When in Doubt Sell the Dollar to Save Stocks

Posted by Ray on August 27, 2009 under Main | Be the First to Comment

This seems to be a continuing theme for whoever is driving the markets to the moon, sell the dollar and buy equities. If you were watching today you would have noticed that oil, gold and stocks were trading down to relatively flat. Right about 12:00 the dollar started to decline which drove stocks and commodities higher.

This is a continuing trend within the markets and the primary reason why we have had such a dramatic rally. However, the reduction in buying power is not worth the trade off, in my opinion. If you are watching the news channels they attribute the markets turn on higher oil prices and virtually ignore the dollars plight, even though it is a weak dollar that moves oil. Why are they ignoring a declining dollar, I do not know, but they are.

There is really no reason for the market to be positive today as unemployment numbers were not very good, but, I guess, no revision in 2Q09 GDP was somewhat good news. Either way, we are seeing continuations of a very tired bull market were the likes of AIG, Citi, Fannie and Freddie are the market leaders. While the talking heads applaud this move I am reducing my equity position to 7%, down from 25%, most of which is international holdings.

Frankly, we are setting ourselves up for a most painful selloff which I am choosing to not participate in. I do not know when it is coming, but it will come and I am sure it will be brutal. The likes of Mark Haines seem to think that my view is very bullish for stocks, maybe it is, but I consider my view to be balanced with the data on hand. The data I see is horrible, frankly, and when AIG and Citi, both of which heavily owned by the government, are the market leaders then we have a serious speculation bubble building.

Examine the chart below, the data at hand and make your own call. I am sticking with the call I made 3 weeks ago, which we are barely 2% higher than now, of a market top. Of all the people I have spoken to, no one understands why we have not sold off yet and, perhaps, we will not. Until earnings catch up with valuations or valuations trade down to earnings I am very bearish on equities.

Cramer’s housing bottom

Posted by Ray on August 24, 2009 under cnbc, Economy, Main | Be the First to Comment

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 30^th. 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

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 30^th 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 7^th. 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.

The Housing ‘Recovery’

Posted by Ray on August 21, 2009 under Main | Be the First to Comment

All of this information about a housing recovery is just plain false. The biggest perpetrator of the housing recovery myth is CNBC and they actually ran this story today showing it is the lower priced homes moving, all other homes are just not moving, period.

There is simply no recovery in housing at this time and if this chart tells us anything is that the market will, at best, be flat for some time to come. However, I am inclined, as indicated in numerous other pieces I have written, that we still have a long way to go on the downside before things begin to level out. This means that banks, 81 YTD, are going to continue closing because they are losing money on these mortgages as people just walk away from homes that they cannot sell and are underwater in.

A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices. Foreclosures are only increasing, as we saw from yesterday’s Mortgage Bankers Association report, and that will mean more inventory.

I think that is proof enough that things are just not that good. I may have missed out on a couple of percentage points over the past week, but the market is going to come crashing down in the near future. Why, because all of the data supporting a bull run is over hyped and inaccurate at best. Housing is one of the data points supporting the bull’s case, but look at the data point and tell me that there is a recovery taking place.

Take a look:

As I have said numerous times before, burying and hiding problems through bogus accounting will only make the problem worse long-term. Enron tried it, MCI tried it, now we have the banks trying it through lax mark-to-market regulations. The FASB enacted the mark-to-market because it made sense, if you had to sell a security today you cannot just wait for a nonexistent price to come along, which is what the new regulations let banks do for accounting purposes.

One last point about this, ever since mark-to-market went away bank earnings have all been good. Do you see the problem? Frankly, real estate is still their biggest problem and the above information supports that theory.

Mortgage rates on the rise

Posted by Ray on August 6, 2009 under Main | Read the First Comment

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.

The Nonsense never stops

Posted by Ray on August 2, 2009 under Main | Be the First to Comment

After reading numerous articles stating that housing has bottomed and about to rebound I find it hard to believe these authors, namely names like Cramer and some other overpaid anchors, are looking at the same data everyone else is looking at or if they are even on the same planet. The same cheerleaders who were their helping boost housing prices to nosebleed altitudes are now saying the worst is over.
This is pure nonsense and while the “worst” may be over I am willing to bet that prices continue to fall in the near future. I know what you are saying, but everyone already said the worst is over and such geniuses like Cramer called the bottom months ago. Well, what can I say, perhaps I like being chastised by the media or I like being a contrarian. Actually I am neither, more like a realist, a student of history and, hell, I like looking at data and not trying to spin it to boost ratings or to sell cheap and false hope.

This is evidenced in an article I read today where a person interviewed on the housing market actually said this:

“By every measure, except foreclosures, the housing market has stabilized and many areas are recovering, according to a spate of data released in the past two weeks. Nationwide, home resales in June are up 9 percent from January, on a seasonally adjusted basis. Sales of new homes have climbed 17 percent during the same period. And construction, while still anemic, has risen almost 20 percent since the beginning of the year.”

Foreclosures are the problem, plus unemployment and the lack of real lending. What we have here is a temporary plateau in housing prices because of pure government intervention, not real market forces. To spin this any other way is an act of stupidity and attempting to encourage people to buy overpriced homes.  I might add that this story came out after a story about how unemployment benefits are running out for people, which is why continuing claims went down, and Congress may extend benefits again, as they should.

What we do Know

There is no question that price depreciation is slowing, but it is slowing under artificial circumstances. Without the first time home buyers tax credit, ultra-low mortgage rates and builders slashing prices demand would be much weaker than it is currently.  However, what the market is really telling us is that prices need to go much lower than they are currently. Artificially inflating prices is simply repeating the problems that got us here in the first place.

If we look at history we have never had such a large appreciation in housing prices than the 2003-2006 period. A friend of mine bought a house in Pasadena California in 2004 for about $550K and by 2006 his house was appraised at 1.05 million, after only 2 years. Now his house is worth, they say, about $800K give or take. Let’s recap that, the home doubled in value and then is worth 20% less than its all-time high price and we think that is enough or a retracement to justify stabilization, I don’t think so. Keep in mind he could afford the home and is in no financial trouble, just wanted to add the disclaimer.

Others were buying in a frenzied mode up until, really, 2007 and then people realized that things were not what those Realator.com commercials said and home prices can go down. Real estate is nothing like the equities market until the boom hit and people would bid up properties and make offers over the asking price. Frankly, the housing market made the dotcom era look tame and, obviously, had worse consequences when the bubble burst all under the false pretense that housing prices never go down.

When people tell you that prices can never go down that is when you should have the “aha” moment that we are in a bubble. Frankly, all prices eventually go down on some sort of cyclical pattern, but they then take a certain period to illustrate their point, usually a rolling 10 year period. This argument was made about equities in 1999, but what they never told you was that during certain 10 year points, equities did go down and at some points substantially. In my opinion, housing only went up long-term because of inflation rather than actual appreciation.  Yes, some areas do appreciate, but inflation is the leading reason why a home built in 1950 originally sold for $10K and today it is worth $100K.

Regardless, housing has a ways to go before the bottom is really here and while that won’t boost ratings or sell more magazines it is the truth. For evidence of this let us take a look at a long-term chart of housing prices:

Combine that chart with the other evidence within the housing market and you will see that there is a long way to go before we hit bottom.

June 2009 NSA New Home Sales Worst Since 1982

Source: M Hanson Advisors

IT’S TAKING A YEAR FOR HOMEBUILDERS TO FIND BUYERS

Source: Haver Analytics, Gluskin Sheff

Builders Are Slashing Prices to Dump Inventory

Source: M Hanson Advisors

Any chartist will also tell you that nothing moves in a straight line and while we have had a huge plunge in prices what we are witnessing is temporary support. There is no other compelling evidence to support  this recovery talk that is everywhere. It is also true that we will not know when the bottom will happen until after the fact, but based on the data we have, I do not see it yet.  Furthermore, until unemployment starts to turn, meaning we have net job gains and the unemployment rate drops by more than people simply do not qualify for benefits,  you can be assured that housing will not turn until at least then.

The Bottom line

We can all believe that things are getting better, but it will only really get better when the actual evidence supports it. The talking heads have their agenda, to get more viewers or sell more subscriptions while I have no agenda whatsoever. Based on this data not only would I not buy a house right now I would not touch any stock that has anything to do with the sector.

From what I see the only way we will ever reach a true bottom, which is what we need for a recovery, is if the government stops intervening in the market. It will be painful and I am sensitive to this train of thought, but it is what we need. I am in the same boat as everyone else because I am a homeowner, but I want to stress the owner part f that statement because I bought my home to live in and not act as a savings or retirement account.

Perhaps if more people took pride in actual ownership of a home then they would not have bid up properties to astronomical, unsustainable levels and this whole thing could have been avoided.