Bernanke "Punts" and Bonds Don't Like It

We got a big giant nothingburger from Ben Bernanke despite a sharp revision in Q2 GDP growth down to 1.6% from 2.4%.

The market cheered the news as stocks jumped over 1 percent.  Many economists were looking for a revision down to 1.4% so the market breathed a sigh of relief.  We were also pretty oversold although I wasn't too impressed with the rally(more later). 

The bond market however was not very happy. The 10 year sold off violently following the news from Bernanke:

My Take:

Now lets not get too excited over this move because it's only one day.  However, it is something that you need to take notice of.

I believe that many were piling into treasuries this week thinking that they could front run a possible QE announcement by the Fed.  Bernanke's speech today was a big disappointment to those who made that bet.

Ben did not rule out the option but he did say he needs to see "significant deterioration" before proceeding with more QE.

I'll give Ben some kudos for his actions today.  As I have repeatedly said:  More QE will do nothing but waste more taxpayer dollars.

Lower rates have done nothing to stimulate lending.  Giving more money to the banks will do nothing because they aren't lending and Main St has no desire to borrow it anyway.

Another QE would have been a potential disaster because it would have put the dollar at serious risk.  I do think we will eventually see another QE because the economy continues to worsen.

We saw further evidence of the slowdown after Intel came out and warned today:

"SAN FRANCISCO/NEW YORK (Reuters) – Intel Corp warned that third-quarter revenue could fall short of its own estimates by more than $1 billion, reinforcing doubts about the strength of a technology sector recovery.


But shares in the industry bellwether, which dominates the market for PC microprocessors, gained 1.05 percent on Friday because investors had braced for bad news and were relieved the downward revision had not been worse."

Quick Take:

I included the second paragraph because it cracks me up.  Every piece of bad news is continually spun positively.  If it's not spun positively then you can almost guarantee that you will some sort of saying that the news was "worse than expected".

Folks, anyone with a brain in their head should not be surprised by any of the news.  The economy is in shambles.  The Fed is pretty much out of bullets.  Ben stayed calm today and did nothing which was the right thing to do.

The problem is there is really nothing left that he can do.  The Fed can't make people borrow money. 

The housing numbers this told you all you needed to know:  We saw record low sales(-27% yoy) at a time where lending rates were at an all time low.

Demographics

The AP reported today that birth rates were the lowest seen in 100 years:

"The U.S. birth rate has dropped for the second year in a row, and experts think the wrenching recession led many people to put off having children. The 2009 birth rate also set a record: lowest in a century."

This trend is alarming and should continue as families lose confidence in their ability to raise a family.  You gotta wonder who is going to replace all of the aging baby boomers as they become net sellers of stocks as they retire(that is if they have anything left after losing 50% twice in the past 10 years)

The Bottom Line


I was not all that impressed by the rally today. 

You should have seen a much bigger move in stocks given the huge amounts of money that came out of bonds today.

Where did all the money go that came out of bonds?

Metals and commodities were pretty flat so it didn't go there.  I would be curious to see what the money market fund flows were today.  Perhaps some central bankers decided to sell their treasuries in an attempt to start getting their money out of the US?

Time will tell.  Needless to say I wasn't impressed with the price action today.

There are some big numbers that are coming out of China next week so perhaps Wall St decided to just take a breather. 

That's fine with me.  This was another long week for investors.  I think it's time for a cocktail so I will end things here.

Until next week!

Foreclosure Starts Surge 24.5% in July

I will be brief tonight because the market moving news will come out tomorrow when we get the GDP revision and then hear from the Fed.

I wanted to touch real quick on the reported second quarter "improvement" in the foreclosure data from MBA today.

Here is the headline from the piece above:

"CHICAGO (MarketWatch) -- The percentage of homes somewhere in the foreclosure process fell in the second quarter, the first drop since 2006 and the largest quarter-to-quarter drop since 2005, the Mortgage Bankers Association said Thursday."

Great news right?  umm...Yeah until you take a look at July.

Before I continue let me note that I pretty have pretty much ignored all of the second quarter housing data because the tax credit distorted the numbers so badly.

We can now start paying attention to the data again because all of the tax credit buyers finished up in Q2.

As you can see below, Q3 sure isn't starting off on the right foot"

CNBC got a sneak peak of the July foreclosure numbers and they were flat out gruesome.

"The Realty Check got a first look at an upcoming report from Lender Processing Services which shows a huge jump up in foreclosure starts in July. "July showed an astounding 24.5 percent month-over-month increase in foreclosure starts, which dovetails with Treasury's latest report on HAMP [Home Affordable Modification Program] cancellations (approx. 50% according to Treasury's numbers)." It also reports that seriously delinquent (6 mos.+) cures have declined by 25 percent. Cures are loans that are made current again. So with fewer cures and more newly delinquent loans, that 90-day delinquency bucket is increasing, hence more foreclosures again."

Quick Take:

It looks like foreclosures are once again starting to heat up.  I can't even describe what a 24% increase in foreclosures is going to do to housing prices.

Making matters even worse is the fact that we are now heading into the slowest season for housing.

I am surprised the banks puked up this many new foreclosures all at once.  To date they have sat on them in order to keep the number of outstanding foreclosures to a minimum in order to support housing prices.

If this new foreclosure trend continues it's going to be a long cold winter for the housing market.
I will be back with full coverage of tomorrow's big events.  Hold onto your trading accounts, tomorrow could be a doozy.

Corporations are Walking Away: Why Can't You?

I wanted to start off with a great Tech Ticker tonight that discusses why it's OK to "walk away" from a house:



My Take

The Tech ticker guys make some excellent points here.  No one should feel guilty if they decide to walk away.  Big business is now doing it it so why shouldn't you be able to?

The double standard that Wall St tries preaches when they tell us that we have "morale" obligation to pay back the loan is absolutely ludicrous. Where were their morals when they goosed you into over paying for the asset in the first place?

The reality here is you are simply making a prudent business decision.

You were sold a bill of goods by everyone involved in selling you the house in the first place.  This included the appraisers, the banks, the Realtors, and the regulators.

The whole housing bubble was nothing but a giant fraud.  This no longer needs to be proven.  The evidence is everywhere.  Everyone was in on the scam from the banks all the way down to the ratings agencies who gave this "bubble" mortgage debt "AAA" debt ratings.

If you are one of the 25% of the borrowers that made a huge mistake and bought at the top, then you should really sit down and think about whether or not you want to spend the next 30 years paying off a mortgage on an asset that might be worth 50% less than what you paid for it.

I mean think about it:  How much sense does that make especially if you are struggling to make the payment every month?

Remember:  The banks are to blame just as much as you are because they gave you the money to do it in the first place.  They are too blame just as much as you are because they allowed you to do it!

The fact that the whole market collapsed is not your fault and you shouldn't be penalized for it for the next 30 years!

Of course their are other factors that you need to consider if you decide to walk.  I suggest that you sit down with a real estate/BK attorney or a financial planner to discuss the ramifications of making this decision.

I was one of the lucky ones who sold in 2005 and it was nothing but pure luck because because I had to move to take another job. 

However, if I found myself in a situation where I was badly underwater, I would walk away in a heartbeat.

Look at it this way:   This probably the best way to get back at Wall St for destroying our economy and then using our tax dollars to resurrect themselves.

If your economic security has been taken from you during this process then it's all the more reason to pull the plug on the mortgage. 

Payback is a bitch and I wouldn't shed one tear for any of the banks if the home owners who were scammed by the banksters all decided to shove it up Wall St's behind by deciding to walk away.

The Bottom Line

A few tidbits on the markets.  Today was a pretty ho hum session.  Silver is really starting to break out.  Gold was strong today also.

I think many investors who are now loaded up to their necks in bonds after the huge treasury rally are now looking for ways to diversify out of the dollar.

I would not be surprised to see the metals do well as a result.

The big fear right now for many investors at this point is the dollar.  The way I see it they have every right to be.   They are also afraid of their treasury holdings because they are all priced in dollars.

Why are they afraid?

If inflation then everyone(including the banks) that loaded up on bonds on the longer end of the curve will automatically get vaporized.

All you have to do is look at what happened to the banks that were loaded up on these bonds during the early 1980's when Volker took rates up to double digits:

Basically if you look above, you were absolutely murdered if you bought the long end of the bond curve in 1977 and early '78. 

1977 dated 30 year bonds at a 4.5% yield don't look very attractive when you could buy ones during the 1979-1981 time frame that yielded double digits.  

This is why I believe it's nuts to see everyone running into 30 year bonds that yield only 3.5%.  If we see just one bout of inflation then the holders of this paper will slaughtered in two ways: 

1.  Let's for numbers sake say Inflation rises to say 10% annually:  You are guaranteed a 6.5% loss on your principle each year with a 3.5% yield in such a scenario.

2.  The Fed will likely raise rates to quell inflation which will then increase the yields on treasuries as they sell off.  The value of the actual 3.5% yielding 30 year bond then collapses because you can buy newly issued bonds at much higher yields.

In my opinion this is why you should ONLY buy bonds on the short end of the curve.  Don't get sucked in to trying to chase a measly 3.5% yield.  The risk of inflation might not be here now but it likely will be 5 years from now or even sooner for that matter. 
This is why I have been tending to "tune out" all of the deflation chatter recently.

Many deflationists claim that gold is useless in a collapse because it cannot be easily used if we collapse.  Some refer to it as nothing but a doorstop if Mad Max hits. 

They also correctly point out that the dollar usually rises and has more value during deflation because assets come down in price which gives the dollar more bang for its buck.

This is all well and good IF the dollar survives.  I tend to look at the other side of it.  What if it's the dollar collapses or becomes worthless? 

The way I see it:  The dollar is nothing but a piece of paper with ink on it that's backed by a country that is technically bankrupt instead of being backed by something of actual real value such as gold.

Am I supposed to feel safe holding this green paper stuff? HA!...Yeah OK!.  Call me a skeptic. 

Let me be the first to say that I am no gold bug.  However, I do own both gold and silver because there is no guarantee that the dollar is safe.

In fact, I could very easily see the dollar collapse.  If we see a QE2 I fully expect the dollar to get smashed. 

How can the dollar hold it's value when the government is creating trillions of them each year?

To be fair they are technically "cleansing" the dollars by selling treasuries.  However, when you really think about it, who is buying the treasuries if we do another QE2?  The government!

Technically we will  essentially be financing ourselves under the "QE" scenario.  How on earth the dollar holds its value longer term in this situation is beyond me.  I have never seen such a total cluster(you know what I mean) in my whole entire life.

The people left standing when this depression is over are the ones who are diversified.  This is not investment advice but I do believe that one must protect themselves from both inflation and deflation because we are going to see both before we get through this.

Please be careful out there and stay nimble!

Disclosure:  No new positions taken at the time of publication.