Thursday, June 3, 2010

Market Drops as the Jobs Number Disappoints/Housing Recovery Nowhere in Sight

So much for a blowout jobs number that was expected by many of the bulltards:

Below is the well respected Haver Analytics take on the numbers:

On the surface, the 431,000 gain in May payrolls after an unrevised 290,000 April rise looks strong but, in fact, it was not. First, the increase was raised by the one-time hiring of 411,000 Census workers. Second, the gain actually fell short of Consensus expectations for a 508,000 rise in the total. Lastly, the 41,000 gain in private sector payrolls was the weakest since January.

· The shortfall in private sector was broad-based. Construction sector hiring fell 35,000 and reversed the increases in the prior two months. Private services-sector hiring rose just 37,000 following firmer gains during five of the prior six months. The weakness reflected a 6,000 decline (-0.8% y/y) in retail sector hiring, a 12,000 decline (-2.2% y/y) in financial sector employment and a soft 2,000 increase (-0.3% y/y) in leisure & hospitality jobs.

· Countering some sense of labor-market softness was a decline in the civilian unemployment rate to 9.7%, although that just reversed the April increase. Moreover, the decline was all due to a 322,000 shrinkage (-0.4% y/y) in the labor force, the first drop since December. Household sector employment, in fact, also declined 35,000 (-0.7% y/y) which was the first drop this year."


As you can see below, housing is unwinding faster than I could have ever imagined. Mortgage applications have essentially fallen off a cliff since the tax credit ended based on yesterday's data from the MBA.

Some blurbs from the report:

"With another week of historically low mortgage rates, the trend from the prior three weeks continued, as refinance applications increased while purchase applications dropped. Purchase applications are now almost 40 percent below their level four weeks ago, while the refinance share, at 74 percent, is at its highest level since December," said Michael Fratantoni, MBA's Vice President of Research and Economics. "In addition, the ARM share dropped last week to its lowest level since March of this year, as borrowers took the opportunity to lock in at historically low fixed mortgage rates."

My Take:

Folks, both sets of data above are absolutely horrifying. Housing applications are falling at rates never seen before. At the same time, the number of potential home buyers continues to shrink due to rising unemployment.

This is a recipe for disater for the housing market and the banks that hold these bloated assets.

The jobs report looks even worse when you throw the bogus birth death rate model out of these numbers. We are essentially seeing negative job growth in the private sector.

Imagine what the jobs report is going to look like when the part time census gig dries up!

The Bottom Line

I didn't even have the chance to get into the bad news flowing out of Europe this morning. The Euro is once again hitting yearly lows against the dollar.

There are rumors floating around that banking giant Soc Gen is in trouble due to their derivatives exposure. We also learned today that the IMF is running out of money after bailing out Greece.

All in all it appears things are going to hell in a hand basket at a pretty rapid pace. Treasuries soared today as a result of the continuing fear of collapse in Europe. Lets not forget we need to peddle another $124 billion of these notes next week. Treasuries should be really interesting to watch next week.

All I can say is hold on tight folks. Things are getting seriously bad out there, and the bailout funds this go around are simply not there to create a second government based recovery.

The next time we roll over we have two choices:

1. Cut off the money spigot and sink into a deflationary depression.


2. Print our way out of this mess which will create severe inflation and the strong possibility of hyperinflation.

It's up to the Fed as to which path we take. Lets hope Ben takes door #1. Hyperinflation or even severe inflation will almost assuredly result in severe social unrest and the potential collapsing of the US government because people will not be able to afford to live.

Please take whatever measures you can to prepare yourself for whats coming. This situation is deteriorating rapidly and you are in for a rude awakening if you are not prepared:

Raise as much cash as you can, payoff debt, reduce expenses, buy some inflation protected assets like gold.

The situation is dire out there and I haven't been this concerned since late 2008.

Ponzi Finance at It's Finest

Just a quick blurb ahead of the jobs data tomorrow.

Today the treasury announced their auctions for next week:






Quick Take

This only ads up to a mere $124 billion...No biggie! Whats another $124 bill among friends?(sarcasm off)

I am sure these auctions will do well as Europe's economy continues to swirl down the toilet bowl. We still somehow represent a "flight to safety". The way I see it sending your money over here for safety is like sending your daughter to the casino with Joran Van Der Sloot for cocktails.

Let's face reality here folks: This Ponzi game of finance cannot continue at this pace. It's mathematically impossible.

What's scary is we now have to peddle these auctions at a time where Europe appears to be heading straight into a debt deflation death spiral.

I say this because extreme austerity will be the only exit strategy that Europe has as long as the Euro is alive because none of these countries can devalue their currency.

As a result of extreme austerity measures: Wages will get crushed as these countries pay off their immense debts. Lower wages will then crater the housing market which then craters the banks and so on and so on.

What will be left will not be pretty. Moving forward, the European governments will have a lot less money in their coffers to spend on things like treasuries because their tax revenues will also crater as a result of austerity measures.

They will also be forced to spend more money at home as unemployment soars. The impact of such conditions will increase the costs of social programs that will be neseccary in order to avoid civil unrest.

The Bottom Line

There will be a day where one of these auctions will fail. It's a matter of WHEN not IF. There simply isn't enough money in the world to continue such irresponsible spending without printing.

My fear is when that day arrives the Treasury will have no choice but to turn our currency into a piece of toilet paper.

Let's all hope this house of cards doesn't tip over next week.

Wednesday, June 2, 2010

Will Credit Cards Become a Thing of the Past?

I will be brief tonight.

We saw a well overdue bounce today after being extremely oversold. We have two huge numbers coming at the end of the week. Consumer data is outtomorrow followed by the big jobs number on Friday.


I thought this was a great piece from Bloomberg. As you can see below, the underground cash economy in Spain is flourishing. This now represents a whopping 23% of Spain's GDP.

You have to wonder if the same thing is inevitable here as our taxes do nothing but skyrocket down the road as we struggle to pay off record deficits.

Will Americans ultimately decide to "walk away" from their taxes just like they walked away from their homes?

I sure think so.

Should this be suprising if it happens? Heck no! Why wouldn't they walk away from austerity measures? They didn't create this mess!

The banks did and then bribed Washington into passing the bill along to the taxpayer. Why in the hell should we be stuck paying off the tab?

Raise cash folks. It might become the new "Mastercard/Visa" of the future as we become creative in avoiding the severe austerity measures that are inevitable as a result of the government's Ponzi bailout/spending binge.

I now look at the European debt crisis as a preview as to what we should expect to see here down the road in the USA. The problems on both sides of the pond are the same. However, our day of reckoning has been delayed as a result of our perceived "safe haven" status.


Tuesday, June 1, 2010

Squatting our Way to Prosperity?

Hope everyone had a safe holiday. Stocks fell sharply today despite positive US economic numbers as the headlines around the BP oil crisis and political instability in the Middle East sent investors running for cover.

I wanted to talk more about housing and the consumer tonight. I have been surprised at the resilience of consumer spending as the economy deteriorated in 2009/2010.

I had suspected a few months ago that this consumer spending rebound could be nothing more than a "squatter bounce" as borrowers stopped paying their mortgages after realizing that didn't have the ability to pay the mortgage back.

The result of such actions would put an extra few grand in most families pocket each month. The effect of such newfound wealth would then have an extremely positive effect on consumer spending since we all love to spend like drunken sailors in this country.

Turns out this may be exactly what is going on:

"A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier"

My Take:

All I can do is chuckle after reading this. Folks, this "walking away/screw the bankers" mantra is one of the unintended consequences that I have warned about on here for over 2 years.

Borrowers have simply run out of options:

- They can't afford to short sell the house because they don't have the cash to do it.

- They also finally realize that they can't sell the house for what they paid for it as they watch prices continue to free fall all around them.

- Finally, they can't continue to pay the mortgage because they could never afford the house in the first place.

So what's an insolvent home owner to do? You take the only option left which is to just simply stop paying the mortgage.

This option is becoming a much easier route for more and more borrowers as the anger against Wall St increasingly turns into a full blown raging hatred for bankers.

The sheeple are finally realizing that they have been "fleeced" by the banksters. As their anger against Wall St continues to escelate month after month, they now feel less and less guilty around making the decision to stop paying their mortgage payments.

As you can see by the numbers above, there is nothing that Wall St can do right now but sit down and take it. They have no choice. They can't take action against the squatters and foreclose on the house because they can't afford to take the losses on the all of these foreclosures.

The only option the banks have is to slowly puch them out on small pieces. This is a better option for a myriad of reasons. It allows them to slowly absorb the losses and by keeping the number of foreclosures to a minimum it helps prop up prices.

As a result, the average amount of time spent in foreclosure before being kicked out has soared to 438 days vs. only 251 days in early 2008 as seen above.

More than 650,000 homes are now 18 months deliquent on paying their mortgages.  This is DOUBLE the rate from a year ago.  All I can say is.. OUCH! Houston we have a problem!!!!

I expect this number to continue and soar now that the borrowers see that Wall St is forced to let them live there for free for a good 2 years or so. I mean think about it! It's their only option for the reasons I described above. They must let the squatters squat!

They risk their own solvency if they take action against all of the "deadbeats" at once. I find it ironic that the demise of Wall St could very well be triggered by the average middle to upper middle class that they have been fleecing for decades.

The early reprocussions of such a "squatting boom" has triggered a nice pop in consumer spending. I must say thought that it's a shame that these people are pissing it away on trips to Disneyland instead of saving it as we all prepare for the oncoming depression.

Perhaps many of them are pissing the money away now because the laws in many states protect creditors which gives them the right to seize any cash and assets from those who defaulted on their loans.

The Bottom Line

The "squatter syndome" is a very alarming trend that appears to have legs. Anger towards Wall St continues to mount as the economy remains in shambles. As the "debt slaves" in this country continue to lose their jobs and run out of options, it will increase the risk of them taking out their anger out on the banks by "walking away" from their debt payments.

Making matters worse is the fact that the borrowers now realize that Wall St can do nothing about it if they decide stop paying. This will only embolden others to do the same.

The "uninted consequences" of such actions could potentially be catastrophic because none of this cannot be sustained.  The banks will eventually run out of cash flow if they don't foreclose on bad loans.

One point should be made very clear here: The housing market is extremely distorted right now because millions find themselves stuck in their homes.

There has been no true price discovery in real estate as a result because people cannot afford to sell at the prices they need to and the banks can't afford to foreclose.

Prices in real esxtate cannot be trusted as a result because the real correction has not been recognized.

I will talk more about our ongoing correction tomorrow. There are many risks to the downside that are putting pressure on stocks.