Friday, August 23, 2013

Friday Wrap: New Home Sales Plummet; Stocks Thin Trade Up; Joe Cocker's Response?

Where we are, it's a beautiful summer day. Crickets are chirping, bees buzzing, birds singing, everything is green and red and gold, warm and wonderful.

Speaking of gold, what was that spike just after 10:00 am, all about? Oh, housing. Yes. New home sales fell by 13% in July, due - according to most usually-misinformed experts - mainly to rising interest rates. It was the lowest level of sales in nine months. Additionally, June figures were revised dramatically lower.

Well, OK, so new homes, already overvalued and, like new cars, worth less than what you paid (and will be paying for 30 years) the moment you walk in the front door for the first time, aren't such a bargain anymore. But why does that affect the price of gold? And, concomitantly, why did interest rates dip at the same time?

Maybe because the economy isn't as good as the doves at the Fed would like us to believe. They still think there's a good chance that they can stop stimulating the economy in September, or maybe October, or, or, or... maybe some day, without crashing the market. And that leads some people to run for safety, in things they can actually touch and feel and believe are undervalued, like gold (and silver, which was up big again today), or to bonds, which are traditionally safer investments than stocks (we'll reserve judgement on that one for now).

Stocks were higher at the close today, but, despite today's thinly-traded silliness, the Dow ended the week down 71 points, the NASDAQ (even being closed half the day yesterday) was still up 55 points (bubble?), and the S&P gained 7.62. Pretty much, the week was a non-event. That's three down weeks in a row for the Dow, and a little bit of a break for the S&P and NASDAQ, down the previous two weeks.

As for the Fed, all they need is some solid economic data that shows the US (and by proxy, the global) economy is healing nicely, or "recovering" as they say, but, like a wounded patient, recovery is an empirical event, one which can be seen, not hocus-pocus numerology or fantasy ripped from the headlines. It is a phenomenon which can be observed. The gal with the broken leg takes off the cast and walks again. The guy who had a heart attack can do jumping jacks or go jogging. That's what recovery looks like.

If the US economy was a patient with an illness, it would have been flat on its back, probably on an operating table, back in 2008-09. Since then, it has been pumped full of fluids, fitted with prosthetics and taken from critical condition to "under observation." Take away the fake limbs and it can't walk or feed itself. Cut off the fluids and the patient will atrophy and die.

That's why the Fed can't taper in September. The patient is still too weak and has been propped up by artificial means (QE and ZIRP). Take those away and the patient will relapse, but, the Fed may give it a go anyway, despite strong empiricial evidence that it is the wrong course of action. That's what the Fed does best - hard to believe from people who are supposed to be smart; they usually make bad moves.

In the end, there will be pain, despite or in response to whatever the Federal reserve does. The economy remains weak and may actually be getting weaker. If they start trimming their bond purchases, it most certainly will not improve, prompting what we think may be the appropriate response for all of us, courtesy of Joe Cocker, from Woodstock, way, way, way back in 1969:

Dow 15,010.36, +46.62 (0.31%)
NASDAQ 3,657.79, +19.08 (0.52%)
S&P 500 1,663.47, +6.51 (0.39%)
NYSE Composite 9,474.75, +48.97 (0.52%)
NASDAQ Volume 1,453,646,250
NYSE Volume 2,586,104,750
Combined NYSE & NASDAQ Advance - Decline: 4141-2401
Combined NYSE & NASDAQ New highs - New lows: 156-52
WTI crude oil: 106.42, +1.39
Gold: 1,395.80, +25.00
Silver: 23.74, +0.703

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