Saturday, August 30, 2008

Fannie/Freddie Debate on Fox

What will the Treasury to do with the two GSE's?

This is a great debate. They also discuss the bank failure situation and the ability of the FDIC to guarantee the depositors.

Whatever path the Treasury decides to take with the GSE's, it looks like its going to be really bad for the housing and stock market. Feel free to share your ideas on how to fix this mess in the comments section. I don't see an answer myself!

Friday, August 29, 2008

Personal Income Data/Gustav Pressure Stocks

Good Afternoon!

We are seeing a big reversal in the stock market today based on a variety of factors. The personal income numbers were terrible:

"Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent."

The same report showed that consumer spending slowed and inflation rose:

"Aug. 29 (Bloomberg) -- Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power.

Purchases rose 0.2 percent, one-third the pace in June, the Commerce Department said today in Washington, while prices surged the most in 17 years. The Reuters/University of Michigan final index of consumer sentiment was at 63 this month, from 61.2 in July.

The figures on spending, which accounts for more than two- thirds of the economy, underscore projections for growth to slow from the 3.3 percent pace last quarter that the government reported yesterday. With unemployment rising and home values dropping, Americans are cutting back on big-ticket items like automobiles and furniture, today's report showed. Stocks fell.

``We are looking for a clear slowdown in the economy,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, who accurately forecast the gain in spending. ``Inflation has been eating into spending power.''

"The Federal Reserve's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent for a second month. The so-called core price measure was up 2.4 percent from a year before, the most since February 2007. That compares with the 1.8 percent to 2 percent median forecast of Fed officials for 2010, which is an indication of their target for the measure."

My Take:

When you put these three things together the story makes sense right? Lower incomes combined with higher inflation= a slowdown in consumer spending.

It doesn't take a genius to figure out why the economy is in such bad shape. What confuses many in this country are the constant sticks saves by the government combined with the unrelenting bullish bias in the financial media.

They both want you to think that the economy is fine, and you should continue to invest in stocks. The facts tell you a completely different story. How can you be bullish on this economy when personal income dropped almost .7% in one month?

Now granted, the end of the rebates represent a good chunk of this number but certainly not all of it. The thing to focus on going forward is there are no more rebates! Incomes continue to drop and inflation continues to run higher than the Fed is comfortable with. This is going to severely hurt growth going forward.

I still have yet to see a catalyst to take this market higher. Whats scary is the majority of the stimulus used by the Fed is now past us. The stimulus checks have been spent, and the Fed is done cutting rates. The one big stick save that's waiting in the wings is the GSE bailout which is just a matter of time.

As I have said before, the market will not like this bailout. You may see a small bounce on the news. This IMO will be followed by a sell off when the bond market gets its say and takes rates higher.

After the GSE bailout, I think the Fed will basically be forced to sit on the sidelines for the duration of the correction. They will be out of cash from backing up the GSE's, and the bond market vigilantes will control interest rates as they take the 10 year higher. They will be switching into "damage control" mode.

Bottom Line:

The economic numbers were pretty rough this morning. The sell off today shouldn't be taken very seriously. All of the moves this week have been on light volume.

Gustav has many investors spooked heading into Labor Day. As a result, they are selling positions and running to the sidelines in case Gustav does some major damage. The personal income data obviously put further pressure on equities.

If anything hits over the weekend, I will have it up here. The market has a history of dropping major bombs over a long weekend in hopes that its forgotten by Tuesday! I think most of the pigmen are probably heading to the Hamptons for the weekend so don't expect much!

I hope everyone has a great Labor Day! Drink a beer, spend time with your families, and try to forget about the stock market for a few days.

Those are my plans!

Thursday, August 28, 2008

3.3% GDP Growth! Party On!

It was another wacky day on Wall St. I wanted to talk about the GDP number tonight. Merrill Lynch's David Rosenberg came out with a great research report today on this bogus number. I can't link his report but I will highlight it below.

Here are some things that Rosenberg pointed out.

- The GDP reported that earnings among the financials grew at a 27% annual rate. Mr. Rosenberg called this an "Alice in Wonderland" number.

- Per unit pricing came in at -3.8% which is the biggest deflationary drop in prices since 1949!

- He can't see how this number can be right when the inflation numbers are running so hot. CPI is running at 5% annual rate and the PPI is running at a 10% annual rate.

- Corporate profits are were down 9.2% in the second quarter.

- GDI(Gross Domestic Income) (This includes personal and corporate incomes) has contracted for four consecutive quarters from 4.6% in Q2 '07 down to 2.3% in Q2 of this year.

- Bottom line: They are non-believers in the GDP number.

My Take:

This Q2 GDP number is a joke. Rosenberg explains in the report that corporate and personal income contractions for 4 consecutive quarters are only seen during recessions.

The deflationary -3.8% on prices was startling to me. This is the biggest quarterly drop in 60 years.

So how can this happen when we have soaring inflation? My best guess is its all about the drop in housing prices and other assets. SUV's are dropping like a rock. I see sales everywhere. Outback is promoting a 10$ steak. I think this 3.8% deflation drop points towards a potential "deflationary collapse".

I understand where Rosenberg is coming from. As an economist, he doesn't understand how there could be such deflation in an environment of soaring inflation.

Some economists believe we can have both at the same time. Less disposable income due to price inflation drops the prices of assets: In other words, the consumer has less money to spend on assets because he is paying more for necessities.

Rosenberg repeatedly emphasized that the GDP numbers don't make any sense and I agree with him.

The headline of this report says it all: "2Q GDP tough to swallow. Needs a Grain of Salt or two"

The Stock Market Dislocation

The price action on certain stocks today was astonishing. The GSE's and financials soared. Equities as a whole rose based on the new mantra from the "bubble boys":

"Merrill Lynch & Co. became the latest major Wall Street bank to cast doubt on speculation the Treasury would directly support the companies, since both have adequate capital to offset losses for "several quarters."

The Merrill note on Tuesday follows similar comments by Goldman Sachs Group Inc. and Citigroup Inc. that threw cold water on bailout concerns.

Fresh calculations by analysts on revenue and losses suggest the companies, while stressed, can survive on their own, avoiding a government takeover."

Kass disagrees(from the same piece)

"NEW YORK (Reuters) - Hedge-fund manager Doug Kass said on Wednesday he is maintaining his short position on the seriously depressed shares of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), saying the housing finance companies still face deteriorating fundamental conditions.

The founder and president of Seabreeze Partners Management shrugged off the recent rally in Fannie and Freddie, saying the companies continue to face higher funding costs in the latter half of the year as well as falling home prices.

"These two companies face not only a margin squeeze because their cost of funds is rising against Treasuries, but a deterioration in their primary earning asset -- which is the left side of their balance sheet, and that is the value of homes," Kass told Reuters in an interview."

My Take:

I agree with Doug Kass here(shocker right?). The pigmen know these companies will end up flaming out. They throw this news out there and then trade on it. They are willing to say anything to keep the game going.

This will all end in tears folks. The fundamentals are all very bearish as I have explained before. Dell had a huge miss in earnings afterhours tonight. Dell saw weakness in markets all over the world including Asia and Europe.

Bear market rallies are common folks! Rumors swirl and the markets react. Stocks trade on emotions versus fundamentals when the markets are under severe pressure.

This is why trading this market should only be done by the pros. This market can swallow a trading account whole in a few weeks because of the volatility. Invest with athesis and stick with it!

Bottom Line:

The market is only up slightly for the week so far. This three day move up on low volume is just another bear market bounce. Gustav will make his appearance over the holiday and could really throw the market into a tailspin if he takes out some oil rigs.

I am hearing this could be a strong category 3 or higher!

The big players are back to work on Tueday and it will be interesting to see what they do.

Wednesday, August 27, 2008

Census: Incomes still below 1999 Levels

I ran across this in the USA today this morning:

"WASHINGTON — Despite an economy starting to wobble, incomes were up and more people had health insurance last year, the Census Bureau reported Tuesday. Income inequality even shrank a bit.

The snapshot was taken before 2008, when the housing market collapse accelerated and job losses soared.

The nation has lost 463,000 jobs since the start of 2008, after adding 1.1 million in 2007, so it's not clear whether the economic gains of last year are continuing.
CENSUS AND POVERTY: See figures for your state
EXPERTS: Economy may stall push for health care
CITY STATS: Most affluent city might surprise you

The Census reported:

•Income. Median household income rose to $50,233 in 2007 after adjusting for inflation. That's $665 more than a year earlier but still below the peak of 1999. Income in black households rose for the first time since 1999.

•Poverty. The poverty rate remained stable at 12.5% of households.

•Equality. The top one-fifth of households took home slightly less of the nation's income in 2007. The middle and lower-middle class gained the most.

•Insurance. The number of people without health insurance dropped 1.3 million to 45.7 million. The uninsured fell to 15.3% from 15.8%. The primary reason for decline: More people, especially children, are covered by government-sponsored insurance."

My Take:

Hmmm...A quick question here. Why has the price of a house DOUBLED since 1999 when incomes are less than they were in 1999?

Anyone thinking we are close to the bottom is housing needs to think about this little statistic. Gee, do you think maybe the banks devised exotic mortgage products that allowed them to blow up a housing bubble?

Folks, all of these lending products are now GONE at a time when incomes are below 1999. There are no more 100% neg. am, subprime, or Alt-A loans anymore. Foreclosures are rising by the day and there seems to be no end in sight. Prices continue to drop.

My second question is this: If the lending products are gone, and incomes are the same or lower than 1999, doesn't it make sense that housing prices will drop back to 1999 levels?

I can't see why they wouldn't. The bank lending standards are probably even tougher now than they were in 1999. The banks also have significantly less capital today versus 1999. Maybe this combination will result in even lower prices than 1999!

Anyone thinking that housing can sustain a 100% jump in prices when income levels haven't changed needs their heads examined!

We sit here today with a 15% correction in housing prices, and the bottom callers are out screaming that we are through the "worst of it". How can homebuilders be up 10% today when you read numbers like this. Fannie/Freddie are both up 20-50% for the week. The spec traders are playing with fire here. When reality finally hits this market its going to be ugly. The numbers don't lie, and the long spec traders are going to get caught holding the bag one day.

I say BULL**** to the idea that housing is stabilizing! Looking at the numbers above, the correction has only begun.

1999 home prices here we come!

Tuesday, August 26, 2008

New Home Sales Rise(Chuckle)

Oh boy, here come the home pumpers!

I had to laugh today watching bubblevision and their reaction to a 2.4% uptick in new home sales in July versus a 2.1% drop in June. Here is the story:

"Sales of new homes posted an unexpected gain in July as heavily discounted properties enticed cautious house hunters to become home buyers.

But sales in June turned out to be much weaker than the government previously estimated.Sales sank to a pace of just 503,000, the worst showing since September 1991. Economists were expecting sales to drop in July.

The news follows Monday's report that sales of previously owned U.S. homes ticked higher in July thanks to lower prices, but record inventory suggested the battered housing market is unlikely to recovery soon.

Earlier Tuesday, Standard & Poor's reported that U.S. home prices fell a record annual 15.9 percent in June, but the monthly rate of decline slowed from May which suggested the housing sector may be stabilizing."

My Take:

The financial media is a joke. They revise the June number downward, and then announce that home sales were up in July by a whopping 2.4%. Without the downward revision, home sales were most likely not up in July. Please read these press releases before you believe the hype!

Of course the housing market is now showing signs of stabilizing according to the cheerleaders. Yeah its stabilizing alright, at an abysmal 500,000 units a month. Inventories are still over 10 months which is almost twice the historical norm.

The market read right through this report and continues to trade in the red.

Hurricane Gustav

Keep an eye on one this folks. Gustav looks like it has the potential to become a monster hurricane, and it looks like its heading right towards the gulf and our oil refineries. You can follow Gustav here:

Bottom Line:

Oil is up due to the hurricane and the instability in Georgia. I have seen computer models that predict Gustav will strengthen up to a Category 3 by the weekend. Oil could soar depending on its track.

I expect a relatively flat day today unless the Fed minutes say something unexpected. A we head towards Labor Day, the volume should shrink dramatically and the volatility might drop a bit minus any surprises or shoe drops.

Stay Tuned!

Monday, August 25, 2008

Market Plunges on Housing/Financial Worries

Happy Monday to all!

What a way to start the week! The markets plunged more than 2% today as housing and the banks continue to drag down the markets.

A key difference to todays market plunge versus the drops we have seen in the last few months was the lack of rotation into commodities. Gold and oil were basically flat.

I warned everyone a few weeks ago that the speculators were running out of places to hide. Demand destruction, deflation worries, and a stronger dollar have ruined the commodities trade. There is no where else to hide folks except to stay in cash or buy treasuries.

Home sales were up 3% versus the 1% that was expected

When you first read this it sounds like good news right? Well once you dig into the numbers, you quickly realize that the numbers are not good:

"Sales averaged a pace of 4.95 million the past three months, the same rate as the previous period, indicating that purchases may have touched a bottom. At the same time, the glut of houses for sale means property values will probably keep dropping, putting pressure on household wealth and consumer spending.

Resales were forecast to rise to a 4.91 million annual rate, according to the median estimate of 75 economists in a Bloomberg News survey. Projections ranged from 4.69 million to 5 million. July's sales rate was the highest since February.

Sales were down 13 percent compared with a year earlier. Resales totaled 5.65 million in 2007.
The increase in sales wasn't enough to keep up with the surge in properties coming into the market as foreclosures mount. There were a record 4.67 million unsold houses and condos on the market in July, representing 11.2 month's supply at the current sales pace, matching the highest ever. The group has said a five to six months' supply is consistent with a stable market.

The median price of an existing home fell to $212,400 from $228,600 in July 2007.

One-third to 40 percent of total sales last month reflected distressed properties, which include foreclosures, he said."

My Take:

Home sales were up slightly but we have two problems here. The first one is inventories are still rising even though home sales are up. This means more homes are coming on to the market via foreclosures, new home sellers, and builders than are being sold. This obviously continues to further pressure home prices.

The second problem is 40% of whats selling are distressed properties. I have always said the demand for housing is there as long as it is AFFORDABLE. When they get to a distressed price they will sell. The problem is that most sellers refuse to admit this. Robert Shiller once said that sellers are always the last ones to capitulate in a housing downturn because no one psychologically likes to admit that they made a mistake or failed.

Sellers that are trying to get $500,000 for a home they bought in 2005 need to realize the housing bubble has burst.

The lending game is over, and tighter standards now apply. Sellers must start pricing into their asking prices. A guy that could qualify for a $500,000 home in 2005 may only be able to qualify for 1/2 that amount today.

Until the sellers realize this, the housing misery will continue. They need to start adjusting their prices to where buyers can qualify. There are way too many delusional sellers that think their home is "different", and that their granite countertops and stainless steel appliances have added $80,000 to the value of their "perfect" house.

Well guess what sellers. The bank doesn't give a crap about your granite. They just lost billions lending to buyers that could not afford their loans, and they now sit on the brink of insolvency as a result. The lending standards are going to be 20% down and no more than 36% of your pay going forward. Granite or no granite.

As a seller, if you can't afford to short sell it at this lower price, give it back to the bank and take the credit hit. I think that based on the increase in foreclosure activity, sellers who bought at the peak are now realizing that this is what they have to do.

This is why I think inventories are going to continue to soar and this crisis still has a ways to play out.

Bank Worries

Here is a nice summary from Bloomberg on what torched the markets today. AIG, Lehman, and the weekend bank failure combined to spook the markets today.

Bottom Line:

Watch out and be careful here. We might be seeing the beginning of another wave of selling in the stock market. There is nowhere to hide. Everything was red today. This is what deflationary collapses look like.

The housing numbers were the key component of what sold off the market today IMO. Lehman and Washington Mutual both appear to be on the brink of failure. The word on the street is that Lehman's boss is on the hot seat.

I know I have said this before but I will say it agian: Until housing prices stabilize, the stock market is going nowhere. Today's data showed us that prices continue to keep dropping and inventories continue to rise.

This is a deadly combination that will continue to put pressure on the banks and the markets.

Sunday, August 24, 2008