Construction Spending Drops, Black Friday Shoppers Solid

Mid-Day Market News & Commentary by Chris McLaughlin, December 1, 2008
http://www.shortsalesriches.com/welcome.html
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The financial markets were jittery this morning after the Institute of Supply Management index of manufacturing activity dropped to 36.2 in November from the reading of 38.9 in October. The drop represented the lowest reading in 26 years, spooking investors who for the most part were pleased with reports that holiday shoppers were buying.

ShopperTrack RCT, a firm that tracks sales for over 500,000 retail outlets, indicated that sales rose 3% to $10.6 billion compared to the Black Friday in the year ago period.

Around noon the Dow Jones Industrial Average was off 371.40 to 8457.64 and the Nasdaq was off 79.14 to 1,456.43.

The U.S. Department of Commerce announced today that construction spending dropped 1.2% for the month of October, a larger decline than the .9% many analysts had expected. Housing construction dropped by 3.5%, a larger drop than the decline of .5% in September. Most analysts attribute tightening credit as the leading factor causing the declines.

And in good news for drivers…national gas prices are now $1.82 a gallon, a price not seen since January 2005. This “energy dividend” is likely to assist many companies that were struggling with higher fuel costs. But for those interested in real estate, let’s hope this doesn’t mean buyers want to drive around to even more homes!

And finally, for the political junkies reading this…Senator Hillary Clinton officially was nominated by President Elect Barack Obama to be his Secretary of State. Obama is keeping Defense Secretary Robert Gates and nominated retired Military General Jim Jones to serve as National Security Adviser.

Now, on to our real estate investor education section…

Indicators and Indices: Information You Need to Know

There are two types of investors in this world: those that follow the masses and those that remain independent. Guess which type typically makes the most money? While many investors that go against the common trend of the day are considered contrarian investors, a more apt description may simply be “informed”. Given the recent melt-down hitting Wall Street and Main Street, only those that have a true understanding of current events will have the stamina, rational and readiness required to profit while others panic.

To that effect, one bit of information every short sale investor needs to know is how to “read” these common indicators and indices. While no single index is able to provide a full picture of current events, taken together the information is useful to demonstrate trends in the market. Here are a few lesser known indices to keep an eye on in the coming months:

Barron’s Confidence Index. Experts tend to think of bond investors as a bit more sophisticated and savvy than stock traders (in general) and therefore able to identify stock market trends earlier. This weekly indictor is not as well known to the common investor but eagerly tracked by “those in the know”. The index divides Barron’s 10 top-grade corporate bonds by the yield on the Dow Jones 40 bond average. Because top grade bonds have a lower yield than lower-grade bonds the index is always below 100 with an average range between 80 to 95; this week – the end of November 2008, it sits at 46.4 as compared to 78.8 only a year ago.

Tip: Most analysts believe there is a “lag-time’ between Barron’s Confidence Index and what stocks will be doing in 3-6 months. Expect the “flight to safety” to continue into early next year and keep an eye out for future reversals.

OFHEO Price Index. The Office of Federal Housing Enterprise Oversight publishes data of major interest to every short sale investor or real estate professional. The most recent data released on November 25th, 2008 shows home prices continued to slide during the past summer by an average of 6.0. However, since the cost of other goods and services increased by 6.7 percent, the inflation adjusted rate of decline actually approached 13 percent over the past year. Despite this dismal news, some states actually showed an increase including North Dakota (4%), South Dakota (3.9%), Texas (3.2%), Alabama (2.8%) and Oklahoma (2.8%).

Tip: The OFHEO utilizes Fannie and Freddie data to derive its data; obviously, given the recent government intervention into these programs the data may be skewed and does not reflect transactions outside of these quasi-governmental programs.
Index of Bearish Sentiment.

Although this index not housing specific, it can provide a useful tool for tracking trends in the general financial and/or economic environment. In a nutshell, this index provides a means of tracking reversals of official recommendations; ie, when the investment advisory service recommends a specific action then it is time to do the opposite.

So for example, if there are 200 total investment advisory services and 100 are bearish then the index would show 200/100 = 50%. This index is used to track the future trends of investors by using a contrarian perspective. When 42 percent or more are bearish then the market will go UP. When 17 percent or fewer are bearish the market will go DOWN.

Tip: Real estate investors can use this as a quick gauge to measure contrarian sentiment in their own markets or as a sub-set of REIT’s, builder stock etc…remember, investor advisory services follow trends rather than make them since by definition, they tend to report on what has happened in the market.

Construction Spending Drops, Black Friday Shoppers Solid

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