Kass: Rate Cut No Cure-All for Homeowner

This blog post originally appeared on RealMoney Silver on Oct. 31 at 8:52 a.m. EDT.

The media were preoccupied yesterday with the drama surrounding Merrill Lynch (MER Quote) and its chairman Stanley O'Neal.

While so distracted, the media missed some very important housing data -- the release of the S&P/Case-Shiller Home Price Index for August, which shows fresh signs of housing weakness.

When I link that release with the negative wealth effect stemming from an extended period of lower home prices (2006-10) and the stretching of the consumer's balance sheet into uncharted territory, the burden of economic growth, as I have previously written, lies increasingly on the shoulders of the stock market. Historically, this has been a slippery slope of dependence.

Many bulls endorse micro analysis over macro analysis. And this often makes sense -- especially if one can recognize the "anointed ones" before they get anointed. Nevertheless, the headwinds expressed in today's opening missive -- similar to the identification of the housing slowdown in 2005 or the subprime mess in mid-2006 -- could save investors a lot of money by avoiding/shorting these sectors. I believe that the same applies to the far too optimistic economic, corporate profit and retail expectations by the body of market participants in the year to come.

A Housing Index Weakens

The 10-city Case-Shiller Index exhibited an annual drop for the month of 5% in prices. That's the largest drop since June 1991. (The all-time record drop was a decline of 6.2% recorded in April 1991.)

Importantly, the index experienced the 21st consecutive month of decelerating annual price movement and the ninth interim of negative annual returns. Sixteen out of the 20 cities in the broader 20-city composite showed drops in prices for the month of August compared with only 10 in the prior month, and 15 of the cities are now year-over-year negative. Tampa (-10.1%) was the worst, followed by Detroit (-9.3%), San Diego (-8.3%) and Phoenix (-8.0%).