TOPPY MARKET

The market got ahead of itself for a few hours today. At 3:05 it has pulled back a bit; the Dow is now up 44, the NAS up 10, and the S&P up 6. The long bond is another big winner today. The ten year rate is hovering around 3.91%.

Housing prices can soar again as mortgage rates adjust downward. The prime selling season is upon us and lower interest costs just boosted the affordability. New construction costs have soared. Builders are actually getting squeezed a little. Hovnanian (HOV) reported lower guidance and was hammered. Local builders in the Winston-Salem area report higher costs including land and materials. Builders now shy from building a house at a contract price.

Oil jumped up mid day and took the market down a good notch. This market is like a schizophrenic who can change from Mr. Inflation to Mr. Deflation in a heart beat. The market is frothy after a very solid run, however, it keeps bouncing off the tests. The NAS is now up 12 and the Dow is up 54. Ten year bonds at 3.91% gives little competition to stocks and the talking heads are spewing out fear talk in relation to real estate.

One of the numbers sited is that 26% of homes are now being purchased by speculators. This is like saying that the majority of beef cows brought to slaughter are bought by speculators. The pin hookers that buy the cows from the farmers provide a service. Speculators who have realized that baby boomers are ready to buy second homes are providing a service to the home buyers.

After the real estate bubble of the 80's, restrictive lending rules were put in place. Builders cannot build high rise resort condominium towers until more than 60 or 70% of the units are sold. Speculators who sign binding purchase contracts are in effect providing letters of credit for the builder. The eventual buyer of the property buys from the speculator not from the builder.

Real estate is not in a bubble because real demand for second homes is still very high. Speculators are involved and eventually buildings will be built for which there is no demand. That time is at least another year or two away.

Comparing to the 1980's cycle; construction was very heavy in 1985; there was talk of a bubble, sales were very strong in 1985 and 1986; long interest rates bottomed November 1986, sales were strong through the first 9 months of 1987, the stock market soared 40% in the first 9 months of 1987, the FOMC raised short rates dramatically during the summer and early fall of 1987, on October 19, 1987 the stock market plummeted, short rates were dropped, the stock market recovered nicely and ended the year of 1987 about where it started, housing prices were weak from October 1987 until the economic recovery of 1991.

If this cycle follows the same general path, the top in the housing market will come long after the bottom in long-term bond rates (mortgage rates). Why would the housing market stop doing well while lower mortgage rates are available?

The talk about a flat tax is enough to scare a home buyer, but most home-buyers will pay little attention to what is being said in congress. I remain skeptical about the flat tax. It would be good for the country but hard to pass.

Stock investors tend to over analyse. The facts are very simple. Stocks are cheap relative to bonds and real estate and smart money always flows to where it gets paid the most.

BUY THE BIG BULL MARKET! IT WILL BE TOPPY AT TIMES BUT SO WHAT! NO ONE IS REALLY GOOD AT TRADING OUT AND IN SHORT TERM! PLAY THE BIG MOVE WHICH HAS AT LEAST 9 MONTHS TO GO!