Saturday, March 28, 2009

Evaluation of Market Bottoming Evidence

The most recent chatter concerning evidence of a market bottoming pattern is widespread in nature, occurring in both financial and traditional media outlets. The impetus for this new found optimism was the release of several economic data points throughout the past week, and subsequent media analysis of the chart pattern formed by the inclusion of these data points. We will first offer an assessment of the data itself, followed by our observations concerning the individuals who are aggressively promoting this new economic storyline.

The two data points that are most widely cited as evidence of a market bottom are new orders for durable goods and existing home sales. The durable goods data is notoriously volatile, and thus we will not pass any judgment until at least four additional months of data are available. The trend in existing home sales however, has the ability to offer a bit of insight. More importantly than the headline data figure, we think, is the fact that approximately 40% of these sales involve a distressed property. This is actually to be expected, and provides evidence that the Market is working to clear the inventory of foreclosures, a prerequisite for any sustainable recovery. Sales of existing homes will likely continue to rise in the coming months, until at least, the Government's refinancing and foreclosure prevention efforts begin to work their way into the economic data. We expect these efforts to slow the intensity of foreclosures at any given point in time, although the total volume will remain relatively unchanged. Ultimately however, the level of existing home sales does not serve as an indicator as to the extent of deterioration in the underlying collateral of the securitized pools of mortgages that continue to rot the financial system from within.

As for the "pushers" of this new bottoming theory, we are not surprised to see that the chief proponents are none other than the usual Wall Street asset managers, who are unashamedly attempting to lure the public back into stock related investments. This is, and has always been, the Name of the Game. Sphere: Related Content

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