Wednesday, April 16, 2008

"Delusional" Stock Market Cheers Bad News

Well stock prices are soaring this morning as the Dow and the Nasdaq both are showing gains of over 1%. I see absolutely no reason for this. The dislocation between stock prices and the reality of the economy has reached new highs in my estimation.

The talking heads on CNBC will cheer the fact that the CPI came in at .2 which was what economists were expecting. They will continue to harp on the fact that inflation is only a "little bit" on the high side. In my opinion this is the worst thing that could have happened. The reason I say this is because the Fed now thinks they have room for another big cut. If they do this, we risk a potential crashing of our currency.

Why do I say this? Well look at what came out of Europe today. From Bloomberg:

"The inflation rate rose to 3.6 percent last month, the highest in almost 16 years, the European Union's statistics office in Luxembourg said today. The March figure is up from 3.3 percent in February and exceeds an estimate of 3.5 percent published on March 31.

``Concerns about upside risks to the inflation outlook are unlikely to ease quickly, leaving little, if any, scope for the ECB to soften its interest-rate stance,'' said Martin van Vliet, an economist at ING Group in Amsterdam. ``This may help push the euro-dollar to $1.60 in the short term.''

MY take:

This means that the ECB will not be cutting rates anytime soon. They are much more hawkish about inflation in Europe because their number one mandate is to control inflation. The Euro is up to almost $1.60 today as our dollar PLUMMETED to all time lows in the low 71's. Just a few days ago I was hearing about a dollar rally on CNBC and that the Euro couldn't rally over $1.59. Well you can throw that idea out the window.

Commodities also soared on the CPI number as the world knows we have no discipline towards protecting our currency and we will continue to cut rates as long as our CPI # continues to stay within expectations. Gold reacted by rising $16.00 and oil held its highs after soaring yesterday. More bad news for the consumer. Weaker dollar=less purchasing power.

The market also is soaring today because the financials came in at expectations. So JP Morgan profit drops 50% because of $5 billion in write downs and this is good news? Revenues fell by 11%. Here is what Jamie Dimon's said about things going forward:

``Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,'' Dimon, 52, said in the statement."

Since when did a 50% drop in earnings mean things are looking just dandy. Some more "bullish news" came out of Washington Mutual. From Bloomberg:

"Washington Mutual said it could lose as much as $19 billion in the next three to four years on home loans depending on U.S. economic conditions. The top end of the forecast is ``well in excess of any historical benchmarks,'' the company said.

Washington Mutual yesterday reported a loss of $1.14 billion, or $1.40 a share, compared with profit of $784 million, or 86 cents, a year earlier"

19 billion in losses expected over 3-4 years!!! These numbers are hideous. Everyone needs to start looking at the fundamentals instead of listening to the analysts who have a vested interest in trying to tell you that Rome is not burning and we are through "the worst part of it". These bottom callers have repeatedly gotten it wrong since this crisis hit last March. The fundamental facts are earnings are deteriorating, the dollar is on the verge of crashing, and unemployment is rising. These are not signs of an economic recovery. these are signs that we are heading into a deep 70's style recession!!!

You want more data look at the housing data. Housing starts fell to a 17 year low.

This is good news compared to whats happening to housing in California From Data Quick:

"A total of 20,513 new and resale houses and condos were sold statewide last month. That makes it the slowest February in DataQuick's records, which go back to 1988. Sales were up 7.1 percent from 19,145 in January and down 34.3 percent from 31,228 for February last year.

The median price paid for a home last month was $373,000, down 2.6 percent from $383,000 for the month before, and down 21.0 percent from $472,000 for February a year ago. The median peaked last March/April/May at $484,000.

Around half the drop in median is due to shifts in the types of homes selling, and how those homes are financed. Last month 15.5 percent of the state's financed home purchases were purchased with "jumbo" loans over $417,000. A year ago it was 37.3 percent.

Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is at a six-year low."

Foreclosure activity from Data Quick in California:

"Foreclosure resales - houses sold after being foreclosed on continue to dominate many inland neighborhoods. More than one out of three Southland homes that resold last month, nearly 38 percent, had been foreclosed on at some point in the prior year. This time last year such sales were only 8 percent of the market. At the county level, foreclosure resales ranged from 28.8 percent in Los Angeles County to 56.4 percent in Riverside County.

In recent months, foreclosure resales typically sold for about 15 percent less than other homes in the surrounding area. When these foreclosure resales dominate a market, accounting for more than half of all sales, they tend to tug home prices down by an extra 5 to 10 percent when compared with communities where foreclosure resales are less common."

My Take:

This California home sales data is stunning. First of all, you are basically $100,000+ underwater on your house on average if you bought in California in the 1st quarter of last year. The percentage of houses being bought with a jumbo loan dropped from 37% last year down to 15% this month. This tells you that the banks are tightening up their lending standards. This will only get worse as the banks continue to writedown huge losses.

Now the foreclosure activity. Again this data is shocking. 38% of Southland sales were foreclosures. These foreclosure sales will end up being sucker sales a year from now. The last paragraph pretty much tells you that. When you have an area with a high level of foreclosures, prices tend to get "tugged down" because there is more supply.

I would be nowhere near ready to buy a foreclosure in California with the rapid price drops and high foreclosure activity. You will be catching a falling knife if you decide to do this. Wait until 2009 at least before dipping into California foreclosures.

Bottom line:

Stocks are soaring but the fundamentals say otherwise. How many times have we seen this in the last 5 months? 300-400 point moves up in one day followed by pullbacks as reality sets in. I see this as another bear rally. Be careful out there and please ignore the CNBC bottom callers.


Anonymous said...

I'm suspect of dataquick sugar coating the FC numbers.

I'm willing to bet there are a lot more but have yet to enter the legal process.

Jeff said...

I think some of the banks also don't have the manpower to process all of these foreclosures.

When the banks who did all of these bad loans need their money in order to stay solvent you will see these numbers rise rapidly.

I think housing is crashing faster then the banks expected. Its going to get real ugly.

eh said...

How many times have we seen this in the last 5 months?

Many, many times.

Jeff said...


Looks like this rally might not even make it to the At least the others lasted until the next day.

Beige book was bad. Stocks are holding for now but the rally looks stalled. We will see how we close.

Anonymous said...

....up is down, left is right.....economy is in the tank...I know, let's RALLY!


Jeff said...

I know...It makes no sense.

JP Morgan just borrowed 7 billion dollars at alomost 8% after reporting supposedly "stellar" earnings.

Why borrow at such rates if you are so solvent?

The banks can only hide their **** sandwiches for so long.

When they run out ways to raise new capital it will be Sayanora.

Wilbur Ross is trying to find money over in the middle east so he can buy banks. He is a buyer of distressed assets.

Get ready for the big financial storm. Its on its way.

Anonymous said...

Plunge Protection Team? At the very least market manipulation.

Jeff said...


Something strange happened today. Wall St. keeps yelling the crisis is over.

You have to wonder: do they really believe that this is the bottom or are they trying to pump the market higher so they can sell and get out?

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