Cramer Fav RIMM misses its earnings and warns on 3Q09 earnings because higher cost handsets are “delayed” (too expensive for cash strapped consumers) until later in the quarter. While the mobile internet tsunami is real, yet very old news, it is also the least important item on the consumers mind at the moment as mortgage payments and food are front and center. This earnings miss is a warning about all of 3Q09 earnings, the top lines will be light, very light because profits are driven by cost cutting, firings actually.
This miss and warning shot has led to the international markets to open lower tonight, much lower. The Nikkei, Hang Seng, and Titans are down 2.7$, 2.5% and 2%, respectively which is probably how the European and US markets will open tomorrow. Frankly, it is looking pretty ugly and I believe this is the beginning of my long awaited selloff that should have come some 3 months ago, but has not. The only thing that has supported the market has been Dennis Kneale’s hope and huge amounts of liquidity and record low yields. For example of the irrational exuberance look at high yield bonds have had record defaults, but they continue to be bid up so clearly the risk/reward button in peoples head was broken, but it is about to be fixed.
As I have pointed out several times the S&P 500 is trading at 133 time’s current earnings and at a 26 forward p/e, which is very rich. Basically, earnings need to show actual top line revenue growth and GDP had to show a solid 4% growth rate, neither one was going to happen. While I missed a few points of growth I jumped out of the S&P 500, officially, at about 1015, or about August 7th and moved to TIPS and 2 yr treasuries. I did not do too bad, but even the TIPS and treasuries performance made me wonder what was going on, not all investment assets go up at the same time.
So, now we get our selloff and the only question is how big will it be? I have no idea, frankly. It could be as little as 3% or it could be as much as a 50% decline on the S&P, frankly the economic data is not really that good if you take an honest look at it, it is better, but not V shape recovery good. I do believe in the 3Q09 positive GDP number somewhere in the area of 2-3% area, all of which from government spending, but 4Q09 and 1Q10 will be flat to negative as the drugs wear off unless they drug us up again. Unfortunately we will need to hold on to our shorts because it will be a wild ride.
This was the solution uttered by none other than Jim Cramer a week or so ago on CNBC. This was his solution to not raise taxes in the near-term, but, as usual, this makes absolutely no sense whatsoever. Not only could the US probably not even place $1T in 30 year paper, Cramer himself admitted a top to the treasury market last week, but that would just add more long-term debt that the US cannot afford.
To think that issuing more debt is the solution so the government does not have to raise taxes is probably one of the more ridiculous things I have ever heard. Sure, if you look skin deep it makes sense, but if one does the math and realizes that $1T at 4.4% interest would cost an additional $44B annually and $1,320,000,000,000 in interest payments over 30 years, well you can see where I am going with this. Statements like those make me wonder how Mr. Cramer did so well as a manager for all those years because clearly numbers are not his strong suit.
The interest payments are just part of the problem as we have an already crippling amount of debt on the books already and higher taxes are a must, not that I am happy about it, but come on reality is here folks. Let us not forget about those 2 huge programs, Social Security and Medicare, which account for much of the $55T in unfunded liabilities the US has yet to save a penny for. Those immediate issues alone mean higher taxes, oh and universal healthcare will certainly add to the deficit and mean higher taxes of some sort, regardless of what they are telling us.
Frankly, anyone advocating higher debt for the US needs to have their head examined or did they forget about last year already. Debt, is not good in large amounts, I am not even convinced it is good in small amounts, but it is inevitable to have some sort of debt, usually a mortgage. Our taxes are already where they are because of our debt load and based on our current wasteful spending it is a certainty that taxes will go higher. To advocate more debt to postpone taxes is irresponsible because you need to pay interest on that debt and record low interest rates is no excuse to go crazy issuing more paper as it will eventually drag down GDP as our debt service payments grow and the dollar plummets.
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.
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.
Cramer needs to call a viewer and apologize for linking The Buckle, BKE, and saying it is a buy, buy, buy. This is the problem with anything that has to do with stock recommendations and is called the “lightening round.” Basically, you cannot make an informed decision about a stock when you rush through a segment and spend, what, 15 seconds with a caller? This poor lady probably went all in and now is suffering a 14% loss, nice job.
Here is their same store sales:
“One good example of what is going on with teen retailers is The Buckle, which had posted double-digit same-store sales gains for 22 consecutive months. That streak was broken in June, and continues in July. The company said Thursday its same-store sales rose 2.8 percent in July, which is a solid increase compared with other retailers that have reported so far. However, analysts surveyed by Thomson Reuters were expected the company to report a 10 percent increase in monthly same-store sales.” So much for blowing out the monthly numbers.
Here is what Cramer said: “Buckle: Cramer is bullish on Buckle, calling it “a superior retailer.”” I realize he switched over to entertainment, but this is a bit ridiculous. I actually have a lot of respect for Cramer the hedge fund manager, but as a TV pundit, he is not so good. He has had some good picks, but my point is that the whole lightening round thing is not good for investors as they will buy or sell on his recommendation. Either he needs to prescreen callers or discontinue that segment.
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