The latest on housing, the economy, easy money, and more!

There’s so much to talk about sometimes, I hardly know where to begin. This is definitely one of those weeks, considering the powerful rally we’ve seen in stocks … at a time when the underlying fundamentals are deteriorating! So let’s get right to it …

First up is housing. I hate to keep harping on the obvious here. But that powerful recovery you’re hearing about on CNBC is STILL proving MIA.

I told you last week that latest readings on home builder optimism and home construction both failed to meet expectations. Since then, we’ve gotten several more updates on the state of housing.

The Census Bureau weighed in on new home sales. The National Association of Realtors told us about pending home sales. And SP/Case-Shiller shared its latest pricing data. All THREE reports had one thing in common: They all missed expectations or proved disappointing!

New home sales? They fell 1.6 percent to a worse-than-expected 313,000 units in February. Economists were looking for a rise of 1.3 percent.

Pending home sales? They fell 0.5 percent in February, compared with forecasts for a gain of 1 percent.

Home prices? They fell for a fifth straight month in January. That left the Case-Shiller index at the lowest level in almost a decade!

Are things better than they were several months ago? Yes.

But some of that is just a function of the calendar — people buy more homes in the spring than the fall. Some of it is also because of the weather. Americans don’t really shop for homes when there’s two feet of snow outside. But they will when it’s 70 degrees in February in New York!

I continue to believe traditional spring demand was pulled forward this year. So while home builders like Lennar (LEN) have talked a good game about demand in their most recent quarters, there’s going to be payback later. Or in plain English: It’s not too late to sell those building stocks!

The Great Economic Growth “Miracle”?
Where?

Now let’s move on to the broad markets. The major averages are wrapping up their strongest first quarter since 1998. I probably don’t need to tell you that later in that year, the Russian debt market imploded, hedge fund Long-Term Capital Management collapsed, and stocks got crushed. That’s neither here nor there.

Unabated money printing is the only thing propping up the stock market.

The real question is WHY have stocks done so well? And will they continue to do so? My answers: Because of money printing and NO!

Look, I keep searching for signs of a great global economic growth miracle that would justify massive gains in equities. But all we keep hearing about is how things are slowing.

We just learned that the U.K. economy shrank 0.3 percent in the fourth quarter of 2011, more than previously expected. French growth shrank to near stall speed in the same quarter, 0.2 percent versus 0.3 percent a quarter earlier. Spain just said its budget deficit deepened to 8.5 percent of GDP from 6 percent, and that its economy overall is on track to shrink 1.5 percent in 2012.

Worst of all are the latest figures from the European Central Bank. Rather than lend to the real economy, European banks took the extraordinarily cheap money the ECB gave them and used it to play “hedge fund.”

Specifically, net purchases of government bonds surged as banks borrowed at cheap short-term rates and bought higher-yielding, long-term paper. But lending to non-financial companies shrank by 3 billion euros in February, while household loans were virtually unchanged.

Here in the U.S., the Conference Board’s Consumer Confidence Index sank to 70.2 in March from 71.6 in February. Regional manufacturing indices for Dallas and Richmond plunged between February and March — to 10.8 from 17.8, and to 7 from 20, respectively. Plus, February durable goods orders rose just 2.2 percent. That failed to recoup January’s 3.6 percent dive and missed expectations.

Understanding the “Real World vs.
Asset Market” Battle

So again, why are stocks doing so well? The most logical, obvious answer is money printing by central banks worldwide.

The Bank of England is pumping out hundreds of billions of pounds to buy assets, and renewed calls for even more printing are going out in the wake of the latest, lousy economic data. It doesn’t even matter that all the previous printing programs haven’t worked — bankers and traders are asking for more free money!

The ECB? They showered European banks with a trillion euros in nearly free money. But rather than actually do something productive for the real world with it, as I noted, those banks just speculated in asset markets!

Bernanke has vowed to keep the presses humming.

And here, Fed Chairman Ben Bernanke used every excuse in the books in comments this week to justify his ongoing use of the printing press to support growth. Never mind that it’s not actually doing anything but simultaneously boosting “good” assets (stocks) and “bad” ones (oil and gas prices), an ultimately self-destructive process.

We’ve seen again and again that these speculative manias, fueled by cheap money, can persist for a while. But we also know that they fail. When they do, they do so spectacularly. Considering the increasing narrowness of this rally, the anemic volume accompanying it, and the loss of key sectors like transportation, utilities, and energy ALREADY, I think the day of reckoning is approaching.

I’m willing to recommend a few select stocks and assets that can hold up in this environment AND a post-QE one. But that’s about it.

I certainly wouldn’t recommend buying shares of Apple (AAPL) on margin at this time … or mortgaging your house to buy housing stocks! Instead, I’d be taking gains off the table and preparing for the inevitable end of the easy money trade!

Until next time,

Mike

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