Monday, May 07, 2007

Vacant Houses

Market Action:
The market probably shouldn’t have opened today, except for Alcoa (AA), the company that is buying another aluminum company, Alcan. Normally, this kind of move would put a bid under the company being bought, which it did, but it’s not supposed to put a bid under the company buying, but it did that. AA was up over 8% on the day and by itself giving the Dow nearly 25 points, about half of the total move. The trading for the rest of the market was pretty dull and the volume was light again, too.

The market seemed to be waiting for something on Monday and we think there are a few items it may be doing that. One is the earnings news expected out of CSCO on Tuesday and the other is the news out of the Fed on Wednesday. We think these two items are basically already known but the market is anticipating something else may happen, therefore the slowdown in trading on Monday.

There may be one other thing that the market is paying attention to and that is all of these big buyouts. Monday, AA proposed a buyout of Alcan and over the past few weeks we’ve seen some rather large companies in the news, like Dow Jones being bought out by Rupert Murdoch. Then this past weekend, Warren Buffet said he wants to buy a large company, in the neighborhood of $40 to $60 billion. We think all of this large company buyout talk is one reason for the Dow to be moving up, people anticipating which company will be bought out next.

As far as the Dow making yet another record high Monday, we continue to be amazed at the absence of sellers. We did note that not all stocks participated in Monday’s Dow advance. The NASDAQ Comp was down (the 100 was just slightly positive) and the RUT, the Russell 2000, ended lower. We realize that the market has done this type of thing before but we do think there is some reason for watching these signals.

The underlying strength of the market continues to wane and we keep watching it to see when the prices wane. We have held our breath far too long.

Real Estate, An ugly mess in housing:
We saw an article on CNN that gave us pause to reflect on what is going on in housing. The name of the article is “The ugly face of foreclosure” and maybe you saw it, too. The article mentioned the city of Cleveland and one of the neighborhoods, the Slavic Village—600 vacant and boarded up houses out of about 11,000. On some Pittsburg streets, every fifth or sixth house is boarded up. The article went on to say that some vacant houses are broken into and the copper plumbing is stolen and sometimes the aluminum siding is striped, both to be sold.

More from the article: Cities are having trouble fighting off problems because foreclosures cause tax collections to suffer. Now with home prices declining, home owners are requesting changes to their assessments, reducing them, so that tax collections are lower. This reduces the cities’ revenues and their ability to help these neighborhoods.

This real estate problem is not going away and is only getting worse. The economy will not be able to withstand the ultimate price that housing will extract from it without a recession or more. We admit that the timing of the effect on the market has eluded us but the event has only gotten closer, and the market advance has Not diminished it.

When someone says the government should bail out the poor people who have been taken advantage of by the subprime brokers or appraisers or bankers, we wonder why this was allowed to happen in the first place. If we can assess this problem building in front of our eyes, why did the Fed let this happen? Our simple answer is they were afraid to have a recession. They have tried to convince us, and maybe even themselves, that the business cycle is dead, meaning that we didn’t really have to have recessions anymore.

Easy credit is a way to postpone a recession and that’s exactly what has happened. Look what’s happened to the easy credit—foreclosures and the destruction of several neighborhoods in the country. What they have done is set us up for this devastating depression that is going on in the neighborhoods of many cities in the country.

This is not going to end pleasantly.

Dow Industrials: 13,312.97 +48.35
VIX: 13.15
HUI: 346.24
QQQQ: 46.63
QQQRS: 0.39 bid
QQQRT: 0.64 bid
RYVNX: 15.16
RYAIX: 20.41
RYCWX: 31.73
TLT: 88.84
BEGBX: 13.99

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