patrick.net

Among the S&P 500 companies compared to a year ago: revenues are up 11%, profits are up 50% with 83% of the companies beating expected earnings.

This is not surprising given that GDP and consumer spending are rising.

Zephyr says

Among the S&P 500 companies compared to a year ago: revenues are up 11%, profits are up 50% with 83% of the companies beating expected earnings.
This is not surprising given that GDP and consumer spending are rising.

Yes, we've also put ~$2T of borrowed money through the patient in the past year.

I agree that nobody should be a permabear or permabull -- but get back to me when they stop extending unemployment benefits to 99+ weeks and actually start booting people out of the homes they're not paying on.

The current external national debt is $8.35T, a year ago it was $6.88T

I hope we can agree a +$1.5T/yr run rate here is unsustainable. Every $100B cut or tax will theoretically throw two million families under the bus (@ $50K each).

Actually, it is probably the case that the $1.5T/yr deficit expansion is entirely sustainable for the foreseeable future. Just look at Japan.

The fundamentals of our economy our sound -- we can produce enough food and goods, and have the labor skills and capital, to produce immense amounts of wealth at the push of a button and the swing of a hammer. The problem is that the intermediate layers are all gummed up, too many people looking for something for nothing, starting at GS and going right down the line.

Or you keep innovating and stay ahead of the curve…

Nice thought, but it's not that simple. When competition is primarily driven by bottom lines, innovation gets kicked to the curb in favor of bean counting and appeasing stockholders every quarter. Greed and stupidity are poor engines for innovation.

I like what Jared Bernstein (International Market Analyst and chief economic adviser for VP Biden) had to say about innovation: It's pure hubris to say that the US has the market cornered on talent and brains.

Austinhousingbubble says

Nice thought, but it’s not that simple. When competition is primarily driven by bottom lines, innovation gets kicked to the curb in favor of bean counting and appeasing stockholders every quarter. Greed and stupidity are poor engines for innovation.

Not at the best companies it doesn't...

Even the 'best' companies would rather pay for ten Ed Nortons than one Al Pacino.

Better companies see innovation as a path to enhance the bottom line.
I think they often overinvest in the hope of finding a silver bullet.
Silver bullets are rare, but they often do find something good.

tatupu70 says

I’m referring to creating new products, or adding new features to your product. Certainly if you are selling a commodity then price is king, but the goal is to make sure you never have a commodity…

Features are items the market (customers) have requested. Being in software industry our new features are driven by customer requests, not what someone in R&D cooks up as new features. A good example of bad innovation driven by internal innovation and not market demands is Microsofts Office new ribbon. As a result no one wanted to use the new Office products at corporate, so they use the prior version. Such moves only hurt revenue and profits.

Cloud Computing ? ... thats no different than IBMs mainframe shared services... Solar ? thats been around for decades past as well.

thomas.wong1986 says

Features are items the market (customers) have requested. Being in software industry our new features are driven by customer requests, not what someone in R&D cooks up as new features. A good example of bad innovation driven by internal innovation and not market demands is Microsofts Office new ribbon. As a result no one wanted to use the new Office products at corporate, so they use the prior version. Such moves only hurt revenue and profits.

Somtimes it's stuff the customer has asked for--but those are only very minor extensions of a current product. The good stuff comes from the creative minds within the company--products that the customer can't even imagine or doesn't know that he wants...

And wrt to your Microsoft example--not every product will be a winnner, obviously. Doesn't change the point though.

@austin

I'm sure there aren't enough bones in this article, but there is some good data.

http://finance.yahoo.com/news/Forecasters-optimistic-about-apf-856923229.html?x=0

one excerpt:

Wages and salaries also are improving. Respondents reporting higher pay more than doubled to 26 percent, while those reporting a decline in wages slipped to 6 percent from 7 percent in January. The net reading for wages and salaries -- planned increases minus planned cuts -- was 20, the highest reading since January 2008.

Hi thanks for your information. I think its very accurate. I would like to ad that Greece has a real problem with basic distrust of government because of their history. As a result greeks do whatever they can do to avoid paying taxes. Greek society has so many wonderful qualities they support strong families, encourage education, and work very hard but this basic distrust of government makes it
so difficult for them as a country to move forward. People do not think its their patriotic duty to pay taxes they think of it as naive. I think before the government is trusted they will have to restructure the way it works. The local government is full of nepotism and corruption. The government must become more transparent and be regulated by other institutions. yaisou!

Greeks have an unsustainable system which enables them to retire at age 58 with 14 "monthly" pension payments each year for the retirees. With the lowest fertility rate in Europe, Greeks don't have enough young workers to pay for these relatively generous pension benefits. Kind of like the CA pension disaster here in the US. When it was pointed out that Germans retire at age 67 were being asked to bailout irresponsible Greeks who retire at 58, Greek Prime Minister Theodoros Pangalos denounced the conditions of the EU deal on the grounds that the Germans stole from the Bank of Greece during World War II. http://www.time.com/time/world/article/0,8599,1968381,00.html .

How dare you tell us how to manage our finances! Just give us your money and STFU!

>>The good stuff comes from the creative minds within the company–products that the customer can’t even imagine or doesn’t know that he wants…

Nice to be able to agree wholeheartedly with you, tatapu70. In technology, innovation comes from people doing stuff that most customers could not fathom. Those who think that innovation comes from the marketing department are oh-so wrong. Sorry.

Austin,

>>When competition is primarily driven by bottom lines, innovation gets kicked to the curb in favor of bean counting and appeasing stockholders every quarter.

Also very true, but the greatest impediment to innovation inside a company is usually not even the bottom line, but rather the status quo of who is important and who is not. Innovation threatens the status quo, It's as simple as that.

Now, if we are talking about Grand Scale innovation, such as doubling the efficiency of mass-manufacturable solar cells from 20% to 40%, the science itself is the dominating impediment, but the other factors will still have a coolng effect.

Nice to be able to agree wholeheartedly with you, tatapu70. In technology, innovation comes from people doing stuff that most customers could not fathom. Those who think that innovation comes from the marketing department are oh-so wrong. Sorry.

I partially agree with this. But innovation must have its roots in understanding the users' needs. Sales and marketing types working daily with users hear valuable feedback, providing ideas that an isolated programmer would not otherwise hear. There needs to be a balance between user feedback/requests and "big picture" development ideas that customers can't yet imagine.

Apple, possibly the most innovative company in US history, makes up things the customer has never thought of.

Their innovation is to create something we didn't realize we needed, till we saw it...

the most marketing research of an automobile ever was the Edsel. So much for letting the marketing department set your directions!

azrob00,

>>Apple, possibly the most innovative company in US history.

I was kinda' waiting for someone to bring up Apple.

You've gotta be kidding me. Apple does very little but package other people's ideas in shiny aluminum and sprinkle "cool" pixie-dust on top of it. I'm oversimplifying here, but that is the essence of apple. I'm not saying they build bad products, but I am saying that very little of it originates in-house.

Apple buys pretty much ALL the hardware that goes into their products from outside sources. The only notable exception is the CPU of some of the new devices, which was based on designs from an acquisition that they made (Palo Alto Semiconductor). All the rest is innovated, designed and manufactured by Qualcomm, Intel, Texas Instruments, Broadcom, Atheros, Marvell, TSMC, Micron Technology and scores of other and smaller semiconductor vendors. Apple is about putting the pieces together and writing the software.

Again, I'm not saying they do a bad job at it, but 90% of what they sell are other people's innovations, 9% is recycled software innovations and maybe 1% is true innovation from Apple itself.

Apples seems to have struck a good mix though. They aren't trying to re-invent the wheel, they're trying to improve and make things better. They don't need to add a lot to take something from useless, to incredible easy to use.

From what I've seen, products developed without outside input are a disaster. Customers need to be included. In fact, whenever someone has a startup idea now, I tell them to get it out the door and to the customer immediately, because they can easily waste years creating something no one wants. It's cool, but no one wants it. If you're not sure about this, think tech bubble of 2000. I knew far too many companies building crap that no one wanted.

justme says

>>Apple, possibly the most innovative company in US history.
I was kinda’ waiting for someone to bring up Apple.
You’ve gotta be kidding me. Apple does very little but package other people’s ideas in shiny aluminum and sprinkle “cool” pixie-dust on top of it. I’m oversimplifying here, but that is the essence of apple. I’m not saying they build bad products, but I am saying that very little of it originates in-house.

True but this is missing the point. There are no other consumer electronic concerns that approach Apple's ability to productize technology. Sony comes close but they are dysfunctional in the typical conservative, hierarchal Asian way.

Take Apple's LaserWriter. It followed HP's LaserJet (which used the same Canon printing element) to the market by about a year yet it totally killed HP's offering in capability and thereby totally changed the way we created printed material. Apple was able to look deeper into what the available technology was capable of solving and put together the complete package that blew away the existing state of the art. HP didn't have the strategic vision or the artistic desire to see beyond Courier-12 and the serial port connection, while Apple saw that with another year of R&D on some tough problems they could create an end-to-end solution that would replace Linotype output, or close to it.

Apple making both ends of the chain -- hardware and software -- was the magic pixie dust here. They didn't have to get on a plane to Redmond to get OS support, they were rolling their own.

Apple is about putting the pieces together and writing the software.

Indeed. Funny how nobody is able to do what they do, or do it so well. When I came back to the states in 2000 I picked up a $200 mp3 player (Nike PSA play) from Fry's. it could hold about 10 songs. It had a real sh---y management front-end for getting music onto the device, really sucked. Later on in 2001 Archos was making 6GB music players with a 2.5" hd. They were transportable bricks with a worse UX.

Apple got lucky when somebody came to them with the right embryonic tech and strategic vision to capitalize on the upcoming 1.8" HDs from Toshiba. Apple then also brought the best music guy in the mac ISV ecosphere on board to rewrite SoundJam (as iTunes) which came out in early 2001.

Again, Apple was a year late to the party, as Archos's Jukebox came out in late 2000. But the Archos offering was saddled by an immense form factor (wouldn't fit in a pocket), sickly-slow USB 1.0 file transfer, and a real suck UX on the device itself.

Apple's offering -- the 1G iPod -- was engineered to SOLVE the problem, and it did. 50 MB/s file transfer over firewire. The clickwheel to navigate the UX, itself a Mac-like arrangement and attention to detail, and a 10hr battery pack and engineering to buffer songs to make the battery last.

So yeah, just some parts and some software . . . that captured 90% of the truly PMP market that didn't really exist before Apple "invented" it.

Innovation is not invention -- innovation is productizing invention. There is a difference, and it's the box Apple occupies, nobody (except Sony and Microsoft) comes close, and apparently nobody is capable of coming close.

pkennedy says

From what I’ve seen, products developed without outside input are a disaster. Customers need to be included.

Apple's secret is that they are their primary customers. They're making the machines that THEY want to use. That was why the Apple II and Mac succeeded, and the Apple III and Lisa failed, and also why the company lost its way in the 90s. They stopped making the machines that were good enough for them, shipping crappy crap instead to target an unfilled market segment.

The PCjr should be a lesson to us all.

justme says

Apple buys pretty much ALL the hardware that goes into their products from outside sources. The only notable exception is the CPU of some of the new devices, which was based on designs from an acquisition that they made (Palo Alto Semiconductor). All the rest is innovated, designed and manufactured by Qualcomm, Intel, Texas Instruments, Broadcom, Atheros, Marvell, TSMC, Micron Technology and scores of other and smaller semiconductor vendors. Apple is about putting the pieces together and writing the software.
Again, I’m not saying they do a bad job at it, but 90% of what they sell are other people’s innovations, 9% is recycled software innovations and maybe 1% is true innovation from Apple itself.

Absolutaly correct. Add to that their services (Itunes) just like Youtube and others utilizes plenty of other vendeors servers and networking products. And many of these vendors are not located in Silicon Valley.

re: post topic, interview with Gerald Celente...

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/4/24_Gerald_Celente_files/Gerald%20Celente%204%3A24%3A2010.mp3

Today's featured property is a lovely 3 bedroom home at 2413 Hickory Dr, Concord, CA that rents for $1450 per month. It features a spacious back yard for gardening. The owners tax basis is $140k. How low can you go?

There seems to be a band of rental prices, and I think Patrick actually had a decent graph on it, where most rents fit between a certain level.

It really seems that most rents fit between about $1000 and $2500. It doesn't really matter how crappy your place is, it isn't going below $1000, thus if you can buy a crap shack, you're going to get $1000 for it. On the flip side, if you buy too high, you're not likely to see much above $2500 either.

I'm guessing that the upper limit is probably caused by LL's who buy crappy 4br units, then rent them for no more than $2500. When "your" unit is compared with the crappy other 4br, it has to come inline with their prices, even though it might be a lot nicer.

We are in the window of time where home prices have bottomed and will likely be close to flat for 2-3 years. This is because shadow inventory will temporarily offset the slowly improving demand. Official unemployment will likely decline from the recent peak of about 10% to around 7% by 2012. At that point, shadow inventory will have dissipated and the rising demand will start to push housing prices up.

Roberto,

Your strategy makes sense, and should be lower risk.

But better current income is usually accompanied by lower appreciation.
It is a trade-off. A question of risk-reward and timing preference.

Let's overlay the 30yr rate over that:

(vertical axis is flipped on the rate, +y = more accelerant)

good point! along with the first time buyer's credit, the FED bought 1.2 gazillion dollars of MBS to keep mortgage rates low. That is also ending, so we'll, lets see how housing fares without bribes... (except in California, California is completely unwilling to quit bribing home buyers, despite a HUGE budget deficit!)

The 30 year fix rate will probably rise slowly to about 6% by this time next year. That is still low by historical standards, and not an impediment to affordability. Affordability high very good in most of the country, and on average countywide. Unemployment and the fear of job loss, and potential further declines in housing prices are the biggest factors holding back demand. Shadow inventory will keep supply plentiful, preventing any big price increases. All of these issues will fade during the next two years.

Zephyr says

The 30 year fix rate will probably rise slowly to about 6% by this time next year. That is still low by historical standards, and not an impediment to affordability

I'm hesitant about tooting my own horn but as soon as I made that graph my mouth dropped at its explanatory and predictive power.

The correlation between the 2009 turn around and 5% rates is unmistakable. That's why we're "going up" right now. A 100bps raise in rates cuts buying power 20% across the board; the 2009 turnaround appears to be a rather wispy thing compared to the historical degree of stimulus being applied.

Now, if the PTB really wanted to save the housing market and what's left of the private economy they need to figure how to keep the price curve going up. We assume the 5%-6% zone is within the FOMCs power to hold, perhaps so, perhaps not.

To really save the housing market the PTB need to figure out how to get 2% loans to people, like Japan has been doing for the past 10+ years.

Many people are still leaving CA.

Only a few people are going to CA (I am one of them).

Prices are still way too high compared to both rents and median incomes. Without toxic mortgages, there is no way for average person to buy. Couple with increasing supply and decreasing demand... there is only one way for prices to go. I would not be moving to CA if I was not fairly confident in this.

Troy says

To really save the housing market the PTB need to figure out how to get 2% loans to people, like Japan has been doing for the past 10+ years.

I think the bigger problem is that people equate "saving the housing market" with "keeping the current price level." When gas is overpriced... why don't we save the gas market by keeping it overpriced?

Zephyr says

We are in the window of time where home prices have bottomed and will likely be close to flat for 2-3 years. This is because shadow inventory will temporarily offset the slowly improving demand. Official unemployment will likely decline from the recent peak of about 10% to around 7% by 2012. At that point, shadow inventory will have dissipated and the rising demand will start to push housing prices up.

You forgot the /sarcasm flag at the end of your post.

The111 says

Prices are still way too high compared to both rents and median incomes. Without toxic mortgages, there is no way for average person to buy. Couple with increasing supply and decreasing demand… there is only one way for prices to go. I would not be moving to CA if I was not fairly confident in this.

Not to worry, with high prices and higher compensation needs, you need not come here, our jobs will most likely come to you. Many other state governments are certianly courting employers here to set up shop in their states.

@Zephyr

One possible source of housing that I think has been missed is current owners who aren't willing to put their homes on the market while things are unknown. If you were thinking of selling in 2006, and didn't, then by 2012, you've essentially been waiting 6 years for the "right time". I don't have specifics, but I'm betting that the housing crash forced many sellers to avoid selling, giving more space for foreclosures. Foreclosures might be trickling onto the market now, but I'm betting they're also replacing some traditional home owners as well.

Those home owners are going to be just itching to trade up/down/relocate/etc by 2012. They could create a continuous glut of homes for another couple of years and/or slowly come onto the market now, forcing banks to pull a little inventory off the market to protect prices.

The flipside is that many of those people will be creating equity during this time as well. If they had planned to move after 8 years (buying in 1998), instead of leaving after 8, they're looking at 14 years, a decent chunk of the mortgage should be paid off by then.

It should also create extra money for the stock market, as they may not be able to trade up right now, thus the effects of siphoning off money to a larger mortgage won't be in play and those people could end up with much larger pots of money in the stock market.

I don't have any figures unfortunately for this, but based on the fact that every time I do a housing search it's 50% foreclosures, and the market isn't exactly crying about an astronomical number of houses on the market, meaning someone had to hold off putting their homes on the market to create a 50/50 divide.

California population data, to july 2009. Shows a pretty constant growth. There might be lots of "talk" of people leaving, but the numbers don't show it.

http://www.google.com/publicdata?ds=uspopulation&met=population&idim=state:06000&dl=en&hl=en&q=california+population+statistics

pkennedy says

California population data, to july 2009. Shows a pretty constant growth. There might be lots of “talk” of people leaving, but the numbers don’t show it.

Or do they, your numbers are showing the rise of "Rug Rats"
put into numbers of migration...
http://pewsocialtrends.org/maps/migration/

Troy,

It is the correlation with the financial crisis and the bottoming of the economy that is unmistakable.

The mortgage rates are important but they are trumped by fear (and greed). People don't care about interest rates when the prices are seen as declining and when they are worried about their income. Fear keeps most people from buying bargains during the market bottom. They also don't care about interest rates during bubbles when they expect prices to surge. Exuberance drives most people to want to buy during market bubble highs. For example, interest rates have been at very high levels and even rising during some previous boom/bubbles. And they have declined during some busts, as prices also declined.

Right now there are more houses than needed. So even with low interest rates, supply exceeds demand. But not by as much as it did a year ago. Recent months have brought a mitigation of this mismatch, so the prices have moved up a little from their depressed levels. And the government policies have also boosted that demand.

Even if mortgage rates rose to 6%, the average US family could still afford the average home today. In most places affordability is not an issue for buyers. They are worried about the risk in the current economy. They are scared by the high unemplyment.

Once unemployment declines people will become more confident. Only then will real demand pick up. Shadow supply will keep prices from moving much for a while, but slightly higher intrerest rates will not be an issue.

The population of California (like the entire US) is growing.

pkennedy,

People who have waited to sell are a major element of the shadow inventory.
However, it should be noted that nearly all of them will immediately buy or rent another house.
They have to live somewhere. So, they cause no real net shift in the supply vs demand balance.

The shadow supply that does push the balance are the empty foreclosures and the empty inventory of new homes.