This blog post originally appeared on RealMoney Silver on March 31 at 7:56 a.m. EDT.
yesterday, the stock market's performance, by nearly any measure, for the month of March was impressive.
At the risk of making a market statement based on one day's performance, equities failed to collapse and staged a reasonably good late-day recovery, which has continued into this morning's futures ramp.
Anecdotally, the bears came out of hibernation in force throughout Monday on the pages of
, with the possible exception of Jim "El Capitan" Cramer on "
"; and in three meetings I had with fund of funds managers in my office yesterday, who, respectively, forecast new lows for the S&P 500 of 500, 550 and 600.
The fact is that few, if any, believe a sustainable market rise is on the horizon. Rather, the almost universal view is that the rally from the March low was a classical bear market rally.
and have taken the
that the March low was of major significance, likely a
Tactically, I covered my trading shorts from Thursday into yesterday afternoon's downturn.
I continue to believe that, after a shallow pullback (which we might have already witnessed), the market is poised for a saw-toothed advance into the summer to 1,050 on the S&P, which is far in excess of even the more optimistic market participants' expectations.
My variant view on the market corresponds with a variant view on housing, which was at the epicenter of our economy's woes and, through a variety of recipes (of a derivative kind), nearly bankrupted the world's financial systems.
The prevailing and consensus view is that home prices will decline another 10% to 20% and that a swollen inventory of unsold homes will weigh on the industry's stabilization/recovery through 2010.
I cut my teeth as a housing analyst at Kidder Peabody after graduating from Wharton in 1972. I learned that the health of the housing markets is dependent on six key factors:
- 1. the level of interest rates;
2. the employment setting;
3. the economic setting;
4. demographics (population growth and household formations);
5. affordability; and
6. the relationship of the cost of home ownership to renting.
With public policy targeted at lowering mortgage rates and stabilizing the jobs market and economy (seen by late 2009 or early 2010), a better backdrop for housing is in sight, but what most observers are missing is the
massive improvement in affordability and a major tilt in favor of home ownership over renting.
As seen by the two metrics below, affordability has dramatically improved:
- 1. Median existing and new home prices divided by median incomes are now at 2000 levels.
2. Median home prices to disposable income (admittedly skewed by higher net worth individuals) is now at 40-year lows.
If the cost of owning a home is no different than renting a home, then the tax, psychic benefits of ownership, and so forth will result in an improving demand component for housing.
Such is the case today.
Setting the Case-Shiller Home Ownership Cost Index to the Owners Equivalent Rent in 2000 to 1.0 times yields the following conclusions:
- The cost of home ownership in March 2009 is only 13% higher than the cost of renting a home. This ratio compares to a 73% higher cost of home ownership vs. renting at housing's cyclical peak in 2006.
- If we take out the high ownership cost/rental cost cities of Miami, New York City and Washington, D.C., then the national cost of home ownership is now equivalent to renting.
No doubt, a vigorous recovery in housing awaits improving consumer confidence and stability in the employment and economic picture. These conditions are all dependent on the degree to which policies gain economic traction in the last half of 2009.
Nevertheless, the improvement in affordability and the benefit of home ownership over renting holds even more significance over the near term.
I am bullish on housing, and I am bullish on the U.S. stock market.
Doug Kass writes daily for
, a premium bundle service from TheStreet.com. For a free trial to
and exclusive access to Mr. Kass's daily trading diary, please click here.
Know What You Own: The most active stocks in Tuesday's midday trading included Bank of America (BAC) - Get Report, Citigroup (C) - Get Report, S&P 500 Depository Receipts (SPY) - Get Report, Direxion Financial Bulls 3X Shares (FAS) - Get Report, Financial Select Sector SPDR (XLF) - Get Report, General Electric (GE) - Get Report and Wells Fargo (WFC) - Get Report. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.