Yes, the ego centric Jim Cramer, like myself, needs to hear that he was right, probably on a daily basis from is legion of paid employees. Before I go further, one needs to read the book, Trading with The Enemy, see it on the right sidebar here, to get a real picture of the beloved “honest” Jim Cramer. Anyhow, he asked Tim Geithner about that rant he had in August of 2007 about the Fed being asleep at the wheel and Timmy said that Jim was right.
Jim was not the one who saw this coming and, in fact, in July of 2007 Jim said that sub-prime was not a problem because CDO’s were diversified, see video below. What changed in a month? In 2007, not that much other than the Fed started to pump liquidity, tens of billions of dollars of liquidity, into the market. Other than that, the ABX was acting funny, but nothing really changed until the beginning of 2008. Frankly, Mr. Cramer said things were bad in August 2007, but remained bullish until the very end.
I knew in August of 2007 that banks were in trouble because the Fed was dumping all of that liquidity into the market. They don’t do that unless there is a major problem that needs to be addressed. I think it is disingenuous for Jim to say he saw it coming when he encouraged speculation into the markets when, if he really saw this coming, he should have said take money off the table. He did not tell you to take money out of the market until September of 2008, after Bear Sterns went down and Lehman was speculated of defaulting.
Even if he did see problems in the market he drastically misjudged the cause of the problem. Again, view the video below, because Jim said sub-prime was fine and dumping that trash on the world was AOK. Guess what Jim, it was not and it caused the world to seize up and collapse. As I have said many times, Jim the hedge fund manager is fantastic, but Jim the TV personality is simply dangerous. I know, he brags about the study that verified he crushed the averages from 2005-2007, but as usual e did not read the whole thing. The study found he was playing momentum, there is no Mad Money effect, and he has an alpha of 0 making him harmless, according to the study author.
If he did see this thing coming then he gave everyone really bad advice and that is a fact.
Perhaps the most absurd statement anyone can make is that if you are not always bullish on US equities you are not patriotic. That type of talk is eerily similar to that of the Soviet Union or some other regime that discourages freedom of speech or thought. Unfortunately, that is what I get a lot from some readers and media personalities.
Tonight Dennis Kneale said, in his Blog You!, segment that because I am negative on US equities I am not a patriot. He seems to think that blind patriotism and belief that things will always get better because we are America is the way to go. He seems to think that things improved so much over the past 12 months that nothing can go wrong. That cannot be further from the truth and let us not forget that it was about 12 months ago that this guy had no idea what the VIX was and said Citi was a screaming buy at 25 a share or so.
Forgetting his past indiscretions let’s just take a look at the facts which determines why I am bearish on US equities. Real estate, both commercial and residential are in serious trouble and since most mortgages were securitized and sold to banks, later used as collateral, then it is safe to assume that banks have billions more in bad debt on their books. That fact alone should scare any normal person about the banking system by itself, not to mention that the Fed and the FDIC are both very concerned over commercial real estate as you read this post. A banking system that holds this much bad debt is not good and our actions will either postpone the inevitable or, in the best case scenario, create zombie banks.
Equities got way ahead of themselves and are currently trading about 130x their current earnings, 26x future earnings. The current pricing of the S&P 500 means that GDP has to have 4% growth in order to maintain these prices, I do not see that as a possibility no matter how they use hedonics to play with the numbers. I think a rational person would say 2% GDP growth is what we should expect which places the S&P 500’s fair valuation at about 850 or so. Earnings are down some 26% year-over-year and very few firms beat on revenue which means they are firing people to make their numbers, is that patriotic?
Monetary policy is a mess and I do not see how anyone could think differently. The Fed has monetized debt, propped up who knows how many banks, printed tons, literally, of money, have interest rates at zero, refuse to let us know exactly how bad the banking system really is and the list just goes on and on. While inflation is clearly not a problem, deflation is here for some time to come, it is highly unlikely that the Fed will be able to rein in this extremely accommodative monetary policy in a timely fashion and inflation will be a major problem in the future. Also, when foreign banks question the value of your currency and have voiced very public concerns over your currency that is a major problem, especially as we depend on them to fund our deficit spending.
Unemployment is a catastrophic problem because consumption is 70% of our GDP and anyone who thinks that the consumer is coming back, you might want to reevaluate that thought. Considering unemployment is going up it is highly unlikely that the consumer will spend on anything other than the basics. There is no sign of unemployment declining in the near future which will remain a problem for economic growth until we either get used to the new normal or change the structure of our GDP, guess which will happen.
Government subsidized growth is not growth as we must pay for it through our taxes sometime in the future. The programs that have been successful cash for clunkers and the first time homebuyer tax credit is the cause of all the demand that we have seen and will more than likely skew the GDP to positive for 3Q09. However, this artificial demand is not sustainable and eventually we will have to pay for it through taxes. Essentially the government is in the banking business, financial services business and the mortgage business all of which is bad for the free markets.
Based on that information how in the world can you be bullish? Long-term I am sure we will be fine, but if we look around the world I am sure we can find better investment opportunities than in the US at the moment. Until things get back to a new normal or until we are fully aware of the risks banks have n their books I think it is incredibly dangerous to just blindly invest on patriotism. After all America is about opportunity to better yourself and if that means you invest in China or India to make more money than that is as patriotic as you can get.
It is unbelievable that a media personality would go to the, if you don’t invest in America then you’re a traitor’ level. I think that is childish and it looks desperate, kind of like picking a fight with bloggers I might add, for ratings. I am in fine company with my bearish call with the likes of Doug Cass, at the moment at least, Paul Tudor Jones, the folks at Horseman Capital, Peter Schiff and a whole host of others. Of course there is the possibility that I am wrong, but based on the evidence I see I really don’t think that is the case, but in the event that I am wrong I will admit it.
Frankly, I consider myself more patriotic than most as I voice my dissent to the status quo and calling out things in the media that I see as blatantly false or spinning. Anyone voicing their opposition to what they see as wrong is a patriot no matter if it is on healthcare or the way our politicians blatantly vote against their constituents. In the days of old it was the media who was inquisitive about the government and tried to get the real facts, but somewhere along the way the media thought that the latest Britney Spears news was more important than reporting on what our government is up to. I guess they forgot why the Constitution gave them such wide power.
Well, not exactly, but that is what many in the media are saying with one gentlemen on CNBC claiming the bottom already occurred on June 30th. He actually said tonight that his call of the housing bottom was correct and on target. Here is the problem, he actually called it in the first or second week of June and he was not and is not correct. I am not sure what data he is looking at, but it must not be the same data that CNBC’s own Diana Olick and the rest of the planet is looking at.
As shown in a post on Friday the only real estate moving are the lower end homes, with 38% of all new sales in the below 100K price range and only 8% growth in the $100-$250K area, see exhibit: 1-1. Frankly, this is not a recovery at all as it shows mid-to-high end homes are not selling, period.
Exhibit: 1-1
U.S. Existing Home Sales Yr/Yr
$0 – $100,000
Up 38.8%
100,000 – $250,000
Up 8.7%
$250,000 – $500,000
Down 6.2%
$500,000 – $750,000
Down 8.9%
$750,000 – $1,000,000
Down 10.6%
$1,000,000 – $2,000,000
Down 23.3%
$2,000,000 +
Down 32.4%
Source: National Association of Realtors
I know what many of you are thinking, last week we had stellar existing home sales and you are correct. However, the 7% increase was merely the headline number and most people ignored the fact that supply also increased by 7%. The medium home value declined 15% lower year-over-year, plus the medium home value declined 2% month-over-month and in July we had record foreclosures to boot. It gets worse, the foreclosures are no longer just the nasty sub-prime borrowers, that number can hardly get much worse, but we are now talking conforming prime loans that are in trouble.
Below is a series of charts from the NY Federal Reserve bank showing Alt-A mortgages and the potential landslide that awaits us. I intentionally did not transfer the sub-prime data as that is becoming very irrelevant to our current housing situation. No matter how you cut it, there is no recovery. Mr. Cramer said that his bottom means that price will stabilize and stop going down. Admittedly, he did say that he did not believe home prices would climb.
Exhibit: 1-2 through 1-6
Serious Delinquency, Alt-A First-Lien
This chart shows serious delinquency estimates by vintage for Alt-A first-lien mortgage loans at the national level. Serious delinquencies are defined as loans that are one of the following: ninety or more days delinquent, in foreclosure, real-estate-owned, in bankruptcy, or prepaid with loss. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Current Transitions, Alt-A First-Lien
This chart shows the transition probabilities for Alt-A first-lien mortgage loans that are current at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Sixty-Day Transitions, Alt-A First-Lien
This chart shows the transition probabilities for sixty-days-delinquent Alt-A first-lien mortgage loans at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Foreclosure Transitions, Alt-A First-Lien
This chart shows the transition probabilities for Alt-A first-lien mortgage loans in foreclosure at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Loss Severity, Alt-A First-Lien
This chart shows the loss severity for Alt-A first-lien mortgage loans at the national level. Loss severity is defined as the average size of a loss if one occurs. A loss occurs when a foreclosed home sells for less than what the borrower owes to the mortgage lender. The amount of that loss includes the costs to foreclose and liquidate, as well as taxes and declines in property value. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Expected Loss through next 36 Months, Alt-A First-Lien
This chart shows the expected loss through 36 months from the most current date; by market for Alt-A first-lien mortgage loans at the national level. Expected loss is computed using the probability of loss through 36 months from the most current date; this is calculated under the assumption that the most recent transition matrix for each date persists through the 36 months and that the most recent loss severity for each date persists through 36 months. The chart illustrates this historical projection for each historical remittance date. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Based on this data it is reasonably safe to assume that the bottom is not here and after the government incentive is gone chances are the housing data will get even worse. Artificially supporting markets is not what the government should be doing, but I am afraid that will not be the case. I am sure we will see more foreclosure moratoriums in the near future which will give people hope that foreclosures are coming to an end. However, moratoriums simply postpone the inevitable and the fact of the matter is even the other mortgage relief programs are not working either. If we cannot stop the prime mortgages from defaulting then we have a major problem on our hands.
One might think I am singling out the Mad Money host and you are partly correct, but also partly wrong. Believe it or not I respect Cramer the money manager, he was great, but Cramer the TV personality is another story. He is what I call a revisionist of his own track record. He called for the bottom to be in place by June 30th which is a gutsy call, but just because you make a bold prediction it doesn’t mean you cannot change your mind if you think you are wrong.
Now, he did change his mind and called the housing bottom early, right around the second week of June. I am not doubting it was a bold move, but when the data is right there and it shows you are not correct I am just beside myself on how everyone on CNBC adopted the “if we make it feel better, the it is better” approach to economics. I, like you, want this to be over, but I am not going to tell you what you want to hear, that would be irresponsible.
I admit I have not been correct on everything I have forecasted, but I have been reasonably close, like my market top call on August 7th. Yes, the market rallied about 1% higher after that call, but it appears that it is going to stick for now, as it should. As much as I like to be right about things, and believe me I love to be right, I am not perfect and I certainly do not revise history to make it look as though I was. Unlike TV everything I write is in print and time stamped so you know what day and time I post my forecasts.
The bottom line is this, the housing market has a very long way to go before it hits bottom and an extremely long-time before their will be a rebound in prices. I have no idea when it is going to be, but my guess is the bottom is probably 8 months off and a recovery, who knows, a year or two perhaps. The one promise I will make is I will not be a revisionist on my track record. In fact, I make no guarantees or warranties on my track record as you should look at what I have to say and then confirm or debunk it.
Michele Caruso-Cabrera and Mr. Kneale have been saying that this recession is no different than any other recession in the past. Not only is that a ludicrous statement it is also very false, considering my past points about bailouts, Freddie, Fannie, Lehman and Bear, Sterns among other events that have taken place. Finally there is a headline on CNBC.com that says; “Why the Economic Recovery May Be Different This Time,” forget the recovery part of the title as there is no evidence of an actual recovery.
I feel somewhat vindicated about this headline as I have been saying that this time is very different than at any time in the recent past. I am sure this is a story that many of the talking heads will not read or acknowledge, but they should as it is a well written article. Here is one of my favorite parts:
“Consumer spending, which typically accounts for 70 percent of economic activity, has been so shaken that it will take years to recover. And even then, the growth will be slow and painful, with subpar job creation.
“The concern is that the magnitude of the downturn was so great and the structural issues so significant that you wouldn’t look for a normal recovery,” says John J. Castellani, president and chief economist of the Business Roundtable.”
It went on to say:
In the latest recession, consumer spending shrank for two consecutive quarters for the first time in half a century.
Based on June data, retail sales, which peaked in 2007, are now at a mid-2005 level. Spending on furniture and household furnishings is back to where it was in 2001. The building and garden materials category is at a five-year low; autos an 11-year low.
Again, among other reasons this time is definitely different and, I hope, government understands this and encourages manufacturing growth in the US versus exporting it abroad. I fear that without manufacturing we will continue to have these economic busts which are getting closer together I might add.
CNBC interviewed Gold Fields CEO, GOLD, and questioned him about investment demand citing investors are not fearing inflation, which is not true. Mark Haines, who I like, then went on to ask if ETF ownership is creating a liquidity bubble in the yellow metal. I guess this is a legitimate question, but when you add up CNBC’s position on gold it is always negative.
I see a pattern of anti-gold bias on CNBC even as most people recognize gold as a legitimate investment and hedge against the dollar and inflation. The irony is that Fast Money had an advisor from Morgan Stanley on last night who is an ultra wealth advisor and they asked him directly about the gold and inflation trade. The advisor did say that his clients are concerned about inflation and the dollars weakness, which means they are buyers of the yellow metal.
I am by no means a “gold bug”, I find that name so insulting anyhow, they do not call stock fanatics, “stock bugs”, but I recognize the importance of gold in a portfolio and own it myself. I believe any well rounded investment portfolio needs to have exposure to precious metals and other inflation protection investments. To not have that exposure is crazy.
Either way you cut it CNBC definitely does not like gold and consistently “talk it down.” To clarify, I do not believe CNBC is holding the price down, someone accused me of that before, what I am saying is they dismiss gold as an investment which is inaccurate at best.
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