We Can Work It Out

Today's Pending Home sales report was an example of capitalism at work. Today's data indicated that depressed home prices helped to bring buyers in off the sidelines. Imagine that. When home prices are permitted to adjust (fall) to levels at which home buying becomes an attractive proposition, those who can get approved for mortgages enter or re-enter the market.

This is something I have written about several times before. However, I stated that if home prices would have been permitted to adjust (fall) to levels which prospective buyers would be incentivized to re-enter the housing market AND if this was permitted to occur unabated the pool of potential buyers would probably have been larger. This is because lending would not have frozen the way it had following misguided attempts to avoid the inevitable correction. Housing price corrections due to delinquencies, defaults and the reigning in of easy lending policies is an efficient way of shifting real estate from those who cannot afford certain properties and to those who can. They also reset prices to levels more indicative of fundamental supply and demand rather than inflated prices due to irresponsible and "creative" lending.

Americans are funny people, they want affordable housing and yet they want their home values to rise. They want social security to be there and to provide meaningful retirement benefits yet they are resistant to any real reform. Now from the auto industry comes the news that The Detroit Three experienced year-over-year sales increases while Toyota and Honda experienced sales declines of over 40% each on a year-over-year basis. So much for Americans being sick of gas guzzlers. Americans (by and large) will purchase the most powerful, the most comfortable and the most enjoyable vehicles which gasoline prices allow. Obama Motors executives should take heed. Car buyers should also pay attention to fuel prices as speculation of a weaker dollar due to increased debt and the monetization of that debt (and some speculators with overly rosy economic views) have oil prices on the rise.

About treasury yields. Long-term yields have been rising and will probably continue to rise for a while, but bond bears should manage their expectations. There are forces (foreign buyers, lack if core inflation pressures and eventual Fed policy) which will keep long-term rates from spiraling out of control. However, the Fed is not close to taking away its short-term stimulus (low Fed Funds and Discount rates along with a myriad of programs to spur interbank lending). The economic recovery is on life support and removing the stimulus would be like pulling the plug.

I have had many questions regarding the details of the BAC preferred exchange. I detailed the exchange a few days ago on this blog. I have been informed that Morgan Stanley's preferred desk published an internal report detailing the exchange and even includes desk market opinion. It is nice to know that some firms still know how to conduct themselves well.