Crosscurrents May 26/05
May 26/05
by Alan M. Newman
Our colleague Jim Bianco (www.biancoresearch.com),
has repeatedly made the point that if there is a bubble in housing, it
is not likely to bust while every day all you see are repeated mentions
of a housing bubble. As with the mania in stocks, it is only when
everyone says (and believes) "this time it's different," that the whole
shebang just goes kerplop. Interestingly and ironically, Marketwatch's
Mark Hulbert just wrote about the real housing bubble, exposed in a study
by Yale's Robert Shiller. The economics professor found that until
2002, the phrase "housing bubble" was hardly ever mentioned in the pages
of major U.S. newspapers. At that point, the number began to surge
upwards like any of the internet or techie darlings during the heyday
of the mania. According to Hulbert's story, "....a graph plotting
the number of mentions of 'housing bubble' over the last 30 years shows
all the telltale signs of a bubble -- a long relatively horizontal line
followed by a huge spike upwards." This is in stark contrast to
the stock mania that commenced in the late 1990s, where there were almost
no mentions of a stock bubble and instead, usually only oft repeated beliefs
that prices could surge almost endlessly higher. Importantly, Shiller
claimed that "relative value" was a very important consideration, rather
than a black and white categorization of a housing bubble, saying "I think
most of us can agree that real estate in certain parts of the country
is more overvalued (or less undervalued) than in others." Amen!
Given that the ten most undervalued of the 99 locales examined in our
February 28th issue were undervalued by 16.3% and that the average overvaluation
of all 99 locales was a paltry 2.8%, we believe the premise of a bubble
is somewhat mistaken and if anything, hastily judged. According
to data provided by the Office of Federal Housing Enterprise Oversight,
average price gains in the last five years amount to 102.4% for California,
75% for Florida, and 68.9% for New York; and all three states have been
labeled as bubbles. By comparison, in the last five years of the
stock market mania, Nasdaq surged more than six-fold! Ironically,
David Wessel's WSJ article last week claimed the Fed was now on the worry
track. The story featured a chart showing year-over-year price changes
for housing from 1985. Prices increased to near 9% in 1987 then
slackened to just below zero by 1991. The pace of increases then
picked up from 1993, rising steadily to roughly 10% last year. Huh.
Yawn. Meanwhile, forget Nasdaq. The Fed stood by and did nothing
as the Dow averaged (yes, we said averaged) 11.7% gains for all of the
years between 1985 and 2004.
CNBC's Ron Insana recently interviewed Sam Zell, the
country's largest landlord, with 128 million square feet of office space
and 225,000 apartments. Responding to a question regarding the existence
of a bubble, Zell said, "The constant conversation about the single-family
home market is misleading. I can't help but compare it to the single-family
home market everywhere else in the world. And when you look at it in that
context, this market is still very cheap relative to the rest of the world.
I don't really think that there's a bubble in the single-family market."
And at the famed Milken Institute Global Conference recently held in Los Angeles, some of the best real estate minds in the country including Zell, concluded that although prices had soared in certain high profile markets, such as California, real estate is a local business and many markets have been experiencing only very modest growth. Zell also commented that the only bubble was the one that existed in the media.
Still, there is no question that the most overvalued
markets (i.e., such as Chico, CA - overvalued by 43%) are at best, approaching
bubble territory. However, the inevitable price corrections, will
very likely be limited to those areas that are grossly overpriced and
will not necessarily affect your own locale. By comparison, the
bursting of the stock market bubble affected practically all investors.
Housing price corrections, like stock market corrections, are not rare
events. That such corrections may be on the horizon for overvalued
locales does not a mania make.
We last covered insider activity in the top
ten Nasdaq issues back on September 7, 2004. At that time, we concluded
that insiders were revulsed by their own stock, since there were 18 sellers
for every buyer. We also concluded these companies were collectively
and massively overvalued. What has changed in the last eight months?
Insiders have become far more active as sellers, indicating revulsion
on one of the largest scales we have ever tracked. The seller-buyer
ratio has ballooned to 31.6 to 1 and the absolute number of 284 sellers
is the most we have ever recorded. Just for kicks, we'll tell you
that the ratio of shares sold to shares purchased was better than usual
at 375 to 1 but let us not leave out that 90% of shares purchased were
at one company; Microsoft. Sans "Softee" in the calculation, the
ratio soars to 1816 to 1. The average P/E multiple for the group
has fallen nicely to 29.3, under the 30 mark for the first time in recent
memory, but still extremely high for a group whose best earnings and revenue
growth rates are probably in the past. Total market capitalization
now stands at $921 billion, up 7% from last September and is equal to
exactly one-sixteenth of the entire U.S. stock market. The average
price-to-sales ratio of 5.6 is enormous, compared to the other 15/16ths
of the U.S. market. Despite the obvious overvaluation, the group
is still quite popular due to their inclusion in the QQQQ Trust, probably
the most heavily traded equity entity of all time. The group comprises
39.2% of the trust, which trades an average of nearly 100 million shares
per day, roughly $3.5 billion worth. While it may be that sellers
are simply taking their proceeds and buying shares in the other nine constituents,
we doubt it. The evidence is quite compelling. Insider activity
says these shares are grossly overvalued.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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