Is the Recession Over?
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Throughout years we heard pundits talk about the V-shape and even the bath tub shape recovery, but how can we call it a recovery when the Dow Jones is still struggling to stay above 13,000? I understand that DOW 30 is more of a global recovery depiction than the S&P500, despite having fewer stocks and having larger multi-national names in its component. I'm assuming the word “bath tub” most likely originated from the idea that U.S. housing will not recover for some time due to stern lending standards, putting a downwards pressure on real estate prices and consequentially our economy for years to come. Granted, even throughout the recession there were bullish pockets of real estate appreciation throughout the nation in cities like Austin and Port Arthur, Texas where home values saw a rise of 7-9% from 2008-2012. This is where I parked my money at the height of the subprime crisis for asset preservation purposes, not so much capital appreciation. A true recovery will not take place for at least another two years, since in my definition a healthy housing market returns 2-4% a year nationally.
A major portion of consumer spending in the early 2000s came from California’s over inflated real estate markets. The largest state, economically speaking, saw its homeowners cash out whatever equity they had and buy anything from Harleys to engagement rings at Tiffany’s. These companies were receiving their revenues from inflated home equity prices that didn’t exist in the first place. Those days are over and investors are getting used to the re-adjusted EPS numbers. Now analysts jump for joy when earnings go from worse to a little better. But fundamentally, nothing major has changed in the last 5 years besides the meager unemployment numbers, which could be skewed or inaccurate.
Consumers fail to see the pockets of inflation already taking root due to the BRIC and MIST countries bypassing the dollar every chance they get. Although the dramatization of a looming hyperinflation is a bit overdone, I can still point out specific goods that have increased more than 100% in my last trip to Home Depot and CVS (NYSE: CVS). In a 3 year period, electrical outlet wall plate covers rose 400%, body wash rose 120%, Gillette razors increased 40%, and I’m not even jumping into commodities like beef and cotton. Consumers accept these prices because they have no choice, but one thing is for sure – their wages fail to keep up! This is a problem that worries me. Would you like to see a better reflection of how our economy is improving? Keep a close watch on these four names that have a high correlation with our economy and whether it is truly moving forward. Below are the 5 year charts for Bank of America (NYSE: BAC), D.R.Horton (NYSE: DHI), Exxon Mobil (NYSE: XOM) and United States Steel (NYSE: X). Notice how all stocks have pretty much remained under the 0% gain threshold. If unemployment drops further after the elections and consumer confidence shows more of a robust trend, then I would consider owning some of these names.
As I forecasted in my article “Sell In May And Go Away,” not much was expected from the choppiness of the markets. I came across a funny caricature that depicts as to who actually made money from bulls and bears this month.
Whether the recession is over or not remains to be in the eye of the beholder. I still don't like seeing banks hoard all the cash they're sitting on and having a person with a 740 fico score jump through 100 hoops to get a home loan, that is if the prospective borrower passes the final stages of brutal examination initiated by mortgage underwriters. Once residential lending guidelines ease a little, I will feel a bit more optimistic going forward.
edgarambart30 is long BAC. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.