Market Talk

Before an afternoon pullback today, the Dow Industrials tapped their highest intraday level since before the anxious days prior to Lehman’s collapse.

Of course, markets were descending back then as storm clouds continued to darken, rather than ascending as they are now. While the financial system certainly appears to be on firmer footing than it was more than two years ago, two enormous burdens on the economy — unemployment and the weak housing sector — are actually in much worse shape. And don’t tell us the market is pricing in better times for housing and employment, because neither one shows much sign of any meaningful turnaround.

Consider this: Back in Sept ’08, the unemployment rate was an enviable (by today’s standards) 6.2%, with roughly 9.6 million people unemployed. There’s now 15.1 million jobless, up 57% — in a little more than two years. Forty-two percent of the jobless now — or 6.3 million — have been out of work for 27 weeks or more; back in Sept ’08 there were only two million out of work for that long, or 21% of those unemployed.

Now for some housing stats to consider — September 2008 existing home sales were originally reported at a 5.18M annual pace; the latest data from NAR showed October at 4.43M pace, down 14% from the pre-Lehman days. Meanwhile, housing starts for Sept 2008 ran at a 828,000 annual pace; in October this year, the pace was off 37% from back then, at 519,000.

Stocks are back to where they were 27 months ago, but the two most crucial pieces of a lasting economic expansion still in the dirt.

Make sure you listen closely for a hissing sound, citizens.

Those jobless claims this morning were a real bummer, for the stock market as well as the housing market. We break it down on today’s Market Talk, as well as deliver a little piece of good news too.

- China better have right intentions regarding its pledge for a stronger yuan. “The probability of a disastrous trade war will skyrocket if Congress believes they have been the victim of a classic bait and switch,” Tim Duy writes.

- “Adjustment in China and America will be slow, but that’s not unexpected or entirely a bad thing,” Ryan Avent notes at The Economist’s Free Exchange blog. “And the best news of all is that America and China have managed to arrive at this point without a major diplomatic fall-out.”

- Obama administration’s housing market stabilization efforts are yielding mixed results. Calculated Risk has the details.

- Digital music is a tough business to profit from, but MediaMemo blogger Peter Kafka says it still makes perfect sense for Google (GOOG) to jump in. A music store would enhance Android as well as give GOOG an “owned and operated destination” for music traffic. “My suggestion: Start simple. Copy iTunes’ pay-per-song model.”

- The fact that the “normally bank-friendly” Fed is pressing big banks to move faster in curbing risky pay practices is a step in the right direction, Yves Smith writes at naked capitalism. “Given [the Fed's] track record, I would not be terribly optimistic, but then again, I am surprised it has gone even this far. It would be great if it surprised me again.”

- May existing home sales dropped 2.2% to a 5.66M annual rate, well below the 5% rise to a 6.06M rate that economists were expecting. “We see more evidence that the next leg down in housing has begun,” Barry Ritholtz writes at The Big Picture.

- Investor sentiment can be a funny thing. “You couldn’t find a bull two weeks and eight percent ago but voila, as soon as the 200-day was captured and S&P 1115 traded underfoot, the equity enthusiasm was palpable, as evidenced by the recent collapse in volatility,” Todd Harrison says at Minyanville. “That’s the fatal flaw of technical analysis, right? Financial assets are ‘better’ higher and ‘worse’ lower, which is why I use them as a risk context rather than a catalyst.”

- Business Insider blogger Henry Blodget goes a bit sensationalistic in a recent post entitled “The Odds Are Increasing That Microsoft’s Business Will Collapse.” But in reality, Microsoft (MSFT) faces a “simple and less flashy situation,” BoomTown blogger Kara Swisher says.

- Looking for the important aspects to today’s existing home sales report? “The key is the inventory and months-of-supply, and if these two measures increase later this year as I expect, then there will be additional downward pressure on house prices,” Calculated Risk says.

- The IPO market never really made a comeback from the tech bubble a decade ago, and it’s telling that Facebook, Twitter and LinkedIn — some of the most successful tech companies right now — keep pushing off filing an IPO as long as possible, Eric Schoenfeld writes at TechCrunch.

The hot money’s been active in the home builders over the past year, but with the housing market starting to look weaker, with fears that a renewed drop is at hand, a volatile sector might get even more volatile. We look at that and give you an update on the yuan on today’s Markets Hub.

- Soon it might not be so easy to walk away. “It seems some banks have realized that they have made it too easy for borrowers to wash their hands of a bad home purchase, and they are pushing back,” FusionIQ CEO Barry Ritholtz says. “Don’t be surprised if this becomes a national trend. The next leg down in housing is upon us, and banks do not want to take the full hit for the losses.”

- Housing starts and new building permits last month show the recovery’s next phase won’t be a walk in the park. “The post-snapback period in the economy is history, replaced by the harder work of keeping the rebound in positive territory,” James Picerno writes at The Capital Spectator. “The numbers in May remind that the task ahead isn’t going to be easy.”

- “I will simply say this: free market capitalism hasn’t been allowed to dictate the process of price discovery for a long time as policymakers have attempted to engineer the business cycle,” Minyanville’s Todd Harrison says. “As we’ve learned before and as we’ll again see, it’s never wise to mess with Mother Nature.

- Ongoing chatter of a bailout for Spain is causing euro-zone debt worries to fester again. But even as the latest rumors look suspect, their mere existence is a cause for concern, FT’s Alphaville says. “The fact that the rumor is out there shows how vulnerable Spain is on the market at the moment,” blog says. Escalating bailout rumors amid repeated denials prompts the old saying: where there’s smoke, there’s fire.

- TechCrunch founding editor Michael Arrington may be ready to sell his blogging empire. According to TechFlash, Arrington hinted at an event yesterday that he was burned out and possibly looking to sell. “It has been five years, and I can tell you, I am ready,” he said.

- Twitter says the month of June has been its “worst month” since last October, based on a site stability and service outage perspective, and this will likely be a “rocky few weeks” amid increased web traffic due to the World Cup.

- “We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system,” Simon Johnson writes. “This can end only one way: badly.”

- S&P 500 broke above its 200-day moving average amid yesterday’s rally, Bespoke Investment Group notes, and the percentage of S&P 500 stocks trading above their 50-DMAs sits at 39%. “While not great, this reading indicates that the market has at least picked itself up out of the doldrums.”

- Citi’s halting certain foreclosures near the Gulf spill, WSJ reports. Citi announces a three-month suspension of foreclosure sales and notifications, effective from Thursday through Sept. 17. Citi expects about 1,000 borrowers to participate initially, but that number might increase.

- Rick Bookstaber sheds light on OTC derivatives and new financial legislation.

I'm sure I'll have no problem moving this sucker now.

Now we’ll get to the Journal story I wanted to point out to you. We made the point this week that what you are starting to see in the economy, in the stock market, is the fading of government and central bank stimulus. I do believe that’s at least partially responsible for the stock selloff.

More concretely, you’re starting to see it in the housing market, where the sugar-high from the home-buyer tax credit is wearing off. It may leave, to mix metaphors, a nasty hangover. From the Journal’s James Hagerty and Nick Timiraos:

The withdrawal of federal tax credits for home buyers led to a steeper-than-expected plunge in May home sales in much of the U.S., as the housing market struggles to wean itself from government support.

Economists and real estate analysts expected home sales to slow after the tax credit, of as much as $8,000, expired at the end of April. But early data from real estate brokers indicate that the sales decline has been far more substantial than expected, with some markets showing declines of 25% to 30%.

Now, really, ask yourself, why should anybody be surprised by this? Since the tax credit was first hatched, roughly half the home sales have been by first-time buyers (the credit originally was offered to only first-timers, the extension also extended it to other buyers.) Consequently, all the action in the market was for homes priced under $500,000, the ones first-timers could afford (I have that anecdotally from talking to real estate agents, but I believe I could find figures to back it up.)

So is a 25-30% slide in sales post-credit really a surprise? It shouldn’t be. So many buyers were “pulled forward,” as they say, that a big drop-off should be expected right about now. If the NAR didn’t expect a pullback at least this big, they’re just fools.

The trick will be to see how sales shape up after that initial drop-off. If memory serves, the cash-for-clunkers program took auto sales from somewhere under the 10M-range — the seasonally adjusted annual rate (SAAR) — to something like 14M, only to see a drop after the program ended, and ground out currently at about 11.4M.

That is a slight enough gain that you could argue it is probably the level sales would have come up to from the 2009 lows with or without the clunkers deal. It also is a level that puts auto sales back where they were in 1983, despite a significant population growth.

Like John wrote yesterday, all of these little stimulus gimmicks are band-aids. Uncle George, and then Uncle Barry, thought they could throw money at the problem and it would go away. But it’s not that simple. It’s not nearly that simple.

- The SEC fraud charges against Goldman Sachs (GS) aren’t likely to hurt the firm much financially, but clients will likely have more questions about conflicts of interests surrounding the firm;s dealings, Chad Brand writes.

- The big question now “is whether this is just the tip of the iceberg,” James Kostohryz writes at Minyanville. “Given the details of the transaction, it seems highly unlikely to me that this was the only transaction of this nature.” And lawyers “will be chomping at the bit and contacting investors that lost money in mortgage, CDS, etc., transactions to see if there were similar patterns that can be exploited in lawsuits.”

- In the fallout from SEC fraud charges, Goldman CEO Lloyd Blankfein needs to step down, Stephen Gandel notes at Time’s Curious Capitalist blog.

- Goldman Sachs “can go long markets and it can go short markets. But it can’t lie to its clients,” Felix Salmon says. “That’s well beyond the pale.”

- “The only sure way to ensure that no bank becomes too big to fail is to make sure no bank is too big,” Robert Reich says.

- Barry Ritholtz strongly disagrees with the “strategic default” thesis – which states people are defaulting on mortgages and instead using that money for consumer discretionary items.

- Economy’s in early stages of healing process. “If it continues, and the labor market shows sustainable growth, and inflation stays moderate, and the eventual increase in interest rates doesn’t derail the still-fragile state of consumer sentiment, the future looks encouraging,” James Picerno says. “There’s a lot of ‘ifs’ to step over.”

- “Curb your enthusiasm” about the economic rebound,” Economist’s Free Exchange blog says. “Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery.”

- Within weeks though we’ll be able to see the natural forces of supply and demand at work in the housing market” without major government incentives, says Miller Tabak’s Peter Boockvar. Economy’s definitely improving, but “the steroid juice of cheap money is again having its influence,” he says. “We can only hope that we can make the transition without it over the next few years better than we did last time.”

- Boomtown blogger Kara Swisher reports Yahoo’s (YHOO) M&A chief is hard at work trying to buy Foursquare, the hot mobile startup of the moment.

The Vampire Squid is in trouble.

Goldman Sachs is getting beat up good this morning, after news broke that the SEC charged them with fraud in structuring and marketing a CDO tied to subprime mortgages. The news is ugly enough in and of itself, but what really captures the imagination are the possible implications and ramifications.

Goldman shares are down 12%, and the entire financial complex is down about 3% on the news. It’s kind of like that scene in “Training Day,” where Ethan Hawke shoots Denzel Washington, after Denzel taunts him, saying he doesn’t the guts to do it. When he finally shoots, Denzel screams in surprise (in a way that only Denzel can convey, too) “you shot me in the @#$!”

The SEC’s charges are straightforward enough: the hedge fund Paulson & Co. paid Goldman $15 million to structure and sell a CDO in 2007, just as the housing market was beginning to crack. Paulson picked the securities to include in the CDO, and then shorted them. Goldman went along, and told investors the securities were picked by an independent third party.

We’ll get all breathless here and suggest to you that this could be the biggest piece of news to hit the financial markets this year. It gets to the heart of the recriminations about Wall Street’s role in the housing bubble, the credit crisis and the financial meltdown. The big Wall Street firms weren’t just providing “liquidity,” as they claimed, they were actively gaming the system to their own benefit. That’s what this allegation says. And it’s Goldman Sachs.

It’s early. These are just allegations. Goldman has not been heard from yet. But another crack in the wall that Wall Street hides behind — that facade that says they’re so successful because they’re just that much smarter than everybody else — has appeared. No telling where it goes or how wide it gets.