Earnings for 1Q10 actually look OK, depending what companies you look at, but there seems to be some weakness in top line revenue, which is what I thought would happen. Even with a few firms not reaching their revenue estimates the EPS seems to look positive. What it looks like is companies are still living off of cost cutting measures which mean that new hiring will be sparse at best. The weekly initial jobless claims still look exceptionally weak, 456K this week which was down from 480K last week, which shows firms are still laying people off, not a good sign, even though there is some stabilization in the claims data. Essentially, we have stabilized from really bad to just bad on the jobs front.

The big issue of the day is Greece, their 10 year is now at 8.7% and rising and the 3 year is at 11%, as they have been caught, again, lying about their debt to GDP. The other PIIGS are also moving into the limelight, Portugal, Italy and Ireland specifically, which is also not a good sign. Why is Greece such a big deal? It is because European banks own a ton of this debt, private banks and central banks, for instance, France holds $781B on such debt and the CDS spread on their debt is rising because of their exposure. In other words, this could be a trigger for another banking crisis and governments are low to out of bullets to fight another crisis.

Existing housing numbers just came out, for March, and the numbers are up 6.8%, but it is because of the closure of the tax credit at the end of April. However, inventories are building, again, which means there will be some downward pressure on home prices in the near future. I am afraid that we are far from a healthy housing market and in my opinion, the government needs to let prices fall in order to clear the inventory and to have real price discovery for real estate. Inventories in the existing housing market is simply too high at well over 3M which, compared to the 5.28M run rate, is terribly high getting closer to a full years worth of inventory waiting to be sold. This is not even looking at the new construction data which will add a significant amount of supply to the market. We need less housing and the only way to clear that inventory is to let prices fall, but that will never happen and look for another extension of the home buyers tax credit.

What is interesting is that banks are reporting stellar earnings, but prices on homes are down, inventory is building and commercial real estate is, literally, blowing up. The question is, how can earnings be so good when the assets are or should be declining in value? Answer, suspension of mark-to-market. Essentially, banks are now practicing the same accounting gimmicks as Enron by using mark-to-model (make believe), but this is legal because the FASB allows it… unreal.

There is little question that the data is getting better, but when we look at why and what levels the data is getting better it is disturbing to say the least. While the numbers are better, the term “better” is a relative term in itself, and we have stabilized from horrible to just bad. In my opinion, all the elements of a double dip or even another serious banking crisis exist in the markets. If we went back to real accounting or factor in a Greece default the markets would get hammered as this would show we have climbed too fast and risk is not priced into this market at all. The longer we refuse to acknowledge the bad debts on the banks books or a default from any of the PIIGS the worse the inevitable correction will be.

While I am bearish on the overall market, mainly due to valuation, I like many sectors of the market. I am partial to biotech, high yield dividend stocks – i.e. MO, PM, VZ, T, etc. – esoteric no correlated assets – frontier markets, country specific ETF’s, precious metals, etc. – and I like bonds, deflation is here folks. I do own MO and PM, I also do not like ‘talking my book,’ but own several biotech’s and PBE, biotech ETF. In my opinion one should be very careful as we are once again looking at new ways to value stocks, this is what they did in 1999. If you cannot value stocks using older methods like P/E multiple and so forth it is not worth owning, in my opinion. I see little real value plays in this market and there is no need to jump into this market right now, your patience will be rewarded. I think one should hold core holdings, dividend paying stocks, high grade bonds and some cash. Cash may be king at the end of the day.

There is some hope that the next aftershock might be muted, a little bit at least. The President just launched his new initiative to save the housing market which involves principal write downs, but no one is asking the really big question, why? With an industry report due out shortly you will see why, according to Diana Olick of CNBC the foreclosure report coming will set a new record. Am I surprised? Nope and you should not be either.

The mortgage mania was an era that will probably never be repeated again by private lenders, it continues through the FHA though. Many believe or believed the worst was over for mortgages blowing up in 2009, but they clearly had not read any meaningful material on the subject. If one read any of the numerous books about the credit crisis, aka lend anyone with a heart beat some money to buy a house they could not afford, they would know that 2009-2010 (the beginning of 2010 at least) was the lull before the storm. Whitney Tilson has probably the best book about the subject with many interesting charts in it, but most telling is that the last 12 months was merely the eye of the storm.

What happens next is really anyone’s guess, but what we all know for sure is that the problems that existed in 2008 are still on the books right now and the problems were merely covered up with the FASB’s suspension of rule 157, mark-to-market accounting rules. As you know firms can now make-to-fantasyland what they feel all that worthless paper is worth, I wish we could run our books like that because I have a painting of some dogs playing poker that I know will be worth millions in a few hundred years. Regardless, the next wave of the crisis is starting to break now as we have resets on prime mortgages, Alt-A’s and even some sub-prime that will begin now.

Why do you think the major banks were so quick to agree with Obama and begin to really renegotiate those loans? It is because they know that the problem is still there and needs to be dealt with since mortgage modifications clearly have not worked, there-default rate is through the roof. Obama knows that the mortgage problem is still very real as well and if the FASB goes back to mark-to-market, well, we are right back to September of 2008 and now the Fed and the government have zero ammo left besides outright nationalization of the banking sector. This is why Obama has offered rich incentives to all parties to begin this program, to help avoid the next wave, but I have little faith that the program will work based on the modification failure. This has nothing to do with politics as I think this is the best plan to deal with the problem, but it is a huge problem and principal write down’s will mean losses for some banks.

The interest rate reset issue is also why you will not see the Fed raise interest rates soon either, along with that other little problem known as the national debt. All the talk about Hoenig getting rid of the “extended period” talk is just a side show. While he might have bubble concerns, rightfully so I might add, he merely wished to change the language, but it means, essentially, the same thing. According to the FMOC minutes here is what was said on the whole dissent issue:

“Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low “for some time,” according to the minutes, which did not elicit major market reaction.

Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.”

His dissent was for the markets, not because he really disagrees with the low interest rate policy. The Fed knows that the housing market is a mess, as they stated in their minutes, and they know that there are plenty of adjustable rate mortgages ready to reset, the terms stink I might add. Sub-prime resets are usually fixed to a maximum of, if memory serves me correctly, 15%, but the real issue is the deterioration of the prime mortgages which has yet to really get started. The prime mortgages, in my opinion, is just one of the reasons rates will not increase as the resets are prime plus (insert risk premium here). If these mortgages can be written down problem solved! Kind of.

Whether or not this new initiative will actually solve the problem remains to be seen, but as I said earlier it is just about all we got left without the government actually buying the houses and letting people pay rent to live in the house. Luckily we are not doing, oh, wait we are doing that to, never mind. Again, another shock to the system will be devastating and this is why the big banks are all over this new modification program, but it is unclear whether or not homeowners will go for the plan or not, see the latest GSE study on how Americans view homeownership. No matter what, unless there is another accounting gimmick, the banks will have to take some losses in the near future albeit smaller losses than a foreclosure.

Of course, the media is not looking at this data and merely parade people wearing rose colored glasses in for their interviews, but this problem is real and it is getting closer. I do not believe it will be as bad as 2008, but it certainly can turn as bad if the problem is not cut off over the next few months. If this new program fails or has a low participation rate that may be a problem. The other unreported issue is the SIV accounts that need to be brought on the banks balance sheets in the near future, those are the accounts that banks “sold” their CDO’s to in order to securitize them, but since 2008 that paper has not moved.

In short, the problems have not changed or gone away. All those who told you everything is fine are either lying or do not have a clue what was written. With 4 negative days in the past month and a rising tide still lifting all boats I think that alone should be a warning that we are still in very unusual times. Let’s face it, markets never go parabolic without having a not so bullish ending and with the banking system still impaired I believe there is a recipe for disaster in the not so distant future.

It was funny to see many of the pundits spin bad data on the weather. This equates to my daughter saying the dog ate her homework. It is hard to believe the snow is to blame for higher initial jobless claims when we are in the middle of winter. However, I will concede that retail sales will be pretty horrible because of the weather, but other pieces of data, well, not so much of that weak data can be blamed on some snow.

Housing starts stink because the housing market is in trouble and even massive government stimulus is not helping. My guess is this data will probably improve in March to April because of the last minute rush to buy homes, but I would not count on that being much of a bump. What is worse is that the President wants a permanent moratorium on foreclosures which is doing no one any good and, in fact, will hurt banks that would not be able to collect or sell an asset that is earning them anything. I am referring to Obama’s demand that before a foreclosure can happen it has to pass through the re-modification process. Capitalism is officially being suspended until further notice.

As far as jobless claims are concerned, they are going to get worse as far as I can see. I am basing this on antidotal evidence of firms continuing to announce layoffs and a jump in the mass layoff indicator a few days ago. It is crazy to think employment will improve when you have blue chip companies announcing layoffs and claims are heading back above 500K a week. This is not because of the weather it is because the economy stinks. David Rosenberg calls this a Houdini recovery and he is correct. Besides a statistical recovery and a rally in equities, which is odd considering the dismal news over the past 2 weeks, the average person is worse off than they were last year. Again, unless it has been snowing for 8 months it cannot be blamed on the weather.

Perhaps it is snowing in Greece as well, that will explain their financial problems. It is true that the weather hurts certain things, but it has a rather limited impact on employment. After all, snow removal companies would probably be hiring. The weather might hurt retail sales, but with more people using the internet, me included, to shop I would not buy the soon to be claim that the weather killed retail sales. This is all about uncertainty in the world and to deny that there is uncertainty is simply crazy.

We have problems all over the place from domestic issues to possible sovereign defaults. Let us not forget we will witness municipal bankruptcies in the near future as well, chapter 9 is the more likely bankruptcy procedure. Health care reform is back and will be passed, whether you like it or not, and believe me you should be careful what you wish for because this means higher premiums for everyone. Do you really think Anthem raised prices 39% because they wanted to? Nope, it is because, I as speculated months ago, they know they are out of business in 4 years. All of these things mixed with tight credit conditions means tons of uncertainty.

Why the markets are not down 200 points, I do not know. However, it appears that Goldman Sachs was a huge buyer or S&P 500 futures yesterday, according to Zero Hedge reports, which made this a futures driven rally, check out the trading between 3 and 6AM for more weird futures action. I do not want to spread conspiracy theories, but all I am saying is the markets are trading very odd right now. I am still very bearish, how could anyone be bullish with the horrible data we have seen as of late? This is not 1 week of bad data, but 2 months worth of bad data and the market ignores it, weird.

Everyone remembers the aftermath of 9/11/01 and how horrible those days were, but what sticks out in my mind, after the obvious, was what happened after words. The President said to get out and shop, and boy did we, but the thing most do not recall is what the auto industry did to boost sales, 0% financing. This was the beginning of the end for the auto industry simply because how can you ever raise financing costs after you go to 0%. The demand that 0% financing created meant that the automakers would have a heck of a time raising those rates and they needed the sales. It essentially created a major problem for the industry which help speed its way into bankruptcy.

We are seeing the same thing happen in housing with all the government help being injected into the market. We have tax credits to encourage buying, but we also see what the market looks like without those credits, see recent home sales data, and we have the Fed lowering mortgage rates like mad with QE. What happens when/if these programs stop? It will get ugly, just like when the automakers tried to stop 0% financing. If you do not let the markets work their magic, i.e. stop malinvestments, the pain is just prolonged. GM and Chrysler should have gone out of business a few years ago but that 0% financing helped keep them around, however it could not stop the inevitable.

The mistakes made by the automakers are being made by the government with the housing market. Homeowners already enjoy a ton of tax breaks, mortgage interest deductions, property tax deductions, etc. and the last thing they really needed was a tax credit to buy a home. It has helped, the data shows that, but the problem is these programs have to end and then what happens? As we have seen already, with limited data of course, is that housing does not move without that tax credit. Sure we can blame the weather or whatever external force we want, but that is ignoring the obvious, housing wants to go lower. That leads me to believe that more tax credits are on the way and QE is a permanent fixture at the Fed, see Japan.

When you incentivize buying to such a degree you create a major problem for yourself, or the country in this case, as you boost expectations on false hope. Once you remove those incentives and reality sets in you are stuck with doing nothing, clearly something government does not want to do now, or let the market sort things out, what should happen. Because the government has created false hope for a housing recovery they have created more problems than they solved. The sales we do see now are false demand, meaning it is only there because of the rich incentives, which means that many economists and market participants are creating strategies or projections around numbers that are not real. The fact is that without a natural housing recovery the economy cannot recover.

While the insane 0% financing hastened the decline of the automakers into bankruptcy, in my opinion, the government is simply slowing the fall of housing or kicking the can down the road a bit. The good news is that at least the incentives will not cause the government to go into bankruptcy, well on their own at least, but it is an enormous waste of money. The government should step back and stop what they are doing and the Fed needs to stop its QE program. If neither stop and they continue doing this the next leg down will be ugly and, the reality is, we do not need more incentives to buy houses, look at the tax breaks you get now. False demand creates false hope which lures investors into investments they ordinarily would not buy. When that false demand and hope disappear those investments decline in value, investors are being suckered.

As if we need another reason for a slowdown in the housing industry Freddie and Fannie 30 year fixed rate mortgage securities have reached a 2-month high. The rates have crept up to 4.72% from a low of 4.38% reached on July 31^st. The good news is that this type of rate increase is pretty insignificant for lower end homes, but the bad news is that this type of rate increase will have a greater effect on the middle-to-higher end home sales.

Even though the housing sales numbers have looked much better over the past few months the improvements were largely in the lower end of the market. The middle and higher end of the market is pretty much dead in the water and will more than likely continue to have price declines. This is not surprising as all of the benefits and incentives are really for first time home buyers who are not going to be able to buy the multi-hundred thousand dollar homes.

The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10 year Treasuries widened 0.04 percentage point today to 0.97 percentage point, the widest since July 21, Bloomberg data show. The spread on Aug. 3 reached the tightest in more than two months, at 0.88 percentage point.

Barclay’s anticipates further declines of 11% in housing prices while Deutsche Bank estimates a 14% decline extending into 2011. The increase in yields on mortgage backed securities is also from lack of interest from investors as well. However the Fed is buying so who knows where rates will be in the near future. Regardless, higher rates will have some impact on housing sales in the near-term, but with rates so low it really shows just a lack buyers in the housing market.