Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 7/21)

Editor’s Note: Liz Peek is a financial columnist.

Poor Henry Paulson!

Our tireless Treasury Secretary has been racing all over the country trying to restore confidence in the economy and seemed to be making some progress when Bam! Home sales resumed their death march and the stock market fell apart all over again. Sales of existing homes fell 2.6% in June to the lowest level in ten years, and are now running at a rate about one third below the high reached in the fall of 2005. Moreover, prices on homes dropped on average more than 6%, and mortgage applications, which are a leading indicator of future buying, also were off more than 6% in June.

The news disappointed investors, since some readings on the housing market in recent weeks suggested that we might be reaching the bottom. I don’t think the continuing slump is so surprising. In part because of all the hullabaloo about mortgage giants Fannie Mae and Freddie Mac, mortgage rates have been moving slightly higher, and in fact last week were at the highest level of the past year. Consumers are pretty smart. If the cost of money goes up, they will spend less on a new home. And we’re certainly in one of those periods where it pays to wait.

The good news here is that the large housing package that provides a Treasury backstop for the GSEs (Fannie and Freddie) and some support for those trying to keep their homes is speeding through Congress. (That is certainly an expression I don’t often use!) The bill makes explicit what had been implicit – namely that the government would not let these companies fail. I think this was a totally necessary and helpful step; the GSEs have been the buyers of last resort in the mortgage markets and boy do we need them to provide liquidity to the markets now.

The financial stocks, which staged a dramatic bounce up (curiously just as the SEC announced a crackdown on so-called "naked short selling" which I wrote about last week), fell sharply yesterday on the housing news. There’s no doubt that the recovery in housing and financials go hand in hand. Yesterday’s drop was not helped by a gloomy projection from Bill Gross, a highly respected bond manager that works for PIMCO on the West Coast. He said that the financial sector would ultimately lose $1 trillion to the mortgage mess; unfortunately, the industry has only to date written off about half that amount.

The other bit of bad news that soured investor appetites was a bigger-than-expected rise in first-time unemployment claims, which came in at 406,000 for the week ending July 19. Some economists say that a reading above 400,000 means we are in a recession (not that anyone really doubts that). Of course, the worse the economy, the longer it will take to prop up the housing industry.

The bright spot this past week has been that softening economic expectations finally filtered through to oil traders. Almost overnight falling – yes, falling – demand for oil reined in the seemingly unstoppable march toward $150. The price yesterday bounced up to around $126, but was still off from the high of $147 earlier this month. A trade group reported that gasoline inventories were running about 20% above year-earlier levels – that has to depress prices. Natural gas prices have been walloped too. The Energy Information Administration reported a huge leap in gas inventories (up 84 billion cubic feet versus a more typical gain of 57 billion cubic feet).