In my latest issue of the Short Seller’s Journal, I predicted a weak showing for July auto sales. Both GM and Ford missed Wall Street’s forecast. With the magic of seasonal adjustments, the industry data overall was presented to show a .7% increase in overall sales vs. June. GM sales dropped 2% and Ford’s sales fell 3%. Again, any overall industry gains can be attributed to mysterious “seasonal adjustments.” June auto sales dropped 3.4% from May.
When Ford reported its Q2 earnings, Ford’s auto finance division reported a decline in profits that reflected lower values realized at auction on cars returned after the lease expired. Auto market weakness typically shows up first in the resale/used market (I traded the auto supply sector junk bonds when I traded on Wall Street in the 1990’s, which is why I’m familiar with auto cycle dynamics). In addition, Ford Credit reported higher than expected credit losses.
My point here is that the auto industry, after being hyper-stimulated by the Fed with $100’s of billions of subprime quality car loans and leases, is going to head south – probably rather quickly. Our financial system is about to feel a huge shock from delinquent and defaulted car financing extended to people who could never really afford the payments. Ford is already feeling it. Carmax also reported bigger than expected losses in its car loan portfolio.
Housing is the other economic sector that has been hyper-stimulated by the Fed and the Government with artificially low interest rates and taxpayer-sponsored low to no-down payment mortgages. Housing is going to head south quickly as well. This was evident with yesterday’s construction spending report: June private construction spending fell .6% from May, non-residential construction dropped its most since December, April construction spending was revised to down 2.9% from down 2%.
Not only is construction spending declining, previously reported construction spending is being revised to show that it was weaker than originally reported.
The housing market data reported by the National Association of Realtors is tragically corrupted. Recently the NAR has been reporting an increase in first-time buyers. Yet, the Census Bureau-measured rate of home ownership continues to decline. Last week the CB reported the rate had dropped 62.9%, a 51-year low (click to enlarge):
What this means is that real first time buyers are not showing up as buyers, contrary to the NAR’s manipulated data. The chart to the left is from the National Association of Homebuilders. It shows the breakdown of home ownership by age demographic for Q2 2015 vs Q2 2016. As you can see the first-time homebuyer age demographic has declined. This graph undermines the data being reported by Larry Yun and the NAR.
My educated bet is that a large percentage of existing home buyers over the last couple years has been speculators – either quick-flippers or “investors” who buy a home with the intent to fix it up and re-sell it six to twelve months later. There will be a lot of “second” home owners who end up stuck with their “investment.”
I have been theorizing for quite some time that the housing market would get “squashed” from the top. The first-time buyer is the key component in the housing market sales activity cycle. If a move-up buyer can’t sell its home to a first-time buyer, the owner with the “move-up” home – the upper price-range home – for sale can’t sell. It leads to a glut at the high end – something that is being reported all over the country.
As I’ve noted several times recently, high-end inventory has been building up across the country for well over a year. Long-time housing market analyst and consultant, Mark Hanson, said in his latest blog post:
I am getting reports from sources in mid-to-high end regions all over the nation that after a strong June, July sales were down between 15% and 50% with Pendings down as much as 60% from a year ago. One large West Coast brokers with whom I talk said they are recommending to clients with mid-to-high end properties on the market over 30-days with no offers to cut list prices aggressively in order to get in front of the market versus the process of small, frequent price cuts that look bad optically and keep sellers constantly behind the market. LINK: Big Trouble Ahead
In other words, the inventory clog at the high end of the market is starting to spill over into the upper-middle price range. I received a price-change alert yesterday about a $1-million+ home which was taken down over 14% in price. The “new price” competition is heating up. I’m seeing “new price” signs in the mid-priced homes now all around Denver.
The point here is that the two primary drivers of economic activity – albeit artificially stimulated economic activity – auto and housing – are heading south. I believe the U.S. economic system will be engulfed by drop off in economic activity that will shock even those who can see through the economic propaganda being reported by the Government, Fed and industry associations.
In my last couple of Short Seller’s Journals, I have been recommending shorts in the housing and auto sectors. These are two high-beta sectors that will sell-off more than the overall market once the market heads south again, something which may already be happening.
As you can see from the following 11-year weekly graph of the Dow Jones Home Construction index, the homebuilders and related home construction companies have been trending sideways since April 2013 (click to enlarge):
The index is down 6.8% since hitting 610 intra-day last Wednesday. The S&P 500 is down just .7% in that same time-frame. But this illustrates my point about the downside potential for the housing stocks if the S&P trends lower.
My Short Seller Journal presents facts about economic data not reported by the media and analysis not generally found on most, if any, blogs. It’s a weekly report in which I also offer ideas for using options to short the market plus trading and capital management strategies.
It’s clear that the Fed is doing what it can to keep the broad market indices from selling off, but underneath the marquee lights there’s a whole world of stocks that are collapsing in price. In the next issue I’ll be presenting what I believe is an energy sector debt-induced Ponzi scheme that could drop from $20 to at least $5. You can access the my short-sell ideas using this link: Short Seller’s Journal.