Saturday, April 11, 2009

Reverting to the Mean

Hello All

Going to keep it simple today. Yesterday I discussed housing prices and why they must revert to the mean before the housing market stabilizes. I also discussed my frustrations around our government's constant attempts to prevent this from happening.

Glenn Beck did an awesome piece around this last week, and I wanted to share it with you. Throughout time we have seen bubbles and busts in the housing market. The end result is always the same: Housing prices ALWAYS revert back to the mean.

It will be no different this time folks. Whats scary here is look how much further housing prices must drop before we get back to reality. Imagine what the ramifications of this will be in terms of unemployment and bank losses as we painfully move back to reality.

The bailouts will not stop this process from happening. All they will do is delay the inevitable and dig us deeper into debt. Anyone thinking we will see a recovery before housing gets back to historical pricing levels needs to get their head examined.

Glenn asks an awesome question around Obama's remarks: Does this sound reasonable to you?

Friday, April 10, 2009

Its All About Affordability

Good Afternoon Everyone!

I just wanted to discuss a couple of things today real quick. I found a great article in the USA Today around the housing crisis.

This article does a great job breaking down the housing bubble. Basically 1 in 9 homes in the USA are now sitting vacant.

Here is the money quote from the piece:

"Sales of existing homes rose 5.1% to 4.72 million from January to February — the largest sales jump since July 2003, the National Association of Realtors reports.

The surprising increase was driven by buyers taking advantage of big discounts on foreclosed homes. The median sale price was $165,400, down 15.5% from a year earlier and down 28% from their peak in July 2006."

My Take:

Its all about affordability folks. I have been preaching this for over a year now. The bounce in home sales that was seen in February was based on one simple formula: AFFORDABLE HOUSING. The median sales price was $165,000!

Homes priced at this level will find buyers because its well within the affordability of the average family when you look at the average household income in the US:

A good rule of thumb is that you should buy a house that's about 3 times what you earn. 3-1 debt to income on a house is the mean that we have seen in this country for decades until the housing insanity that hit earlier this decade.

As you can see above, the average household income is around 50k. So Americans in general should pay around $150k for a house. The median price for the home sales in February was 165k. HELLLOOO!!!!! Anyone see a trend here?

When Americans can find something within their affordability range they buy it. Just as importantly, the banks and their tighter lending standards will do loans at 3 times income because they are confident they will actually be paid back.

This is not rocket science people! This is why I get so infuriated when I watch Wall St. and Washington continue to try and prop up home prices by doing more bad loans at unsustainable artificially low lending rates.

America sent a message in February: Give us affordable housing and we will buy it!!!!

The problem we have here is most of the McMansions in America in the hot markets are priced at 400-500k. Most of these houses are not going to move until they are sliced in half or more depending on the market. Look at the math above folks. It says it all. There is plenty of demand for housing homes are priced at proper debt to income ratio's.

Home prices only got this expensive with exotic lending products that no longer exist. These prices must be adjusted because housing is never coming back to where it was! The banks keep praying that it does but its not gonna happen folks.

This means trillions in losses for our financial system(Ooops! I mean the American taxpayer) as millions continue to get foreclosed on and sold huge losses, and new home sales are forced to be given away at a 50% haircut.

March Tax Receipts Plummet 28%

I'll end with this little tidbit. Take a look at the Treasury tax data for March. Revenues are down 28% as a result of this economic collapse.

Anyone care to explain to me how we can afford to spend $11 trillion in bailouts at a time when are our tax receipts are off by about a third? Can you say nightmare?

Keep spending Washington DC. Bankruptcy is right around the corner.

Wednesday, April 8, 2009

Are We Being Raped?

Just a quick note. I might not get back on today because I have lots of work to do today.


You need to ask yourself this question after Wells Fargo announced today that they expect to see record earnings for the 1st quarter.

If Wells is really is doing this well then why in the hell did the taxpayer have to fork over tens of billions of dollars to this bank just a few months ago?

I call bull**** on this "announcement". With all of the mark to market changes combined with the shadow foreclosure inventories, I think this is nothing but a cooking of the books. The fraud rolls on ladies and gents.

If things are so great right now at Wells Fargo then why doesn't the CEO of the bank go on CNBC today and open up their books? Why are are we still "kept in the dark" in terms of what their balance sheet really looks like if things are booming?

I would love to see banks do well, however if you REALLY are profitable, don't steal billions from the taxpayers of this country! None of this makes any sense folks.

I am sick and tired of the pigmen gaming the system. Hey Wells: If you are this profitable: Gimme my damn money back!!!!

Shadow Inventory

Below is a great example of the games that the banks are now playing:

As you can see above in the San Francisco area, 51,602 properties were foreclosed on in the Bay Area since 2007. However, only 30,823 have been resold to date. These numbers don't make sense right? Whats going on here is in classic pigmen style, the lenders and the state enacted a "moratorium" on foreclosures which has allowed them to show that the shadow inventory has "officially" been "burned off(yeah right).

The reality here is they are just simply taking advantage of this moratorium and holding onto 19,800 empty homes and not including them in the foreclosure stats. As a result, expect to see another flooding of foreclosures hitting the market in the San Francisco area in the very near future. If you live in this area, don't get suckered into buying thinking that all of the foreclosures have almost all sold.

There will be plenty to choose from when they release their next load of toxic waste onto the housing market.

These are the types of games that are going on right now guys and gals. I don't trust these earnings by Wells Fargo one bit. If they are accurate then we have just been totally screwed over by our government and the pigs on Wall St.

If we are bailing out companies that don't need to be bailed out then we need to hold people accountable for this type of blatant fraud!

History Repeats Itself

We have seen speculative manias like this before when we thought the worst was behind us. The mirage that things are fine is a very strong one that's been finely crafted by Washington and Wall St.

The reality here is the economy is still awful. Walmart missed big this morning and the jobless claims were -650k. -400k is considered to be recessionary. There were also upward revisions to previous month claims.

We have seen viscous bear market rallies before. Here is a great example of one below:

Economic Recovery? HA!

Alrighty Folks,

Its reality time.

I just got done vomiting after spending several hours watching Bubblevision today. I don't know why I torture myself like this: Perhaps I am a glutton for punishment? All I can say is thank god for Rick Santelli. He is the only rational guy left on CNBC. Others like Mark Haines are getting there but I still see little horns on top of their heads.

Anyways, the majority of the day on this absurd network was spent highlighting the so called "silver linings" of growth seen throughout the economy. According to the "Power Lunch" retards, the economic mustard seeds are starting to sprout as our economy begins to show strong signs of recovery!

I am really starting to get agitated by this constant inaccurate pumping of the economy by this channel. Has anyone ever wondered how many trillions of dollars this network has cost investors that actually believe that this is accurate financial news reporting? I bet the numbers are astounding!

IMO this network should be a subscription service for investment professionals that have the capability to differentiate the snake oil salesman thats "talking his book" from the guys who are actually bringing solid fundemental economic data to the table.

Anyways, let me once again be the "counter weight" to the CNBC pump. The mustard seeds are not sprouting ladies and gents. In fact, if you look at the data you would think that someone hasn't watered them in about 6 weeks!

I suggest everyone reads this piece from the New York Times around US production. As you can see, lack of demand as a result of the struggling consumer has pushed US production into a tailspin:

As you can see above, this is the 2nd largest contraction in US production since The Great Depression. I expect that we will pass the '82/83 contraction within a matter of months the way this graph is falling off a cliff.

In fact, if you look at world industrial output, we are actually contracting at a faster pace than we did during The Great Depression!:

We don't need to produce things folks if no one has the desire to buy them. The Baltimore news reported over the weekend that there are 57,000 cars sitting in Baltimore Harbor with nowhere to go!

The New York Times explains in the piece above that its going to take years to mop up this excess inventory. Factories will continue to run at a much lower capacity as we lick our wounds and pay off our debts. Anyone thinking that this is all going to turn around by 2010 needs to be put in a straight jacket. There will be mustard seeds sprouting here someday, but its going to be anytime soon!

Housing Numbers

This is another subject that CNBC loves to go on and on about. Housing sales are up! Mortgage applications are too and blah blah blah blah blah.....

Lets take a look at the real numbers:

My Take:

Yes home sales are up in February, but all this bump really did was get us back to December levels. Remember January was one of the worst months ever for home sales so moving up from these levels is nothing to write home about. All three of these months are all WAY below where we were during the boom.

Whats also interesting here is you can tell by the increased number of housing applications that there is demand for housing. The problem is no one is qualifying! You can see above that during the boom years when lending was loose, mortgage applications were a great indicator for what home sales would look like down the road because the banks would give a loan to anyone with a pulse.

This graph does a nice job showing you from how tough the lending standards got from 2007-'09 as the housing bubble burst. There is now a huge gap between applications to buy a home(this does not include refi's) and actual home sales. The banks finally learned how to say NO! Sigh...if only Paris Hilton could learn the same lesson....:)

What this chart tells you is home prices are still too high and the banks refuse to lend to someone who can't afford the house! The gap between home sales and applications would be much smaller if housing was affordable. This means only one thing people: Housing prices will continue to fall until this gap is narrowed and buyers can once again qualify.

Bottom Line:

Don't believe the hype! This bounce is doomed the way I see it. The bulls were barely able to take the market higher despite getting favorable news on the uptick rule today. There was also news of a potential bailout of the insurance industry. This also failed to propel stocks.

I continued to hold the S&P short. The insurance companies are now a very tempting short in my view. Some of them jumped 25-30% on the bailout news. PRU is the name I am looking at on the short side. They have the worst management team of all the big insurers according to my contacts. There is no need to jump in too soon here though. They may run up on the Fed news for a bit.

Until next time!

Tuesday, April 7, 2009


Good Afternoon Folks!

Its great to be back today!

Stocks pulled back today as traders got prepared for what is likely to be an awful earnings season.

Alcoa kicked off the earnings season today with big a swing and a miss after announcing a $497 million dollar loss. What a shocker eh? NOT! Get prepared for lots of misses folks because I think you are going to see further signs that our economy is completely collapsing at a frightening pace.

Why do I say this?

Well, just look at the news. Moody's announced today that default rates surged to the highest since The Great Depression:

"April 7 (Bloomberg) -- Thirty-five companies defaulted in March, the highest number in a single month since the Great Depression, according to Moody’s Investors Service.

The rate at which speculative-grade corporate borrowers worldwide failed to meet their obligations rose to 7 percent from 4.1 percent at the end of last year, Moody’s said in a report today. So far this year, 79 companies rated by Moody’s have defaulted, the New York-based ratings firm said."

After this kick in the balls we got some horrific news around credit and the consumer:

"WASHINGTON (MarketWatch) -- The balances on American consumers' credit cards fell at a 9.7% annual rate in February, the fastest rate of decline since late 1976, the Federal Reserve reported Tuesday.

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion, to a seasonally adjusted $2.56 trillion, the Fed said.

Credit has declined in five of the past seven months. Prior to that, credit had declined in only one month in the previous 15 years.

"No other recession has seen monthly changes in consumer credit contract this many times or so deep before going back to January 1943, which is how far the data go back," wrote Young Kim, an analyst for Stone & McCarthy Research. The retrenchment reflects "less available credit, less consumer demand for credit, and consumers' new found propensity to pay down debt."

Credit expanded by $8.1 billion, or 3.8%, in January, revised up significantly from a $1.8 billion estimate, highlighting the risk of large revisions. Credit has grown 1.1% in the past year, the slowest growth since 1992."

Quick Take:

As you can see above, we have nothing to worry about folks the economy is fine! We should be back to strong growth in a quarter or two. I mean that's what they say all day on CNBC right? Now I can see why the average GDP growth estimate by economists for 2010 is 3.8% after reading articles like the ones above.(sarcasm off) .

Are these economists smoking crack? I am amazed we have bounced as high as we have from the 600's on the S&P. Buying any stock seems like financial suicide to me after reading these types of articles. Every time I think the news can't get worse it does.

Question here: If all of the economic data seen today can only be compared to what was seen in the depression then shouldn't we all be expecting to head into a depression?

I mean am I actually supposed to believe that things will be ok after watching our panicky government throw money out of helicopters right into the bankers pockets? I would love to ask Tim and Ben: Do I look that stupid?

These idiots are doing nothing but throwing trillions of dollars into financial black holes. You might as well have taken the money out into the backyard and burned it. The result would be the same.

If we were smart, we would have taken this bailout money and thrown it into the real economy instead of the bankers. This money could have been used to help create jobs. We could have used it to feed the millions that will be starving as we head straight into our own generation's great depression.

What angers me here is none of this had to happen. What makes me even angrier is when it did happen the money was thrown to the bankers instead of to the people. It went down the wrong hole folks and now its gone! Whats sad is if GREED and FRAUD hadn't consumed Wall St and the rest of our nation we wouldn't be in this predicament.

Now that the money is gone here is the reality that we are left with:

The consumer which represents 70% of our economy is collapsing. Credit card balances are falling at the fastest rate since 1976. A credit contraction like the one described above has never ever been seen in this country since they started keeping records in 1943.

35 companies defaulted in March which was the largest number seen since The Great Depression.

The bottom line here is the economy isn't slowing down folks: Its coming to a complete halt!

I expect to see a failed bond auction within the next 3-6 moths. Mark my words here folks. You read it here first: All hell is going to break lose WHEN(not if) we see this failed bond auction.

This will then become the "come to Jesus" moment for our government and the economy. WAshington will then have to come to terms with the fact that their debt game is over.

When this occurs they can go one of two ways:

1) We print our way out of the debt and head down the hyperinflation route.


2) We severely slash spending and grind our way out of this for several decades similar to what was seen in Japanese deflation scenario that's gone on from the '80's until today..

Either option is going to be extremely painful. I am hoping when push comes to shove our governments picks option #2. History has shown us that governments do not survive hyperinflation. This is how Hitler came to power in Germany back in the '30's. One thing is for sure here folks, either way this game is just about over.

I wouldn't be surprised to see this correction continue. Stocks became way oversold. I continue to be short treasuries and the S&P.


Check out these two videos that I picked up from The BNN(Business News Network) from Canada.

They feature some of key bear heavyweights from around the world: Noriel Roubini, Meredith Whitney, Ian Gordon, and Eric Sprott.

There are some wild predictions along with some top notch research. Ian Gordon actually predicts the DOW will bottom out at 1000! If you look at the charts its very plausible by the way IMO. This is the where the DOW was when this debt party got started in 1982.




Until Tomorrow!

Sunday, April 5, 2009

William K. Black

Good Afternoon Folks

Today is all about Bill Black. I highly recommend that everyone takes a half hour out of their day to watch the videos below. They feature William K. Black who was one of the lead regulators that helped clean up the S&L crisis back in the late '80's.

I have often asked "where are the cops?" as we try and clean up this mess. Bill asks the same questions and does the best job I have ever seen exposing the fraud that occured on Wall St. Bill also explains that this disaster is as much a "moral crisis" as it is a "financial crisis".

Our financial system is fundamentally based on trust and confidence. We will not see this crisis solved until both of these are restored. IMO the masterminds behind this fraud at the major banks must be exposed and removed from their positions before we can begin the healing process.

Bill does an incredible job explaining exactly what happened:

Part 1

Part 2

Part 3