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Wednesday, July 18, 2012

Housing Starts, Banks Sending Misleading Signals on the Economy

We're all looking for some good news out there. So sometimes we see it where it ain't. A colleague of mine sent me this article authored by no less than the famous Jim Cramer of CNBC.
An astounding read on housing 
A report from Wells Fargo reveals a booming mortgage business -- and a U.S. economy in fine shape. 
By Jim Cramer Mon 9:22 AM 
If you took the time out to read the report of Wells Fargo (WFC -0.72%) -- and, believe me, there was time to do it -- you would have been pretty much stunned at how much business it's doing and at how strong the mortgage business is in the U.S. Put the following facts in perspective from a company that has more than 30% of the mortgage market in this country. 
  • Mortgage business revenue was up 90% from a year earlier and 11% from the prior quarter. 
  • Revenue from refinancing was up more than $19 billion, or 43%, from the first quarter, "indicating continued strength in the overall housing market, where we see increases in sales and pricing in markets throughout the country, even some of the hardest hit areas during the slowdown," according to CEO John Stumpf. 
  • A 31% increase was achieved in commercial loan growth, through portfolio acquisitions and organically increased credit card penetration. 
  • Credit quality continued to improve, with the charge-off ratio declining to 1.15%, the lowest since 2007. 
  • Nonperforming assets declined by $1.8 billion from the first quarter, down 11% from a year earlier. 
  • Record net income rose by 17%, with earnings per share up 17% from a year earlier. "Mortgage volumes have been much stronger than anyone expected a year ago or even three months ago, for that matter, with originations more than double where they were a year ago, and our mortgage pipeline, which should lead to future revenue and expense growth, has also doubled," according to CFO Timothy Sloan. 
These are astounding numbers. They're the kinds of numbers that signal a gathering strength in housing, something that few people expected and fewer still had thought possible, given that the economy was supposed to have hit a wall a few months ago.
 - MSN Money

My response to my hopeful colleague was this...

I think he's wrong...look at his bullets. The first two are just saying that whoever can still qualify to re-finance or purchase an investment property is doing so now, because rates will never get lower. The third bullet has nothing to do with housing. Bullets 4 and 5 just reflect that the higher-risk loans are being gradually replaced with current loans being given only the those with money and perfect credit. Bullet 6 reflects this and as a result, the bank is making more money.


The bank is cleaning up its loan portfolio by virtue of the minority of folks who have money and credit. That's a far cry from reflecting a "gathering strength in housing".  Cramer's confusing bank profits with housing strength...not the same thing.


My outlook is more in line with this article...


Analysis: In the U.S. housing market, recovery or Lost Decade?


Thanks, will make another great blog post....


cdr

Today brought more reason to mistakenly think the worse may be over...housing starts were up in June.

June U.S. housing starts up 6.9% to highest level in four years

But considering that housing permits were up in May, this was no surprise. And since housing permits are down in June, I guess we will be hearing next month that housing starts were "unexpectedly" down in July.

Yesterday, Mr. Bernanke was morose in his testimony to Congress on the economy, and Mr. Geithner admitted today in an interview by Larry Kudlow at the Delivering Alpha conference of big investors that the economy today is much slower than at the end of last year. And that the solution is...to "govern" and raise taxes when it is politically unpopular, so that more economic incentive programs can be funded.

Which brings us around to NYU economics Professor Nouriel Roubini in a recent interview on the state of the global economy and how it will impact America. You may notice that he touches on many of the same "spike" factors I touched on in my January forecast of global lumber prices...Middle East volatility, oil prices, their impact on Europe and China, and their link to our economy.



Don't be misled by the misdirection of current news reporting. The long-term trend is still stagnant, and foreboding unresolved issues lie ahead. Hope for the best, and plan for the other.

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