Friday, August 28, 2009

End of the Line

Hi All

Here is a quick video that I thought you would enjoy:

My Take:

What's a government to do? Spend money that they don't have or stop and let people starve?

1.5 million desperate Americans are facing the reality of losing their last lifeline of income by the end of the year. How many more people have to suffer before we finally suck it up and take our medicine?

Let's face it folks. We need to face the music and force many banks and every other bad company that's bankrupt to take their losses. Our nation will burn to the ground if we continue to bailout the favored elite.

The economy if NOT functioning. The government has spent trillions on bailing out America and its done nothing to help the little guy. The jobless still remain unemployed and they are about to lose their last option.

I am all for a few social programs that help people in dire situations. However, like the gentleman said above, we must stop spending money that we don't have in other areas of the economy in order to prevent our deficits from deepening.

I think its time the stimulus filters down to the people that actually need it versus bailing out the millionaires on Wall St.

We need change folks before we lose our country.

Thursday, August 27, 2009

The Consumer is Dead

Hello All

Before I start I wanted to let everyone know that I will be in and out throughout Labor Day. I am on vacation so it might get quiet around here at times.

Just a quick video tonight. Davidowitz is one of the best retail analysts out there. He sees what I see: Consumer destruction! For whatever reason, the market continues to ignore it.

The reality folks is the economy sucks versus a year ago. Stocks are "recovering" by slashing costs and firing workers.

The reality is from a revenue standpoint retail sales are down nearly 10% versus last year. Recovery? Where?

Without year on year top line growth, the economy will continue to struggle. I see no catalyst that will reignite the consumer. Jobs, earnings, and savings are all dropping.

Trying to live in a "bubble world" thinking that things are turning around is a good way to get crushed investing in the stock market over the long term. There will be intermittent bear rallies as we work through the worst collapse since The Great Depression.

However, one fact remains:

There is simply no way that this economy can recover in only 12 months as the consumer deleverages and repairs its balance sheet. The consumer is now faced with paying off unprecedented levels of debt.

It will take years for these wounds to heal. Wall St isn't ready to accept this as they try and speculate themselves into a recovery.

The market is starting to remind me of the time right before the tech bubble burst. It's filled with blind speculation based on ZERO fundamentals. Stocks are rising at an unsustainable pace. Bubblemania is back!

Let's all remember: Without the government stimulus this economy would be a mess. Eventually, the punchbowl MUST get yanked as the government is forced reign in spending. The speculators will once again be left holding the bag when the fundamentals return as they always do.

I am amazed at how investors continue to return to this casino after getting faceplanted with a 50% loss TWICE on the S&P in the last 10 years. Some people never learn. Perhaps we are addicted to bubbles?

The market is betting on a recovery. I see nothing of the sort. We will see who is right a few months from now:

Wednesday, August 26, 2009

New Home Sales are Strong! At the Right Price

Before I get started I thoughy everyone could use a laugh. Check out the new stimulus T-shirt:

Classic isn't it? I laughed my butt off when I saw this one.

Ok, back to the markets.

Today was another "borefest" on Wall St as the bears and the bulls continue to tango around the 1000-1050 area on the S&P.

We got some more bullish housing data on new and existing home sales. I have to admit, that tax credit seems to really be working. A few mortgage brokers have told me things(especially on the low end) that things have picked up as a result of the government stimulus.

What's interesting here is when you dig into the hew housing data, the real demand is coming from houses that haven't been built yet versus the spec "McMansions" that are already up.

According to the most recent report, new home sales are up 33% for houses that haven't been built yet while the new home sales for homes that are already up were down 6%. The reason for this is builders have adjusted to build what the buyer is looking for: Smaller and cheaper homes!

As I have said before, the 1-3's or 100-300k end of the market has been doing extremely well as a result of the first time home buyer tax credit. Homes in this price area are affordable which is critical in an environment that's dominated by tight lending. Buyers today must have the income needed to afford the mortgageor the deal isn't going to happen.

The answer to the problem with housing is simple folks. The price to income ratio must drop to where buyers can actually afford to buy them which is historically 3 times income. For example if you make $70k then you can comfortably afford something in the $210k range.

This means one of two things has to happen:

A) Incomes have to rise sustantially.


B) Housing prices must drop to fall in line with incomes.

Since we are in the midst of an economic collapse with soaring unemployment, I think we all know that option B is the only choice that realistically works.

The only way we got to this point was because Wall St created Ponzi lending products that enabled us to buy homes that we had no business buying. In the bubbly areas the price/income soared to 10-1 as buyers used no doc and subprime loans to buy up everything in sight.

What we have now learned is these homes were simply unaffordable which is why we now see a 13% delinquency rate on all mortgages right now!

What we are now learning as prime defaults soar is it didn't matter what your income bracket was: EVERYONE MADE THE SAME MISTAKE OF BUYING HOMES THEY COULDN'T AFFORD.

This is why the high end of the home market is totally screwed: The lending products are no longer available to buy these homes.

Banks would laugh at you today if you came to them with a loan application had a price to income ratio of 10-1. They would deny your application before you got two feet inside the bank. You would walk out of there with the word "DENIED" stamped right across your forehead.

Economic Disconnect found a great chart from Bubble-meter decribing the huge disparities in demand at the different home sale price levels:

The Bottom Line:

The numbers don't lie folks. The cause of this crisis is simple: Housing prices historically got way out of whack with incomes. The answer is also simple: All homes must fall back to levels where people are able to qualify.

The problem we have here is this adjustment will destroy the balance sheets of the banks on Wall St. The government has been desperately trying to prop up housing prices by lowering interest rates in an attempt to reflate the bubble and keep prices elevated.

Washington needs to realize that this WILL NOT WORK! Any economist with half a brain can figure out the problem here. Middle class Americans had no business buying homes for 500-600k just like upper middle class Americans had no business buying $2 million homes.

I also want to point out that this insanity was basically seen in certian "bubble areas" of the country. 600k homes in areas where housing is affordable will hold more of their value because there is less supply of them.

The fallout of this stupidity at the mid to high end will result in an upper end collapse in home prices because there simply aren't enough buyers to soak up the inventory.

This will put many prime loans at serious risk and will trigger another string of losses for the banks.

If you are in a home under $250k you have probably taken the largest part of your hit from the housing bust unless lending rates rise in the bond market as a result of our unfathomable deficit's.

If you are in the market for something above the low end in a bubble area, be patient, those $600,000 homes in suburbia will be $300,000 within a year or two.

As for the stock market: It's barely worth mentioning right now because the volumes are so low. When insolvent government owned stocks like AIG, C, BAC, and F are responsible for 40% of the trading volume on the exchange please accept this advice: Run away as fast as you can unless your an obsessed day trader or addicted to gambling!

These stocks are being gamed daily via HFT's so I would avoid this charade because you might be the one that gets stuck holding the ball when they decide to move onto something else.

The price action overall has been insane on Wall St recently. There is no rational way to accurately analyze it. Hopefully when the summer ends and the big players on the street get back to work, the market might start making sense again.

Tuesday, August 25, 2009

Is Wall St Buying Ben Bernanke?

Obama's reappointment of Fed chairman Ben Bernanke was supposed to be a pleasant surprise for the markets today

Wall St barely blinked after the announcement. This was a surprise IMO because Bernanke has been hailed as the "saviour" of the financial system according to the financial pundits.

Ben has also consistently backed the bankers almost everytime as the Fed continues to scramble to keep the financial system in one piece.

Does anyone else find this muted response to Ben's second term strange?

Why didn't we see a 300 point up day as Wall St cheered the reappointment of their fearless leader? The market recently has done nothing but move higher on any word of a new "green shoot". Yet, this shoot was almost completely ignored.

The silence was defeaning in response to the Bernanke reappointment as far as I am concerned. The DOW closed up only 30 points today despite seeing better housing and consumer confidence #'s.

The Iranian people were more joyeous over the announcement of Ahmadinejad's second term versus Bernanke's second term announcement!(scarcasm off)

Is America Ready For a Change?

You gotta ask yourself this after seeing the muted reaction in the markets today after the Bernanke announcement.

I believe the smartest people on the street are not very confident in Bernanke. You need to ignore what the wizards of Wall St said on CNBC in reaction to the news. Wall St is in total spin mode right now because knows that they must restore confidence in order to turn the economy around

Behind closed doors however, Wall St looks at where we are conomically and wonders if this was the right move. I believe that Wall St is petrified at what they see when they look at the real economic numbers. The economy continues to sink despite the largest stimulus package in history.

The Fed has dropped money out of helicopters for 2 years only to see the economy continue to fall apart.

The Freddie news today regarding its mortgage portfolio was a perfect example:

"Freddie Report:
Mortgage Fundamentals Still DeterioratingLast update:
8/25/2009 9:51:19 AM
By Andrew Edwards

NEW YORK (Dow Jones)--Mortgage financing giant Freddie Mac's (FRE) monthly report showed that whatever improvements there have been in credit markets underlying fundamentals are still declining.

Delinquencies on Freddie's portfolio nearly tripled to 2.95% in July from 1% a year earlier. Freddie holds a portfolio of $2.23 trillion in mortgages and is restricted to buying mortgages from the strongest borrowers. Delinquencies edged up slightly from 2.78% in June.

"July delinquencies showed no improvement whatsoever, and what incremental movement there was, the figures showed accelerating credit weakness," said Jim Vogel of FTN Financial.

The report also showed that Freddie is unwinding its portfolio of mortgage-related investments faster than had been expected by market observers."

My Take:

Folks, if trends like this continue there will be no recovery. Delinquencies have TRIPLED from a year ago. Recovery? Where?

The supposedly "bullish" housing data that was released today via Case/Shiller really doesn't mean anything because we don't know all the facts.

The massive shadow inventories combined with various foreclosure moratoriums make it extremely difficult to guage how large the housing inventories really are.

I am also hearing more and more stories of families that have simply stopped paying their mortgage(for 2 years or more). The banks have reacted by doing nothing. The banks figure its better to have someone in there taking care of the place then it is to foreclose on it, be resposible for upkeep, and then be forced to take the loss on their books.

God only knows how many squatters there are right now that find themselves in this situation.

It's going to take years to figure out the real story here. I would be in no ruch to buy until the banks puke up the real losses. I am sure its much worse then we are led to believe.

The Bottom Line

Wall St's support of Bernanke is mild at best. They all know he was part of the Greenspan mess that created this nightmare in the first place.

Bernanke's reactions to the financial crisis are unprecedented, and even the smartest guys in the room don't really know how this is all going to play out.

The Fed has basically orchestrated one gigantic fiscal experiment that's created a lot of uncertianty in the markets, and uncertianty is the one thing that Wall St hates most.

Monday, August 24, 2009

Wall St's Bond Game

The primary dealers are happy campers after today's treasury auctions.

I thought I would get a little more into detail about the bond game that I described on Friday because we saw a perfect example of it today.

I will use TNX(10 year) as the example because its the easiest way to see in a graph how the bond market manipulates the yields on treasuries. Let's take a look at Friday and today's TNX action:

Quick Take:

The grey bar divides Friday and Monday's trading. As I described on Friday, the primary dealers and the bond market love to sell off treasuries a day or week before treasury auctions because they are able to pick up treasuries on the cheap during the auctions.

Once the auctions are completed with a strong bid to cover ratio(BTC), treasuries soar as the market breathes a sigh of relief that the auctions got done.

Like clockwork, the auctions of course went smoothly today:

Final Take:

This "old school" bond play worked like a charm today. Yields soared on Friday as the bond market prepared for the auctions which allowed the PD's to get sweet entry points on treasuries from a pricing standpoint. As you can see above, yields then collapsed and treasuries soared once the auctions were successfully completed.

The primary dealers will now sell off the bags of treasuries that they picked up on the cheap at a much higher price and make a sweet profit on the spread.

The reason I say the markets were gamed here is because there was no reason to see such volatility in yields over the last few days.

The moves in TNX are greatly exaggerated IMO versus what the market has done the past few days. For example: There was no sell off in the markets today so yields shouldn't have collapsed as violently as they did.

On the flip side, Friday's move was strong, but the violent sell off in treasuries was way overdone versus the up day in the market.

This is a classic example of Bond market manipulation. If you want to try and take advantage of Wall st's games via a trade, I would suggest shorting ticker TBT before the treasury auction results are announced if you see yields rise sharply the day before the auctions.

Many think that it's very bearish when the primary dealers get stuck with 50-60% of a treasury auction. Ummmm...Think again. They are making a fortune as long as the game above continues to work like a charm.

As long as the BTC ratios stay in strong, the bond market is a goldmine for the PD's. If they BTC's start to slip(like I eventually believe they will) then the PD's are going to be in deep trouble. Until then, all is good!

Meanwhile as Wall St makes a fortune on this collapse, Rome continues to burn as J6P continues to suffer as they lose their jobs and houses at a record pace.

U6 on unemployment is nearing 20% as the economic crisis continues to deepen. It was reported over the weekend that California has an official unemployment rate of 11.9%.

The Bottom Line

I personally find it disgusting that Wall St is making billions at a time when the taxpayer is stuck paying off the tab for their mistakes.

The fraud continues to roll on!

I mean think about the enormous bailouts that we have been stuck with as a result of Wall St's greed: AIG, Fannie, Freddie, TARP...Need I go on?

Why is Congress not forcing Wall St to use their massive profits to help payoff the trillions in debt that they stuck the taxpayer with? It's going to take us generations to pay this nightmare off.

I know I know....Keep Dreamin... Like that's ever going to happen. I can hardly wait to read about the billions of $$ in bonuses that Wall St will dole out to themselves at the end of the year as a result of their games.

It just goes to show you that Washington DC is bought and paid for by Wall St.

The pigmen get bailed out at the expense of the taxpayer and they then rape us again by using the TARP money to game the markets once more in order to pay themselves more billions. I never thought I would see such a thing in this country.

America is rapidly becoming a two class system: The Oligarchs and the Serfs.

Sunday, August 23, 2009

Joe Saluzzi

I caught this on Zero Hedge today and I wanted to make sure that everyone had a chance to watch it.

Joe tells it like it is in this interview. I loved it! The market and the economy couldn't be further apart, and its turned the stock market into one giant speculative casino.

IMO, the distortions between where the market is trading versus how the economy is doing is setting up the bulls for a major beatdown unless the economy recovers sharply. At the same time, its hard to call tops and fight the trend. Good stuff!