Friday, August 20, 2010

Market Drops as Double Dip Concerns Deepen

Investors continued to avoid stocks as they become increasingly "sick of the market" according to Marketwatch:

"Some investors are saying, "I'm outta here," says Michael Farr, president and chief investment officer of Farr, Miller & Washington. "I'm hearing scary things from investors," he says. "They're sick of the market. They don't want to invest any more. They're pulling their money out of stocks and putting them in bonds." But in doing so, they're settling for a high-priced market with the lowest returns "in my memory."

Quick Take:

As most of you know I spoke a lot about this yesterday.  It was nice to see the MSM pick up on investor sentiment.

Mutual Funds have now seen outflows for 15 consecutive months as a combination of fear and unemployment begins to force the masses to start changing their 401k strategies. 

In the case of unemployment, we are beginning to see an alarming trend where we see desperate investors begin making hardship withdrawals in their 401k's in order to survive:

"The portion of participants borrowing from their 401(k) accounts or taking out a hardship withdrawal rose two percentage points from a year earlier to 11%, while those with loans outstanding also grew two percentage points, to 22%.

Hardship withdrawals edged up to 2.2% of participants from 2%. About 45% of those who made hardship withdrawals a year earlier also took another one in the second quarter. Top reasons included prevention of foreclosure or eviction, college expenses or home purchases."

Quick Take:

I often wonder why the bulls think the market will continue to go up when there are so many headwinds for stocks.  On top of the issue above there is also the issue of simple demographics.

Where are the buyers of stocks going to be as our baby boomer generation starts tapping into their 401k instead of adding to it?  Also, who is going to replace them as our aging population begins to decline?

The population problem is now a serious issue for Russia and some believe this problem was one of the triggers that exacerbated the death spiral in Japan:

As you can see above, a depression is probably the best form of birth control on the planet.  People begin to ask themselves how they can support a child if they don't have the ability to work?

What's scary here is we now have the same issue that Japan did:  An aging population.

Eventually, the longer term effects of a depression begins to psychologically effect younger generations who decide to not get married and instead live with their parents for longer periods of time in order to financially survive.

I just finished an interesting article about how difficult it is for young women in Japan to just find a date let alone marry as the males lose their confidence in their ability to support a family.

Will this happen here?  Time will tell but my best guess is its highly likely.

The Fed

The Fed's Bullard was out with more QE rhetoric today as the economy continues to sink:

"WASHINGTON (MarketWatch) -- If inflation continues to decline, a new round of quantitative easing by the Federal Reserve in the form of Treasury purchases may be warranted, said James Bullard, the president of the St. Louis Federal Reserve Bank on Thursday. At the moment, with inflation low and the recovery on track, no action is needed, he said. "Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted," Bullard said. Any quantitative easing should not be large or sudden. "Shock and awe is almost never a good way to proceed," Bullard said. A series of small policy actions can add up to large action, he noted in a speech in Rogers, Arkansas. The European sovereign debt crisis has abated somewhat but remains an important factor in the global economic mix, he said."

Quick Take:

What on earth is this going to accomplish?  We have record low interest rates right now as it is and nothing has changed.

People have no interest in borrowing more money right now!  This policy is idiocy at its finest.  Pissing away more tax dollars on a failed policy is nto the answer.

I can't help but think of that song "We're on the Road to Nowhere" from the '80's when I see such asinine rhetoric.

The scary part is you know they will pull the trigger and do it too.  I call it rhetoric now because I don't think they are ready to pull the trigger yet.  Eventually you can be guaranteed that they will.

The results of such actions are going to eventually going to hurt the currency.  They also risk waking up the bond market who has been extremely patient with the Fed's policy to date.

At some point this is all going to become extremely inflationary.  Deflation may rule the day today but inflation will almost assuredly rule the day down the road if we continue down this QE path.


I will shut things down for the week after this last segment and The Bottom Line.  I wanted to highlight a Trilia survey that polled renters sentiment on housing:

"Today Trulia hosted a quarterly conference call with Simply Hired discussing the results from our recent American Dream survey on attitudes toward home ownership. Government and industry experts agree: consumer interest in buying homes is an essential element of a healthy real estate market. However, 27 percent of renters indicated that they do not plan to buy a home - ever. Of those renters who do plan to purchase someday, 68 percent said it would be more than two years before they do. This reluctance to buy could potentially drag out the real estate market’s recovery timeline further than many have predicted."

The McMansion Era is Over

"Americans are veering away from the “McMansions” that had grown popular before the recession. Those American adults for whom home ownership is part of the American Dream displayed a preference for smaller homes, with only 9 percent saying their ideal home size is more than 3,200 square feet– the same number of who said they’d like their home to be between 800 and 1,400 square feet. Fifty-five percent of Americans would prefer a home between 1,401 and 2,600 square feet."

Quick Take:

Yawn....Call me when 75% of renters say they never want to buy a house again!

Seriously, this is some pretty alarming data.  This essentially tells you that 95% of renters plan on buying nothing for 2 years.  Almost 1/3 now say they never want to own buy a house.

If you are a Realtor you probably haven't slept well since this data came out.  

Something else to noote here is it appears the days of wanting to own a McMansion are apparently over.  I personally never understood why anyone would want to own these huge homes in the first place.  The maintenance alone would drive me nuts!

Essentially what this tells me is the people that paid bubble prices for McMansions at the peak are totally screwed for two reasons:

1)  No one can qualify for a mortgage to buy these Ponzi priced McMansions because they can't afford them.

2)  Potential buyers no longer have the desire to own a huge home.

I think when all is said and done this is the segment of the market that's going to get hit the hardest.

The Bottom Line

Nothing changed much today.  Investors continue to avoid stocks like the plague.  We have some huge bond auctions next week.  This is where my attention will be focused.

I think the early week auctions should go well because they are short term treasuries.  I am hoping to see treasuries rise on this news.

We have 5 and 7 year auctions later on in the week.  This is where I plan on taking a shot with some TBT if treasuries move higher earlier in the week. 

Interestingly, treasuries were down today despite the market sell off.  Something to take note of. 

Have a great weekend everyone!



CT-Hilltopper said...

Have you ever seen the video to the Talking Heads Road to Nowhere song?

David Byrne is on the bottom of the screen running throughout the song in a suit and a tie as various vignettes play out, childbirth, marriage, old age...I believe what is being portrayed is that everything is static and noone really moves that far from where they are born unless they are very rich or very lucky. Much like a rat in a maze.

That's my take on it anyway.

Jeff said...


I have seen it but it's been awhile.

Interesting observation. I guess those guys were prophets because it appears that's the tyoe of world we will be living in soon!

flipdippy said...

I think you're going roundabout pointing out what we all already know.

Our free markets are not free. They no longer provide any sort of useful metric on the health of corporations or a sector of the economy or the economy as a whole.

Like you say, all the retail participants and now a large chunk of the institutional participants took their toys from the sandbox and have gone elsewhere. Yet, that's done nothing except allow those HFT machines and algobots to feast upon those stupid enough to apply traditional and tested investment philosophies into the major market indices.

So, yeah, I say the market can make a run to new all time highs or at least come close to the 2007 highs within the next 6-18 months. Low volume, lots of machines, plenty of QE $$$, and enough dumb traders are the fuel for this disconnect to persevere.

And to your point, Jeff, when the bond market collapses, won't that just provide some serious a-bomb type fuel to push up the markets as the sheeple run from bonds and have to put their money *somewhere*, because Uncle Sam won't allow them to hold it in cash, gold, or outside of a sanctioned 401k type retirement plan?

I'm wondering when you are going to come to the dark side on this matter.

All around rome continues to burn, so why not? Eventually it will collapse, but given how bad every data point I read says the economy is, it really doesn't have to be anytime soon (although, it's always possible it will).

Jeff said...


I would have agreed with u up until June. I think the short aide of the market is way more attractive at this point. Market can't move higher to any extent without buyers.

The HFT's might be able to prop up the market but they can't take it higher IMO.

I haven't wanted to get short since last summer until now. When the big players like Druckenmiller are walking away it tells you that things are really messed up.

I spoke to a contact on the street that I have who explained the current sentiment. I am going to talk about it on monday.