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Five Things You Need to Know: "Home Sales May Have Reached a Low," Prays Author of "Why the Real Estate Boom Will Not Bust," The Mystery of Consumption, Is This Sustainable?, Now Everyone's a Quant, Closer to Reality


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. "Home Sales May Have Reached a Low"

Pending sales of U.S. existing homes rose by 4.3% in August, versus an expected rise of 0%, according to the National Association or Realtors.

  • While pending-home sales remain down 14.1% over the past year, the better-than-expected number was cause for rejoicing, at least among those with the largest stake (other than homeowners) in pending-home sales, realtors themselves.
  • "Our sense is that home sales may have reached a low in August," said David Lereah, chief economist and completely unbiased spokesperson for the National Association of Realtors who just coincidentally, purely as a matter of chance, happens to also be the author of a book titled "Why the Real Estate Boom Will Not Bust - And How You Can Profit from It: How to Build Wealth in Today's Expanding Real Estate Market," which is doubtless an even-handed view of today's housing market from someone who is merely observing it as an "economist" for the NAR and therefore a casual bystander with little if any stake in the perpetuation of the housing boom other than to just point it out to those of us who want to read a book about getting rich in real estate like everyone else.
  • Sales are recorded as "pending" when a sales contract is signed.
  • Typically it takes one to two months for the sale to close, where it is then recorded as officially sold.

2. The Mystery of Consumption

"A year into the housing market's slowdown, Americans have yet to snap shut their wallets, defying predictions that the cooling market would have a chilling effect on consumer spending," the Wall Street Journal announced over the weekend.

  • Despite plummeting home sales prices, this year consumers have increased their purchases of goods and services at an inflation-adjusted annual rate of more than 3%, the same as last year... and the same as the year before that. The question is, why?
  • According to the Journal, one explanation is low unemployment (4.7% nationally) and rising incomes (albeit modestly - see chart in Number 3, below).
  • As well, the Fed's Cathy Minehan last month said, "The run-up in housing values over the past several years did not spur much of a bigger-than-expected increase in consumer we wonder about how large a spending effect one should expect to accompany a fall in housing prices, if that were to occur."
  • Have patience.
  • We should know if Minehan is correct soon enough. Data developed by former Fed Chairman Alan Greenspan and Fed economist James Kennedy show that cash extracted vie cash-out refinancings and home equity lines was down sharply in the second quarter to an annual rate of $497 billion from a peak of $871 billion in Q3 2005, the WSJ said.
  • More likely, there has simply not been enough time passed between the cooling housing market and a subsequent decline in consumer spending coincident with a what the newspaper calls a "reverse wealth effect."

3. Is This Sustainable?

Personal Consumption Expenditures continue to hold firm...

... and Retail Sales and Food Services continue apace...

... even as Personal Income growth, although still positive month-over-month, has stagnated...

... and personal savings as a percentage of disposable personal income remains negative...

... and Existing-Home Sales have plummeted.

Is this situation sustainable? Probably not. So, what if the consumer does give up? Who will take up the spending slack? Here's one guess...

Federal outlays by category, 1950 to 2075 (projected) from the Congressional Budget Office

(As a percentage of GDP)
Source: Congressional Budget Office.

4. Now Everyone's a Quant

Back in the old days automatic quantitative trading programs exclusively belonged to mathematics PhD.'s at hedge funds and large institutions. Not anymore, the Wall Street Journal reports. Now Mr. Jones can run his own portfolio-based auto quant program!

  • Back in the day, "quantitative" strategies or "program trading" based on data-crunching was the stuff of large institutions and hedge funds, but now, according to the Wall Street Journal, a host of brokerage firms are starting to offer services like these to retail investors.
  • TD Ameritrade plans to start rolling out automated trading for its six million client accounts as soon as next month.
  • Fidelity Investments has rapidly enhanced its Wealth Lab Pro software, which lets users pick from about 1,000 "quantitative" strategies or program their own approaches using historical stock data and more than 600 market indicators, the newspaper said.
  • At TradeStation's brokerage unit, where automated trading already makes up a significant percentage of the business, trading is up 50% from last year and the average customer now buys and sells 47 times a month, the Journal reported.
  • On the one hand, quantitative strategies remove the emotion from decision-making by forcing us to count the data in front of us instead of relying on subjective measures.
  • However, it is possible to find any number of market relationships that may appear to be fruitful when counted, but which could be far riskier than we imagine. As Minyanville Professor Scott Reamer has noted on numerous occasions: correlation is not causation.

5. Now Closer to Reality

In the July 18 edition of Five Things we looked at the potential outcomes of a US government crackdown on the online gaming industry. Turns out, we are edging even closer to a potential 14.5-1 payout!

  • Legislation passed here on Friday would now outlaw the processing of bets taken on-line by banks and credit card companies.
  • The bill prohibits US gamblers from using credit cards, checks and electronic fund transfers to make online wagers.
  • UK gaming company stocks fell sharply on the news.

Potential Outcome of U.S. "crackdown" on Internet gambling.

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