Why are they bouncing? Why not? We went down and people love to buy those dips and that means they are just going to love this chart, courtesy of Barry Ritholtz's team. We don't get our next Case-Shiller data point until the 26th but we did get mortgage applications this week and they are down ANOTHER 6.7%. This is despite the fact that an average 30-year mortgage is still just 4.98%.
I know that we have been trained to ignore supply and demand in commodities as well as to pretend that all prices are inelastic and that American consumers will buy anything at any price because they are generally mindless sheep that you can lead into anything with the right jingle but, if they are not willing to buy a $250,000 home with a 5% mortgage – what's going to happen when that mortgage is 6%?
At 5%, a $250,000 mortgage has a monthly payment of $1,342.05. At 6% that payment jumps up to $1,498.88 – 10.5% higher! At 7% it's $1,663.26, 24% higher – that's the "cost" of housing as rates tick higher but, of course, that will force housing prices even lower to compensate and the Fed will tell us that inflation is low because home prices will be falling faster than food prices are rising – so we have that to look forward to…
Copper hit a new all-time high in Shanghai this morning(as the guy who owns 90% of London's closed for the holiday exchange supplies sold it to himself for more money than he did yesterday) and gold is back at $1,400 in the futures and that should give us a better entry on FCX puts than we expected for round 2 but Paul Krugman has me worried now that maybe commodity prices are just high because the World hasn't got enough of them to go around. Usually Paul and I agree but i think he may be discounting the effect of a 10% decline in the dollar a little too much – which is understandable as he is still arguing for more stimulus while I'm arguing that the way they are stimulating now is causing this problem and can not and should not be sustained.
We don't have to like the market to buy it above our breakout lines but we do need to keep in mind that this is a very thin rally that is very likely nothing but window dressing aimed at dragging money off the sidelines so the IBanks who have been propping up the markets can, once again, stick the retail shareholders with the bag as they load up on puts (watch the VIX to confirm) and crash the markets once again. I've seen it happen in 1999, I saw it happen in 2008 and, both times, the rally lasted longer than seemed logical but the smart play was to hit and run – not to leave your money on the table but…
This morning’s Case Shiller data shows more of what we’ve been seeing in other housing data despite being a lagging indicator. Clearly, the weakness in the housing market is back:
“New York, November 30, 2010 – Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.”
“The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 1.5% decline in the third quarter of 2010 over the third quarter of 2009. In September, the 10-City and 20-City Composites recorded annual returns of +1.6% and +0.6%, respectively. These two indices are reported at a monthly frequency and September was the fourth consecutive month where the annual growth rates moderated from their prior month’s pace, confirming a clear deceleration in home price returns.”
War does not determine who is right, only who is left. – Bertrand Russell
Just when you thought it was safe to go back in the water, Japan and China are at it again. We discussed the "fishing’ incident last week and Japan has released the Chinese captain who rammed one of their Coast Guard vessels. Now shippers in several Chinese cities said customs officers have stepped up spot inspections of goods being loaded onto ships bound for Japan and being imported from the country. Traders said officers in some cases were taking the highly unusual step of looking at every item in a container instead of following normal practice of examining a small sample. The heavy searches, which can add costly delays to shipments. For it’s part, Tokyo wants China to pay restitution and now China’s navy is moving into disputed waters.
China is fighting a trade war on two fronts as they are threatening to retaliate against US businesses operating in China if Congress passes legislation intended to force a revaluation of the Yuan. The House of Representatives is set to consider legislation this week that would let companies petition for higher duties on imports from China to compensate for the effects of a weak yuan. Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China’s currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.
So we are pressuring China to strengthen their currency, which would make our currency relatively weaker. One would think the dollar couldn’t get much weaker than it is now (see Dave Fry’s chart). We’ve been shorting GLD (buying GLL) and TLT, expecting a dollar bounce off these levels but if we fail here – we’re going to have one very ugly chart.
Of course a 10% drop on the dollar could be just the ticket for the markets – since our stocks are priced in dollars. That makes them look pretty good compared to cash that’s sitting on the sidelines (or tied up in notes) that’s lost over 10% of it’s buying power since June.
We have Case-Shiller at 8:30 but that’s not my main concern.
Inflation is much worse than it seems and Doug Kass made an excellent point in TheStreet.com: "Few economists or pundits have noticed that the BLS has increased the weighting of OER to 24.433% of CPI. It had been 23.158%. (Because it’s now declining?) And let’s not ignore the fact that Americans’ misery index in reality is far worse than the above official numbers indicate due to fraudulent U.S. economic statistical methodology. U.S. solons have relentlessly altered CPI, jobs data and GDP statistical methodology to obfuscate declining U.S. living standards. John Williams notes, "On the inflation front, the CPI-U annual inflation rate jumped to 2.7% (3.4% for the CPI-W)…. Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to 6.1% in December vs. 5.1% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.7% (9.68% for those using the extra digit) in December vs. 8.8% in November." Plug in the pre-Clinton or the SGS-Alternate Consumer Inflation Measure as well as a more reasonable nominal income metric — U.S. solons greatly overstate jobs and income — and the American misery index would be more in line with the palpable ire in the U.S.A."
The whole article is a good read on CPI and the fallacy of the Owners Equivalent Rent calculation that has been keeping inflation "in check" for those fantasy consumers that are buying one of the 300,000 homes being sold in the US this year. We talked about it at length last year but it’s very nice to see it getting some attention in the MSM since we are still making policy decisions based on this nonsense. Nonsense won a victroy in California yesterday as Moody’s, S&P and Fitch won dismissal of a negligence and fraud lawsuit by two California investors who lost money on their A-rated bonds. U.S. Magistrate Judge Dale A. Drozd in Sacramento threw out the case in a ruling filed today, saying the investors’ complaint wasn’t specific enough about the alleged fraud.
Ronald Grassi, a retired California attorney, and Sally Grassi, a retired teacher, sued the New York-based companies in federal court in January 2009, claiming they gave high ratings to risky mortgage-backed bonds packaged and sold by Lehman Brothers to curry favor with the investment bank, which filed the biggest bankruptcy…
Case-Shiller CPI is formulated by substituting the Case-Shiller housing index for Owner’s Equivalent Rent in the CPI. For a complete description of the reasons and methodology, please see What’s the Real CPI?
The chart and commentary below is courtesy of my friend "TC" who writes:
CS-CPI continues to fall albeit at a less rapid pace and measures -5.1% YOY. Meanwhile the government’s CPI-U also continues to fall at a slower pace and measures -1.5% YOY. The divergence is to due to the government’s housing metric of Owners’ Equivalent Rent (OER) continuing to show price increases (+1.7% YOY) vs. Case-Shiller data showing price decreases (-13.3% YOY).
click on chart for sharper image
Since the Case Shiller housing market peak in June 2006, OER is up +7.7%, while the Case-Shiller index is down -30.9% – an amazing 3860 basis point divergence!
CS-CPI YOY has now fallen for 11 consecutive months and 14 of the past 18. Meanwhile the government’s CPI-U YOY has fallen for 6 consecutive months.
With rental prices and food prices starting to drop, I expect to see CPI-U (the official CPI) to continue to decline. Moreover, with the coming end of the $8,000 housing tax credits for new home buyers and a phase-out of treasury monetization by the Fed, a reversal in the housing index is likely.
It’s highly unlikely that home prices have bottomed in the bubble areas as well as most major cities, even though some select markets, especially Florida areas that have been hammered mercilessly, may be in a bottoming process now.
Dr. Housing Bubble outlines a solid case for "the bottom is not in" viewpoint in Shadow Inventory Case Study. Please take a look. It’s a good read.
Over the past couple months, I have had many people tell me "the housing bottom is in". Supposedly the stock market bottom is in as well, and in just a couple years the S&P will be back at 1500. Really?
Any optimist talking up a housing recovery might want to pause and look deeper into the housing crisis. Amherst Securities Group analysts believe the market faces about 7 million properties that are likely to be seized by lenders have yet to hit the open market. There are two sources that contribute to a huge shadow housing inventory; ARM mortgages which are due to reset now through 2012 and current home owners who are struggling to make payments.
Assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman.
The favorable seasonality will be over come the October housing numbers and the reality of a 7-million-unit housing shadow inventory is likely to set in.
The uptick in the housing numbers are due to banks slowing down the filing of forecloses due to the government loan modification program, the spring/summer seasonality strength of the housing market, buyers rushing to take advantage of the soon to expire $8,000 first-time home buyers credit and the record low mortgage rates thanks to the Federal reserve buying treasuries to help keep mortgage interest rates artificially low but that program is due to be over during the 1st quarter of 2010.
When the shadow inventory is unleashed and government is out of stimulus gun powder for the housing market, reality that the housing correction is not over will set back in.
I’ll jump back into posting with a few thoughts on housing.
First, Case-Shiller as out with its July home price survey. It followed the trend of improving prices established over the last couple of months. Nationwide prices were up 1.6% and the number of cities showing price declines dwindled to just two. Here are the numbers for the twenty cities in the survey.
(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)
I think so and have said so repeatedly but here’s a genius who thinks so too (the mark of genius in a person being the extent to which he agrees with you). The pessimist’s argument is that the only high end houses currently selling are those bought pre-bubble for, say, $1,000,000. Their owners watched the value soar to $2.5 and then drop to $1.5 but they still have equity they can cash out and use to buy a cheap house in a retirement spot. The C/S index would be really whomped, the argument goes, if it accurately reflected the loss of value of all those houses that aren’t selling.
Of course, Case-Shiller reflects actual sales, not present value of houses still unsold and since they aren’t selling, the index is accurate, as far as it goes. But if the homes with no remaining equity ever do begin to move, either through foreclosure or abandonment (not a problem in Greenwich, yet, but I’m hearing reports of it happening in Stamford, in good neighborhoods), watch out.
Just because the Fed and Wall Street have driven home ownership rates to an all-time low and increased the number of renters to an all-time high through their warped monetary schemes, while driving rents up at an annual pace of over 8%, why worry?
Just because your monthly rent is at an all-time high, while real median household income is at the same level it was in 1989, why worry?
You may not agree with this stance, but it’s a really good explanation for how Puerto Rico got into the mess it’s in.
There are headlines crossing wire tonight that the government will not be making a bond payment tomorrow. PR is calling out to the US to make a deal for relief – not necessarily a bailout but the buying of time for a restructuring.
John Oliver explained why the current situation can be blamed mostly on the Puerto R...
The first phone call that changed Michael Daugherty’s life came in May 2008. Daugherty was a happy man, running a good business in a nice place. That’s how he talks about it, like the opening five minutes of a movie, setting up how...
Sometimes is just works! Wyckoff logic is excellent when all the evidence supports your view.
The traditional Wyckoff logic traders will see the Wyckoff accumulation in this stock. Notice the NetVolume divergence with price, very telling. Point and Figure chart showing off an excellent 'CAUSE', that exploded into a fantastic 'EFFECT'. Some times winning is just too easy!
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PnF Chart, love the 'CAUSE' that was the base for the 'EFFECT'
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This chart looks at the Nasdaq 100 index over the past 10-years.
A potential “Head & Shoulders” (H&S) topping pattern could be in play, highlighted in red.
Even if this is NOT an H&S topping pattern, the following situation has me watching Tech very closely; the index broke 5-year rising support line (A) last fall and the rally over the past couple of months has it kissing the underside of lines (A) and (B) at (1).
The NDX “Kissed” the underside of dual resistance of late and has turn...
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Remember this? It was Monday. PRGO is down from around $130 to under $100 since I started following it LAST WEEK. That's down almost 25% in a week, and almost 50% in the last year. So I wrote,
"Perrigo CEO Joseph Papa leaves Perrigo (PRGO) to lead Valeant (VRX) while PRGO issues a warning about missing earnings expectations. Not surprisingly, PRGO stock plummeted today.
Robert Ingram, Chairman of the [Valeant] Board, stated, "The Board has conducted a thorough search process and believes that Joe is the ideal leader for Valeant at this time. He has a strong shareholder orientation,...
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Back on September 2, 2015 when bitcoin was trading at $230, we laid out the simplest and most fundamental reason why, irrelevant of one's ideological persuasion with "alternative" or digital currency - bitcoin would soar.
it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the ...
Although we try to stay focused on finding and managing promising trade ideas, the comments in the comment section sometimes take a political turn (for access, try PSW — click here!). So today, Jean Luc writes,
The GOP debate last night was just unreal – are these people running to be president of the US or to lead a college fraternity! Comparing tool size? The only guy that looks semi-sane is Kasich. The other guys are just like 3 jackals right now.
And something else – if Trump is the candidate, that little Romney speech yesterday is probably already being made into a commercial. And all these little snippets from the debate will also make some nice ads! If you are a conservative, you have to be scared now.
Phil writes back,
I was expecting them to start throwing poop at each other &n...
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Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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