We held our levels, we held our levels, we held our levels.
I have to keep saying that because I feel like we’re in one of those boxes that a magician puts you in and then proceeds to plunge sword after sword into the box until you can’t imagine how the person inside can escape unharmed. That’s kind of how I view the markets every time I switch my brain back on (after trading hours only!) and read the financial news.
I’m not going to say anything bad about the markets myself:
- The Prudent Investor compares Wall Street to the Titanic
- Singapore’s Central Bank sees inflation as a danger to growth
- Peter Schiff says "Inflation is going to get a lot worse. People are going to be shocked…at what things cost."
- Roger Nusbaum say China may implode
- Enzio von Pfeil says it’s time to move to cash
- Forbes sees a "Debilitating currency crisis"
- Barry Rhitholtz is concerned about the "Fear and Greed Index"
- Ticker sense points out China’s AVERAGE p/e is now 49.6
- Financial Armageddon says… well,, you can guess what they would say!
- Business Week sees the rate cuts as driving us into a massive bubble
- Of 19 S&P companies reporting, we’ve had 10 misses already.
So woo-hoo, how about those markets?!? I said this morning that all we had to do was hold half of yesterday’s gains and the Dow almost did, but BA announced a delay on the Dreamliner and AA had bad earnings and AIG got a BAC downgrade (which for some reason carries a lot of weight) but hey, XOM was up as oil rose back to $81 so BUYBUYBUY!
We’ve got the Nasdaq leadership we always wanted and I covered today’s gains with some QQQQ puts but, hopefully, we’ll be taking those off the table quickly if the market can keep going. The Nasdaq is clearly on fire, up over 10% in the past 30 days and Happy Trading sees the index with room to run:
You can’t fight this momentum tape but we do need to watch this critical level. The Nasdaq peaked out at 5,000 in March of 2000 and bottomed out at 1,135 in Oct 2002. If we view this run as part of a long, long bounce, then 3,067 is the halfway point between the highs and the lows – let’s call that 3,100. If we throw out the spikes, however, we have a tested high of 4,300 and a low of 1,400, giving us a median point of 2,850, just 40 points away. That’s the level I’m going to be keeping my eye on (assuming 2,800 itself doesn’t become a turning point).
Friday we have Retail Sales Data and the PPI, one of the last things remaining that can spook the markets. Tomorrow we have Wholesale Inventories, Import & Export Prices, Jobless Claims, the Trade Balance and our Budget for September – all before the bell at 8:30 followed by Oil Inventories at 10:30. As I noted above, the data we have gotten has been TERRIBLE but the markets have shrugged it all off so one can only conclude that a wise investor needs to stop reading – just like our Commander in Chief!
Thank goodness we got rid of that dreary Al Gore with all his "facts" and "concerns" about "stuff" and we got the leadership this country deserves to help us, not to just to ignore the issues, but to actively deny they even exist. Today’s markets are a reflection of that and, much like an unwinnable war, as long as we can keep throwing money and men at the problem, the party never has to stop – never, ever, ever…
The WSJ has a nice interactive map of the mortgage party, which you would think is under control but the fact is that MORE high-risk loans were written on ’05 than ’04 and EVEN MORE were written in ’06. As any barbeque enthusiast knows, if you just keep adding fuel to the fire, it will get done eventually! On a national level, 29% of all loans, over $700bn of them on 3.5M homes last year, were sub-prime loans, bringing the national total to $1,500,000,000,000 of high interest loans on 10.3M homes (10%).
The concentration of these loans was, of course, highest in the poorest communities. These are the people least likely to be able to afford the increase, least likely to be able to afford to refinance, least likely to have family able to assist them, least likely to be able to afford a lawyer or an accountant when the bank moves to foreclose or some other vulture comes to force some onerous deal on them so their families can have a roof over their heads this Christmas.
"We had an aggressive home-mortgage industry trying to get people into homes they couldn’t afford at a time when home prices were very high. It turned out to be a house of cards," says Karl Case, an economics professor at Wellesley College. "We’re in the early stages of the cleanup." The data suggest that financial suffering is likely to persist in many parts of the U.S. where subprime lending had surged. Many loans at risk of going bad have not yet done so. As much as $600 billion of adjustable-rate subprime loans, for example, are due to adjust to higher rates by the end of 2008, which means that more and more borrowers are likely to fall behind.
Here’s a great example from the Journal – this is the situation affecting 1/10 of all homeowners in the US: Last September, Darla Ball, a printer and copier saleswoman, purchased a $460,000 home in Las Vegas using an adjustable-rate subprime loan with an initial rate of 8.2%. At the time, she says, she expected to refinance before her interest rate resets to 14% next year, which will raise her monthly payments to $8,000 from $3,700. But in the past year, she says, prices of comparable homes in her subdivision have fallen to $310,000, which means she would not qualify for a new $460,000 mortgage, unless home values go back up to that level, an unlikely scenario. She says she has stopped paying her mortgage and is trying to negotiate with her lender. "I’m going to lose my home anyway," she says, "so why pay?"
$1.5 Trillion and no reason to pay. Yet we are celebrating when Citibank writes off $3Bn in bad loans. What about the other $1,297,000,000,0000??? I’ve said before I’m happy to get behind this rally AFTER we hear from the regional savings banks and other lenders as they explain exactly how they think they will be collecting this money. Poor Darla, even if she put 10% down, is still $104,000 upside down on her mortgage. Even if the bank takes over her home at no cost and tosses her onto the street without a fight and doesn’t have to pay her property taxes or utilities or paint the house or pay the big guys to toss out her furniture – even if all that goes great for the poor bank and EVEN if they get the FULL market value for her home, they are still stuck writing off 25% of their $414,000 loan.
Multiply that by just 20% of the 10.3M sub-prime loans out there and we could be talking some real money (about $200Bn in losses). So let’s not worry about the 2M homeless Darlas (assuming she lived alone of course, otherwise multiply by 3.2) that would be represented by just 20% of these loans failing), let’s worry about all those poor bankers, who will be getting to know the home auctioneers on a very personal level.
Is this a reason not to play the rally? Of course not! I’m not sure an alien invasion wouldn’t be spun as a positive in this environment but let’s stay aware of the undercurrents that may actually start to matter and watch out for the home related sectors, no matter how beaten down they may look – they’re not $200Bn beaten down yet! The trick to playing a hot market is knowing when to get out so I would just like us all to be vigilant for signs of lending issues, signs that Darla may not be buying a new washer/dryer for the home she won’t be living in by March, etc…
That’s why we have Nasdaq leadership, they’ve got the mix that is least likely to be affected when it all hits the fan. Much like the Titanic, even as one end of the ship begins to fall into the water, the people on the other end start to rise – even reaching "record levels" just as money flows from one part of the market to the other – it’s a temporary effect but, wheeee, what a ride!
Right now, investment capital is flying out of the $15Tn mortgage market and into the stocks because, as I predicted back on August 22nd (1,000 points ago), US equities are simply "the least sucky place to put money in the second half of ’07." It’s nothing to be proud of – when one end of the ship is sinking into the icy water, of course everyone runs to the other end. Smart speculators may even buy up space on that end of the ship and sell it to people who are running from down below to the part of the ship that is rising. They may even get higher and higher premiums as the ship continues to sink in the water, leaving less and less space above the water to be sold.
In the end, however, there are not enough lifeboats (but don’t worry, the speculator can afford one) and too many people on a sinking ship to save – even the survivors may lose a few limbs but, like I said, wheeee – what a ride!
