Wednesday, May 14, 2008

Another Bad Month!

We got confirmation that the turn is here with the April numbers. April was a uneventful month weatherwise in most of the country, so the bulls couldn't use the snow as an excuse (except maybe in Alberta?).

I asked recently whether CREA was just making up bullish fantasy numbers as they almost ignored the huge drop off in the housing market when they revised their 2008 projections downward. They did drop their estimate of housing sales but they barely touched the all-important sales price increase (5.5% to 5.3%). I figured that since they wrote it on May 6th, they must have had at least some clue on the April numbers: Since March was up only 4% YoY, they must have seen at least some stabilization in the sales price increase to justify going with a 5.3% figure for the full year. I was thinking maybe a small uptick to 5% YoY in April...

Wrong! According to CREA's numbers, April saw a YoY increase of only 3.2%. The only good news for housing bulls was that the sales drop was only 6.1% (versus an 18% drop in March). New listings soared by 18%.

For sales to average an increase of 5.3%, we would have to get some 5-6% figures in the second half. That would require not only immediate stabilization in pricing but a pickup in price. With new listings picking up, people spending a fortune on gas and the economy slowing, good luck with that.

Let's see what May brings but I think a negative number is likely before the leaves turn this fall...

Tuesday, May 13, 2008

TSX hits a new high but vulnerable

I mentioned last month that the TSX was just a good day away from a new high. It took a little bit longer than a day but we finally got there on Monday. Oil and a select group of commodities hit new highs. Most commodities still remain below their Feb/March highs. The TSX also leveraged a strong bear market rally in the US (or a new bull market rally, only time will tell).

Gold has had a nice selloff here, but oil seems to me to be in either a huge speculative blow off phase or in a "peak oil" new paradigm. Once again, only time will tell.

I will repeat what I said last month:

"bubbles can persist for a long time, and perhaps I am way too early on this one.

What will be the catalyst?

One thing that can hurt commodities in the short run is a strong US dollar. The US dollar has become universally despised. If it can put a short/intermediate term bottom here versus the Euro and rally to 1.50-1.52, it could put a top in oil, gold and other commodities..."

Since I wrote that on April 21, the USD has rallied versus the Euro to 1.54 and a short/intermediate top has been put in for gold, silver and many other commodities. Oil has remained immune.

It bears repeating again: Just recognize that the TSX is not a very diversified index. 75% of the TSX in 3 groups (mining, oils and financials). There are 3 mega cap stocks in Toronto
(Encana, Potash and Research in Motion). We all remember what happened to the TSX (TSE back then) in the Nortel crash. This could be similar...

I believe that US financials are going to get uglier in 2008, and commodities are in some type of bubblish top here. Doing some back of the envelope calculations (assuming that the US is in recession and still in a bear market):

  • Say we get a 20% correction from record levels in energy and material stocks and a 10% hit to financials (near the March lows) and we keep everything else (including RIM) flat, that would translate into a 12,800 TSX (about 13% off current levels).

  • Say we get a 30% hit to energy/materials and 20% hit to the financials everything else, that would be an 11,000 TSX (25% off)

These are not outlandish scenarios in my book. If we get a typical 30% bear in the US and the commodity bubble bursts, I would expect the TSX to at least test the 11,000 level.

Keep these things in mind as we hit a new record...

Long SKF, HXD, QID

Tuesday, May 6, 2008

Are they just making this stuff up?

Is CREA just making this stuff up? Earlier in the year, they projected existing home sales to drop by only 1.6%. After some horrible March data, I mentioned that their numbers were fantasy.

Well, it appears that they agree. Today they chopped their numbers down big time.

From the CREA website:

National home sales are forecast to ease 11.5 per cent to 460,900 units in 2008,
and to ease a further four per cent the following year.

They increased their estimate of the sales drop from 1.6% to 11.5%. I think that when it is all said and done, 11.5% will seem low (there was a 13% drop in Q1 alone). But, OK, fine.

What about price? They had previously projected a price increase of 5.5%.

CREA says:
The MLS® residential average price is forecast to rise 5.3 per cent in 2008 and a
further 4.2 per cent next year, pushing prices to new heights.

So they did a decent cut to their sales numbers but barely touched the average price forecast! There will be approximately 50K less homes sold this year and perhaps 50K of extra inventory (than they forecasted just 3 months ago). They think that losing those 50K transactions will have no impact on selling prices and that home prices will still increase by a magical 5%. I see....

Since the average price increased by just 4% in March, they are basically saying that the huge slowdown in the housing market this winter will magically stabilize here. Even if you allow for the possibility that the February and March numbers were snow related, you would need to get a decent April number (ie 5%ish) to justify 5% for the full year. Since it is May 6th, I would imagine that CREA already has a reasonably accurate preliminary figure for April. Therefore, I would not be surprised to see a decent April number. This would do little to change the chain of events that I listed last month.



Thursday, May 1, 2008

Now, can we ask the question again?

I asked the question back in February: Did we go into recession in December?

I am still waiting for the G&M or Financial Post to ask this question.

Today we got news that February GDP was -0.2%. On April 1st, I stated that based on Dec-Jan data, it appears that the economy was basically going flat. So now we can make it 3 months of basically no growth.

Can we at least start to ask the question, and also ask: If we are at zero now, and then the housing bubble and commodity bubble only began to deflate in March, how do we avoid recession?

G&M? FP?

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