March 5, 2012

Oil, Housing and Stocks, Oh My!

By Louis Basenese of Wall Street Daily

Don’t Sweat the Triple Dip

The latest S&P/Case-Shiller report out this week showed that home prices across the United States continue to fall.




With one exception: Detroit.

Residents in the Motor City enjoyed a 0.5% increase in home values in 2011. (Woo-hoo!) Must be the positive influence of all those Chrysler commercials featuring Eminem. Or not.

In all seriousness, I’m not surprised home prices keep falling. When I declared a bottom in the real estate market, I told you that prices are going to be the last thing to recover. So don’t sweat the fact that they’re decreasing. Instead, pay attention to the other data. It continues to improve.

In fact, just last week the National Association of Realtors reported sales of previously owned homes rose 4.3% in January to a seasonally adjusted annual rate of 4.57 million. Which is the highest level in nearly two years.
So don’t be fooled: Regardless of housing prices, the real estate market’s looking up.

The Oil to Natural Gas Ratio is Completely Out of Whack

As I noted last week, oil prices keep climbing, causing more pain at the pump for all of us. But we’re not the only country struggling.

It turns out that Brent crude oil prices are standing at or near record highs in multiple currencies.



What’s the big deal? Well, if prices keep climbing, overall demand is bound to cool off. And that should help bring the oil to natural gas ratio – which is completely out of whack – down a bit.








Based on current prices for oil and natural gas, the ratio now stands at 43, compared to a long-term average of 10.

Let’s just say a reversion to the mean is long, long overdue. And when it materializes, natural gas prices are going to climb higher.

If you want to profit from this situation, San Juan Basin Royalty (NYSE: SJT) and companies in the hydraulic fracturing services space remain my favorite ways to do it.

Yes, Stocks Are (Still) Cheap

Albert Edwards, Global Strategist at Societe Generale isn’t a believer! He says the triumphant rise in stock prices promises to be short-lived.

“Hope still beats in the breast of equity investors,” says Edwards. “The market will rip out that hope and consume it in front of investors’ eyes.”

Umm, anyone got a number for psych services for Monsieur Edwards? Because that’s about the darkest assessment I’ve ever heard about stock prices. And I’m just not buying it.

Even after a record-setting start to the year, stocks are still cheap. Incredibly cheap, based on the latest analysis from Citi’s Tobias Levkovich.

He calculated the spread between the S&P 500 earnings yield and the 10-year Treasury rate, and found it’s currently between two and three standard deviations away from the average. In other words, it’s trading at an extreme. Stocks should not be yielding this much more than bonds. 




The last time the spread got this lopsided was back in early 2009, right before stocks staged a massive rally. Coincidence? I think not!



Based on his analysis, Levkovich predicts that stocks could jump 24% over the next year. I’m betting he’s right… and the melodramatic Edwards is wrong.

Courtesy  Louis Basenese  at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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