Housing Market Recovery?

“Shadow inventory” is considered the number of homes that are either in foreclosure or likely to end up in foreclosure held on banks’ balance sheets.  This inventory creates substantial pressure on housing prices and potential losses to banks.   If the number is manageable, it usually means waiting for the market to digest the overhang. But if shadow inventory is large, housing prices could experience further declines before they hit bottom, which of course has dire consequences for communities, homeowners, and the economy.

Estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely.  Current estimates vary from 1.6 million to 8.2 million homes, depending on which database of loans and criteria are used to determine possible foreclosure rates.  Mostly likely, the shadow inventory is probably in the range of the numbers above. Regardless of the actual number, the sooner this inventory gets worked through the system, the sooner we will see an improvement in the housing market and the broader economy.

While the actual shadow inventory numbers are a wild card in the housing recovery, we may be starting to see the first signs of the housing market stabilizing.  While sales of homes are still historically very low, regular housing inventory is on the decline and fell to its lowest level since March 2005 in December 2011, according to NAR.  The NAR reported inventory fell to 2.31 million in January. This is down 21% from January 2011. This decline in inventory was a significant story in 2011 and may continue to accelerate in 2012.  In addition, total existing home sales increased 4.3% in January from December and are slightly about the January 2011 figures.

It may be that we are finally starting to see stabilization in home prices and a meaningful decline in inventory; which is the first phase to a lasting housing market recovery.

That Was Then, And This Is ???

We would like to just point out the fact that so far this year, the stock market’s performance has a strikingly close resemblance to the performance it had this time last year. In both years, the SPY (S&P 500) began at 1257. Last year, the market gained 6.8% to a peak on February 18 at 1343. Bullish investor sentiment reached a peak of 51.5% during the month according to the American Association of Individual Investors (AAII). Similarly this year, the stock market has gained 6.8% YTD to close on February 15 at 1343 on the S&P 500. Bullish investor sentiment recently peaked at 51.6% during the month according to the latest data from the AAII.

In 2011, the stock market faced problems in late February due to a variety of circumstances. There was widespread social unrest in Libya and Egypt, an earthquake and devastating tsunami in Japan, political gridlock on raising the debt ceiling, and a European crisis that added to the abundance of “headline risk,” (which we spoke about in October). This led to a “risk off” scenario that resulted in drastically lower stock prices and a volatile trading range from early August to the end of the year. To sum this all up, we think it is safe to say that there still exist plenty of political, global, and natural risks apparent in today’s landscape. But much of the market behavior seems to be more influenced by political factors and unforeseen events rather than your basic macro-economic data and corporate earnings. Barring any catastrophic or too many unforeseen events, are we back to climbing a new wall of worry? We will likely know in the coming weeks.

2012 Annual Limits and Tax Information

The latest update to the annual limits as well as relevant tax information is now available.  The link below will take you to a PDF file with all the updates, including info on 401k deductions, Medicare, tax brackets, social security, as well as the latest estate tax exemptions.  


http://www.cffpinfo.com/pdfs/2012_AnnualLimits.pdf

The January Effect

Here is an interesting article by Steven Russolillo from the Wall Street Journal. It focuses on the January effect and some of the correlations between the first month of the new year vs. what we might expect for the rest of 2012.

The Dow Jones Industrial Average surged 415.35 points, or 3.4%, last month. It was the biggest January point gain in the Dow’s history and best percentage surge since 1997. The numbers look even better for the S&P 500 and Nasdaq
Composite. The S&P 500 jumped 4.4% last month, its biggest gain since 1997. And the tech-heavy Nasdaq advanced 8%, registering its best performance since 2001.

A majority of the January gains were accomplished in the first three weeks of the month, as stocks have leveled off during the past week. Skeptics say there’s not much justification for following the “January effect.” Just because the market moves a certain way in the first month of a calendar year shouldn’t necessary translate into future direction over the next 11 months. But for whatever reason, it’s hard to deny the pattern. The blue-chip Dow has matched the direction of the January performance in 85 of 114 years of the Dow’s history, according to WSJ Market Data Group, good for a 75% success rate. On top of that, when the Dow finished January with a gain, it ended the full year higher 82% of the time, according to WSJ data. When the Dow has risen in January during the years dating back to 1970, the rest of the year has followed suit 92% of the time.

Now that we’ve laid out all the bullish arguments, there are several caveats to consider. History isn’t always an accurate assessment of future performance. And this theory fails to take into account current market fundamentals. While 2012 has started strong, the rally has also shown signs of vulnerability. The Dow’s four-day losing streak is the longest skid since the end of November. About 1/3 of the price-weighted Dow’s monthly gain was concentrated in only one stock: Caterpillar. And Bank of America swiftly shifted from the Dow’s worst performer in 2011 to its top gainer last month, jumping 28%. Corporate earnings continue to be lackluster and Europe’s sovereign-debt crisis has the potential of flaring up at any given moment.

There are lots for investors to chew over in the coming days. And its worth noting that February is typically one of the worst months of the year for stocks. Investors will have to fight the seasonal tide if they want to push the market even higher. Since this post was heavily focused on the “January effect,” we’ll leave you with one final seasonal trend.

The Stock Trader’s Alamanc’s early 2012 indicators are a perfect three-for-three. The Santa Claus rally came to fruition. The “first five day” theory — which states the S&P 500 has never fallen in a year when the first five days see gains of 1.8% or more — was intact (the S&P 500 rose 1.8% in 2012′s first five trading days). And now the January barometer suggests future gains for the broad market. “Since 1950 this trifecta has occurred 27 times in 62 years,” according to the Almanac. “Full-year gains followed in 24 of the 26 previous occurrences, 92.3% of the time.”