of the subprime quake are beginning to ripple through the millionaire’s market. You might have seen this quote in yesterday’s issue, from The New York Times:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic…

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

Another report tells us there are around 7,000 unsold condos in downtown Miami, all just waiting for that special buyer. This, from Bloomberg:

…banks that financed the condo projects agreed to let developers slash sales prices by as much as 40 percent, said Peter Zalewski, a principal with consulting firm Condo Vultures LLC in Miami. That spurred demand from foreign buyers and all-cash investors, many of whom are renting out their units until prices rebound, he said.

The question, of course, is when will prices rebound? The truth is, nobody knows. Investors with short memories hope for a swift return to a property landscape in which people with no jobs and no visible income – “no-doc” loaners – moved into houses with Infinity Pools and granite countertops. When will we see that again? Maybe not for a long, long time. Maybe never. Moreover, we’d bet that, on a national scale, there are a lot more unsold condos and empty villas than there are all-cash investors. That, too, will continue to keep a lip on prices.

Maybe the foreigners will buy them up on the cheap, then? Well, them foreigners ’ave got problems of their own, sir…

We can probably count the Europeans out of the game for a little while, at least. Ratings agency Moody’s finally downgraded Portugal’s sovereign debt rating today, sparking fresh concerns about “contagion” of the continent’s ongoing crisis. The agency (which must fairly be in contention for the Christopher Columbus Award for discovering something a long time after a large number of people already knew about it) cited worsening public finances and weak growth outlook as the reason behind their knuckle-rap. Portugal’s government finances will continue to deteriorate for “at least another two to three years,” Moody’s team of clairvoyants announced.

Even without this entirely predictable wrinkle, European leaders appear committed to a path of austerity. Between national belt-tightening and the social unrest this balance sheet restoration will surely bring, we can’t foresee too many Spaniards or Greeks opting to relieve American developers of their obligations anytime soon.

So how about all those cashed-up Asian buyers? Your editor is in Beijing this week, on his second visit to China’s capital city. As you might expect, it’s pretty hard to get a grasp on what’s really going on here. Early this morning we took a taxicab to what we thought was going to be an old “Hutong” – traditionally some of the poorer areas of the city with narrow, snaking alleyways and, in recent years, very low cost housing for migrant workers from the provinces. After a 15-minute drive from our hotel, the taxi driver stopped in front of a shiny new shopping mall. “New China” was all he said before handing us the receipt.

We did manage to meet up with a Mandarin-speaking fellow reckoner in the afternoon, however, who was kind enough to gave us a quick tour around a bit of the “other” China. We’ll have more on that this weekend, when we’re safely beyond the bounds of the Great Firewall.

Joel Bowman
for The Daily Reckoning