Friday, February 16, 2007

Markets Rally Late, Dow Sets Another New High

US indices spent most of Friday trading in the negative, but the Dow got just enough of late activity to boost it to another closing high - the third in a row.

DJIA: 12,767.57 Up 2.56; Nasdaq: 2,496.31 Down 0.79; S&P 500 1,455.54 Down 1.27.

On a day that was altogether lethargic, the averages managed to just barely hold their own. News from the housing market was the only notable piece, with a 14.1% decline in January housing the headline.

Despite what some experts may be saying, the long, slow decline in housing starts, median prices and overall prices and the antecedent rise in mortgage delinquencies is only gathering momentum. Housing prices over the last 10 years had grown out of the reach of most Americans and a readjustment is necessary. There's going to be much more pain down the road to suburbia in coming months and years, with massive failure of a lender or two the culmination.

An environment wherein a two-earner family with a gross income of $90,000 thinks seriously about trading up to a $500,000 home simply cannot sustain itself. Sooner or later, prices cool, speculators back out, deals are undersubscribed and the whole thing goes bust. That's exactly what's occurring in South Florida especially and elsewhere to a lesser extent. Markets in Las Vegas, parts of California and the Northeast corridor have already been cooling down for the last six months to a year. The trend will spread, the herd will thin and all of a sudden - over a period of 2-3 years - you've got a buyer's market. That's where we're headed.

A bust in the housing market isn't going to affect the investor class much, however, unless people begin cashing in 401k's to make the mortgage payments. A more likely occurrence is that municipalities will face the untidy prospect of seeing tax revenues truncated under the auspices of the highly-popular-but-fiscally-unsupportable market value assessments. It's a nightmare for tax districts large and small, and it's coming fast.

Another good week for stocks ends with this cheery note: crude oil rose $1.40 on Friday to close at $59.39. $60/bbl. still looks like a short term top. Pitchers and catchers reported for Spring training this week. Spring is just around the corner.

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