Does Weakness In Housing Threaten The Economy?

Georg Vrba: buy signal next month . Stay tuned!

RecessionAlert: Sees improvement in leading indicators for US growth, while highlighting danger areas worth monitoring. See the article for detailed charts on each indicator.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI, you should be reading this update. Doug also has updated the big four indicators important to the NBER in recession dating. Everything except employment is showing a decline – small so far. This is the single best summary of concurrent indicators, so join me in watching it closely.

Matt Busigin has a first-rate analysis of the employment situation , covering many topics with special insight and better use of data. I have followed employment data carefully for many years and I am not easily impressed. This is really good! He covers plenty of news you can use:

• Household versus payroll surveys – the picture is better than we think
• The reality of labor force participation
• We only need job growth of 67K per month to maintain the current unemployment rate
• How much unemployment is structural
• Could the Fed respond to a tight labor market faster? Much faster…

This is a very big week for data.

The "A List" includes the following:

• Michigan Sentiment (F). This has extra importance when we are seeking a better read on employment and spending.
• Consumer confidence (T). Same idea as the Michigan survey.
• Initial jobless claims (Th). Continues to be the best concurrent information on jobs.
• New Home Sales (W). Housing remains crucial for the economic recovery.

The "B List" includes:

• Case-Shiller home prices (T). Seems to lag other price indicators, but widely followed.
• Durable goods (Th). January data, relevant to those monitoring GDP.
• Pending home sales (F). All things housing are important.
• Chicago PMI (F). This is always especially important when the calendar delivers it on a Friday and the National ISM comes the next week --- with employment Friday just ahead.

I am not very interested in the GDP revisions. While this provides a base for future measures, it is "old news" for investors. The conclusion of Yellen's "Humphrey-Hawkins" testimony, to use the old name, is now scheduled for Thursday morning. This is probably an all-time record between the House and Senate versions. While the statement will remain the same, we can expect the Senate members to raise some interesting new questions, especially about weather effects and the possible impact on tapering.

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a "one size fits all" approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Last week Felix made a dramatic switch from neutral to bullish adding trading positions throughout the week. That has worked pretty well. We remain fully invested and there are many sectors that might emerge from the penalty box. It has been a challenging few weeks for traders. While Felix does not anticipate market tops and bottoms, it was a nice mix of risk and reward.

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current "actionable investment advice" is summarized here .

This is still an important time for long-term investors. We all know that market corrections of 15% or so occur regularly without any special provocation. Recent years have been the exception. Over the last several weeks I have emphasized the need to maintain perspective, using market declines to add to positions. (It helps if you have been actively rebalancing your portfolio and trimming winners. Then you have some cash). I have also highlighted some of the best advice. Here are highlights from this week:

• Why you should emphasize process rather than outcomes. This is probably the biggest single investor mistake – going for the "hot hand." Barry Ritholtz offers some questions you should ask before evaluating investment returns. He has some interesting football analogies. I strongly agree with the thesis. You need to have a proven process and maintain confidence. Otherwise, you will always sell at the wrong times. It is a foundation of our methods.
• Why liquidity can be your downfall. Warren Buffett explains why you should usually ignore the market noise about your stocks. I agree. I always have target prices for new buys on my watch list and sales of current holdings if there is an attractive offer. It is infrequent trading, but it is not "buy and hold." Here is how Mr. B puts it:

  "If a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited," Mr. Buffett wrote. "If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming."

  That's not how equity holders often react, Mr. Buffett said.

  "Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally," he wrote. "Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments."

• Beware of the profit margin argument. You know. That claim that the market is about to crash because profits are not "normalized." This is an unending, multi-year theme from those who expect a fast market decline. Each year I try to explain why this reasoning is misguided – based on an overly-simplistic bivariate view of the economy. Each year the people in the comments tell me that I am wrong. Here is my most recent effort . I think that profits will "mean revert" but that many other good things will happen at the same time.

And finally, we have collected some of our recent recommendations in a new investor resource page -- a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love feedback).

The market has now demonstrated renewed resilience, but no one knows for sure about corrections. For the average investor this is not the right question. It is more important to focus on fundamentals – the economy, earnings, and the risk of recession. These factors are all encouraging.

I have a special respect for Calculated Risk on housing issues. Bill was accurate on the factors in housing and mortgage markets in the pre-crash era. He has earned a widespread respect among professional economists as he has broadened his commentary and analysis.

I suspect that some of his early followers have moved on as his commentary as become (quite accurately) more bullish. This is especially unpopular right now – both politically and in the popular market media. It is not the path to page views.

Since housing is very important for the economy, I am watching closely. Most casual observers focus on foreclosures and "shadow supply" which ignoring the "shadow demand." These kids cannot live in the basement forever!

Written By: Jeff Miller