Deficit, Housing, and Crash 2011

Finance at First Light
Good morning!


  • $1.4T Deficit is No. 1 Economic Threat | Economists think it’s worse than high unemployment and the risk of inflation or deflation.
  • Housing Prices Falling | The Case-Shiller Index of home prices is down 3.7 percent in six months, and probably has farther to fall.
  • Market Crash 2011 | Bears say the market’s worth only 910, but bullishness is rampant with bets on gains being 12 times as popular as bets on losses, liquidity staying high, and bulls saying to buy dips.



1. $1.4T Deficit is No. 1 Economic Threat

The National Association for Business Economics said its 47-member panel of forecasters increased its estimate for the 2011 federal deficit to $1.4T from $1.1T last November, according to Reuters. The Jan 25 to Feb 9 survey found, “Panelists continue to characterize excessive federal indebtedness as their single greatest concern,” followed by state and local government debt.

There’s still no official spending plan in Washington for fiscal 2011, which began last Oct 1. The government is surviving on a continuing resolution for funding that expires this Friday. Agreement between Republicans and Democrats has been hard to find on even a two-week extension to the resolution, much less anything bigger, much much less the $14.3T statutory debt limit ceiling looming later this spring. The continuing financial ineptitude in Washington could cause investors to demand higher Treasury interest rates, which would pose yet another challenge for economic growth.


2. Housing Prices Falling

The Case-Shiller home price index fell another 0.4 percent in December, its sixth monthly decline in a row, and Wells Fargo says it has another 5-6 percent drop ahead of it in the coming six months. The decline raises the “specter of another vicious downward spiral in housing activity. Falling home prices are causing appraisals to come in more conservatively and causing lenders to increase down-payment requirements. Homebuyer traffic has been stagnant for the past six months and new homes sales have been stuck near their cycle lows ever since the homebuyers’ tax credit program ended.”

But a bottom is near, says Simon Constable in the Wall Street Journal. His reasoning: “Housing is the most affordable it has been in decades … the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. … Investors have started to buy up houses and condos, in some instances paying entirely in cash … a sign that these investors are betting on a rebound.” He quotes Pimco’s Scott Simon saying housing will probably bottom this year, but might dip another 5 percent first — consistent with Wells Fargo’s forecast.


3. Market Crash 2011

Paul Farrell wrote last week at MarketWatch that the S&P 500 is worth only 910 and that a crash would hit by Christmas. The lies he sees cheering the market higher include: “Inflation and rate rises won’t push China and America over the edge into a new bear recession,” and, “stocks rally in the third year of a presidency, often more than 20 percent,” and Jeremy Siegel’s recent comment at a conference, “There’s nothing but upside to come … the next several years are going to be good for stocks.” Ignore the lies, Farrell says, because “there is a high probability a new cyclical bear market will begin this summer … and overshadow the 2012 elections.” He tells America to wake up: “With commodity prices rising rapidly, all the bizarre rationalizations Wall Street uses to keep Bernanke’s interest rates low are rapidly vaporizing.”

Bullishness is certainly building, with about 12 times as many stock investors speculating on gains as there are on declines, a three-year high.

This is a very abnormal era, says Doug Noland at AsiaTimes. In just the past 16 weeks, the Federal Reserve’s balance sheet has grown $225B. International reserve assets have spiked $1.5T in one year, $2.6T in two. “There’s been nothing comparable to this in the history of central banking — in the history of ‘money.’ The resulting liquidity onslaught has inflated global securities and commodity prices, distorted market perceptions of risk and liquidity, depressed global yields and fomented speculative excess in any market that trades.”

Raymond James Chief Investment Strategist Jeff Saut thinks a market pullback “will likely be in the 5-10 percent range” but thinks “it is a mistake to become too bearish.” He’s “going to begin committing some of the cash raised over the past eight weeks back into stocks, preferably during bouts of weakness.” Of the 19 stocks he suggested since the beginning of the year, the following have held up best: Altera (ALTR), CA Inc. (CA), Celestica (CLS), Skyworks Solutions (SWKS), Stanley Furniture Company (STLY), Stanley Black & Decker (SWK), Tempur Pedic International (TPX), The Williams Companies (WMB), and closed-end fund Royce Value Trust (RVT).

Have a great day!
Jason Kelly
The Kelly Letter

This entry was posted in Finance at First Light, Real Estate, Stock Market Forecasts, US Economy, US politics. Bookmark the permalink. Both comments and trackbacks are currently closed.


  1. Ron
    Posted March 4, 2011 at 10:34 am | Permalink

    Thank you Jason for providing this forum….

  2. Posted March 3, 2011 at 12:44 am | Permalink

    Nice work covering the PE on indexes, guys. Newbies are in good hands in this community!

  3. Evan
    Posted March 2, 2011 at 7:11 am | Permalink

    Hmmm. Thanks for the help, guys, but I’m still a little confused, because your sources produced contradictory answers. Cory’s link shows the P/E at 14, which would indicate a fairly valued to undervalued SPX. But Jeremy claims to have seen the SPX with a 19.34 P/E, and the Morningstar link also shows the market as slightly overvalued.

    Jeremy, I checked on my broker’s site and on Scottrade and could not find a listing for the SPX P/E. Would you mind providing a link to where you found it?

    • Jeremy
      Posted March 2, 2011 at 12:05 pm | Permalink

      Evan, Cory provided you with a link to SPY which is an ETF that tracks the S&P 500 and not the actual index itself. SPY (the ETF) could be undervalued for a variety of reasons, for example the weighting of stocks that comprise the ETF’s overall portfolio could be different from that of the actual index itself. Furthermore, while both have climbed in the current bull market SPY has outperformed the market (i.e the S&P 500) in the past 3 years or so. In other words its probably not fair to assume that the fundamentals of the ETF, which tracks the index, will exactly mirror those of the index – one is a financial measurement and the other is an investment vehicle. I hope that didn’t confuse you further. Perhaps Jason can shed some light on the situation if he has the time.

      In your Scottrade account search any stock hit the earnings tab and the P/E of the S&P 500 is listed there as 19.34. With all the buying sentiment around, I think its safe to say that the market is not undervalued at this point.

      • Evan
        Posted March 2, 2011 at 2:57 pm | Permalink


        Thanks for taking the time to explain. I did see that Cory’s link was for the SPY ETF, and was wondering if that was the reason for the difference.

        I’d always heard people reference the P/Es for the indices and wondered where they were getting that information, but I could never find it anywhere. Good to finally find a site that has it, although there is no P/E info for the DJIA or NASDAQ on Scottrade, for some reason. Those aren’t as big a deal, though — I was looking for the S&P P/E primarily, anyway.

  4. Kent
    Posted March 2, 2011 at 6:48 am | Permalink

    Jason, I have never seen so much ink over the last few years about housing crisis and housing prices! Some decades back, I learned that housing values move in an 18 year cycle, with 9 years of “up” prices and then nine years of “down” prices. Now obviously it may not be exactly 9 years, but throughout history it has been pretty close. So what is the big deal that prices are dropping? Stick around and ride them up… but it will be a little while yet… you cannot rush the cycle.

  5. Larry
    Posted March 1, 2011 at 11:17 pm | Permalink

    What are these estimates of S&P at 910 based on? I always thought the P/E was a good indicator.

    These bulls and bears don’t really have a clue what the market will do. Jason Kelley himself a few months ago was predicting the S&P could drop to 500.

    In the end it’s all about earnings. With the continued growth in the emerging economies, earnings are bound to materialize. Plus many US corporations are sitting on huge amounts of cash.

    Pick a number? Or stay long, and try not to time the market?

    • Evan
      Posted March 2, 2011 at 2:59 am | Permalink

      How can you find the P/E of the S&P?

      • Cory R
        Posted March 2, 2011 at 4:48 am | Permalink

        P/E for the S&P 500 –

        Currently at 14.

      • Jeremy
        Posted March 2, 2011 at 4:52 am | Permalink

        Evan most sources list the P/E of the S&P 500 (SPX). Using research tools on your brokerage account would be a good source as well. If not perhaps the above link will help. Its from Morningstar and presents the fair value of the market on a daily basis.

        The historical P/E of the S&P is somewhere around 17. So using this knowledge in conjunction with the chart you can get an idea of what the P/E of the market is. Last I checked (on Scottrade) the P/E of SPX was 19.34, which coincides with what the chart currently illustraes, which is that the market is slightly overvalued. Taking into account the historical P/E of the S&P 500 (17), a P/E ratio in the low teens is typically one measurement that helps identify a stock or index in this case as undervalued.

        Hope that helps a little.

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