WASHINGTON (MarketWatch) - Sales of new homes rebounded in September from summer sales levels that were much weaker than previously reported, the Commerce Department reported Thursday.

Sales increased 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 in August. Previously, August’s sales had been reported at a 795,000 pace. September’s sales were slightly higher than the 758,000 pace expected by economists surveyed by MarketWatch.

The three previous months were revised sharply lower, which means the housing market was much weaker in the middle of the year than previous believed, and no one believed it was strong.

I guess it all depends on what you believe, doesn’t it? First of all, that counting sales without taking cancellations in to account means anything at all. Secondly, using those incorrect sales numbers to compute inventories is sensible. Thirdly, that reporting that “sales rebounded in September” when compared to a hugely downwardly revised number in August is meaningful. Like, the September number is right when all the others are wrong? Give me a break. This is, of course, a government number for which we pay good money.

Some of the myths that are being promulgated by the government, Wall Street, the NAR, the financial shill media and others. Believing any of these myths is a clear and present danger to one’s financial future.

• The Federal Reserve can manage the economy by skillful adjustment of interest rates and money supply. Neither recession nor inflation pose any real threat. The Fed commenced operations in 1913. Since that time, it has been unable to avoid inflation, stagflation, recession, depression and market crashes. Yes, we have had a long calm period of apparent growth, fueled by easy money and credit. But a high price will be paid. John Hussman goes into detail in numerous articles about this myth
• Even if the US slips into a growth recession, other economies around the world are strong and will quickly lead a recovery. The bubble is worldwide. It is already starting to burst in some of the EU countries, notably Spain and Britain. The most recent data shows deflation picking up in Japan as a result of slowing exports to the US. Steve Roach’s recent piece addresses this myth.
• Technology companies are largely immune to economic issues, because they do not need to borrow money. Exciting new technologies will continue to power growth. Technology companies are heavily dependent on the health of the economy. It is amazing that 2000 has been forgotten so quickly.
• The US consumer never falters and robust consumption will keep the economy strong. US consumers have been spending more than they earn by borrowing the difference, frequently using their houses as collateral. That borrowing is rapidly coming to an end and so will the growth in consumer spending. Recent warnings from retailers show this is happening.
• Problems with “subprime” mortgages are contained to the housing market and will not affect the economy as a whole. The widespread credit problems with corporate loans, commercial paper and various exotic instruments show that securitization of mortgages has served to spread the pain throughout the economy.
• House prices will resume their upward climb shortly, probably next spring. Now is a good time to be shopping for bargains. Inventories are continuing to grow at a time of year when they should be shrinking. Foreclosures and bank-owned properties are piling up. There are too many vacant units out there. Prices will not start to climb until inventories fall to a healthy level once more. The inventory trend is in the wrong direction. It will not turn quickly.
• Stocks are cheap. Stocks are richly priced, even based on record earnings. Analysts claim that they are cheap based on big earnings increases forecast for 2008. But earnings have already begun their cyclical decline with a fall in this quarter.

Nassim Nicholas Taleb, author of “The Black Swan“, takes on the Myrdal Prize in the Financial Times.

The environment in financial econ­omics is reminiscent of medieval medicine, which refused to incorporate the ob­servations and experiences of the ple­beian barbers and surgeons. Medicine used to kill more patients than it saved – just as financial economics endangers the system by creating, not reducing, risk. But how did financial econ­omics take on the appearance of a science? Not by experiments (perhaps the only true scientist who got the prize was Daniel Kahneman, who happens to be a psychologist, not an econ­omist). It did so by drowning us in mathematics with abstract “theorems”. Prof Merton’s book Continuous Time Finance contains 339 mentions of the word “theorem” (or equivalent). An average physics book of the same length has 25 such mentions. Yet while economic models, it has been shown, work hardly better than random guesses or the intuition of cab drivers, physics can predict a wide range of phe­nomena with a tenth decimal precision.

Every time I have questioned these methods I have been abruptly countered with: “they have the Nobel”, which I have found impossible to argue with. There are even practitioner associations such as the International Association of Financial Engineers partaking of the cover-up and promoting this pseudo-science among financial in­stitutions. The knowledge and risk awareness we are accumulating from the current subprime crisis and its aftermath will most certainly not make it to business schools. The previous dozen crises and experiences did not do so. It will be dying with us, unless we discredit that absurd Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel commonly called the “Nobel Prize”.

Personally, I think Taleb goes too far by casting a slur on the intuition of cab drivers who, unlike most economists, have been known to do an honest day’s work. Now in all fairness I should also mention this quite good piece by Steve Roach, who suffers from being a trained economist but is able to transcend this problem on occasion. “After nearly five fat years, the global economy is headed for trouble. This will come as a surprise to policy makers and investors, alike-most of who were counting on boom times to continue.”

Speaking of black swans, look at the charts of the mortgage insurers. Private mortgage insurance has been used as a credit enhancement on high-LTV mortgages for many years. However, the mortgage insurers probably don’t have enough capital to withstand a systemic default. If, as and when their financial strength ratings are downgraded, then this will impact the securities that have been credit-enhanced with their insurance. MGIC recently warned that at least one rating agency was considering a downgrade. Their stock prices are sending a clear message.

YESTERDAY This Day’s Madness did prepare;
TO-MORROW’s Silence, Triumph, or Despair:
Drink! for you not know whence you came, nor why:
Drink! for you know not why you go, nor where.

- The Rubaiyat of Omar Khayyam
Translated by Edward J. Fitzgerald

The “Horsemen” are flogging their steeds, foaming bullish despite over-valuation and a flagging consumer. Nothing to do but wait for this to exhaust itself. Likely the overstressed horses will collapse. RIMM and AAPL +$13, GOOG +$25, AMZN +$8.

The problem with the quant or algorithmic trading that we see everywhere is that it doesn’t see the truck coming through the red light.

The surprised quants who got slapped last time said, well this wasn’t in our models. And that’s the problem, the models look at just what they’re programmed to look at, and nothing else. So when something comes out of left field, they are completely lost because their universe doesn’t allow for that.

And that is going to happen real soon now. This is runaway behavior.

This article in the New York Times shows that it is way too early to even think about a bottom in the housing market, from a sentiment point of view. A foreclosure auction brings out amateur speculators in droves.

“The market’s really low right now, so you can get a good price,” said Lori Crook, a food server at Keys Cafe who said she was looking for a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”

……..

But instead of alarming buyers about the risks, the auction of so many foreclosures at once was an invitation to speculators, small and large. Some, including Bryan Kihle and Jim Casha, who bought a four-bedroom house for $145,000, bid without seeing the properties. “I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up,” said Mr. Kihle, a building contractor.