Category Archives: Housing Market

A Debt-Riddled System That Is Hitting The Wall

An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically. – Robert Kaplan, President of the Dallas Fed

Fed officials always understate risks embedded in the system. Translated, the statement above implies the Fed is worried about the amount of debt accumulated in the U.S. economic system over the last 8 years. Kaplan specifically referenced the $6.2 trillion in corporate debt outstanding as a reason for the Fed to stop raising the Fed funds rate. Non-financial corporate debt as a percentage of GDP is now at a record high:

More eye-raising for me was the warning issued by the BIS (Bank for International Settlements – the global Central Bank for central banks). The BIS warned that the surging supply of corporate debt, specifically the amount of BBB-rated debt, has left the credit market vulnerable to a crash once the economic weakness triggers ratings downgrades. A large scale ratings downgrade of triple-B issuers to junk would cause an avalanche of selling from funds which can’t hold non-investment grade debt. This has the potential to seize-up the credit markets.

The BIS would not issue a warning like this unless it was already seeing troubling developments in the numbers to which it has access. Recall that leveraged loan ETFs plunged in value the last two months of 2018. Same with high yield bond ETFs, though the drop in leveraged bank loans was more troubling given their status as senior secured and ahead of junk bonds in the legal pecking order.

As you can see from the chart below, it looks like the value of senior leveraged bank loans may be headed south again:

Just like the stock market, fixed income prices rallied sharply after the Fed and the Trump Government acted to arrest the sell-off in the stock market in late December. But this was always a short-term “fix,” as economic fundamentals continued to deteriorate, perhaps at a hastened pace because of the Government shutdown. But neither the shut-down nor the trade war are the causes of the collapsing global economy.

More evidence the consumer is tapped out – Deutsche Bank wrote a report detailing signs that the average U.S. household is running up against its willingness and ability to assume more debt and monthly interest expense. I have been suggesting this was the case for a few months in SSJ. One indicator I thought was interesting is a chart showing that the average hours worked in sectors selling “big ticket” items is now declining (home furnishings, travel arrangement and reservation services and used car dealers).

Another chart showed that, based on regional Fed surveys of senior loan officers at banks, demand for credit cards, auto loans and personal loans is declining:

One of the reasons for the drop in loans is simply that the average consumer simply can not afford the monthly cost of taking on additional debt, especially higher-cost credit card and auto debtl. Just as significant is the fact that interest rates on these types of loans are rising quickly – i.e. the average credit card interest rate is now 17% vs 14% a year ago. Deutsche Bank omits to explain why the interest rate on these types of loans is rising much faster than the Fed funds.

The interest rate charged on a loan reflects the “risk free” rate (Fed funds), the time value of money and – most important – the inherent risk associated with specific types of loans. Interest rates on credit cards and auto loans are rising to reflect the increased risk attached to these forms of credit – i.e. the rising delinquency and default rates.

Besides the rising cost of necessities, the average household is getting squeezed from higher interest payments on the record amount of household debt that has accumulated over the last 10 years. The chart below shows the year-over-year growth in household interest payments going back the 1960’s:

The aggregate household interest payment has soared at a 15% Y/Y rate. Interest payments as a share of total household spending have jumped to the highest level since the financial crisis. Virtually every prior time when interest payments spiked this much, a recession promptly followed.

Last but not least, as Treasury debt hits a new record every day, it was reported by the Treasury that the U.S. budget surplus in January, traditionally one of the only months of the year with a spending surplus because of tax receipt timing, was only $9 billion. This missed the consensus estimate of $25 billion and was far below the January 2018 surplus of $49 million. For the first 4 months of the Government’s fiscal year, the budget deficit was $310 billion, 77% higher than the $175.7 billion deficit for the same period last year.

The budget deficit will surely be much higher than the $1.2 trillion annualized rate recorded in the first four months of this FY. Federal interest expense hit a record high for the four-month period. Annualized, the projected $575 billion interest expense alone for FY 2019 would be more than the entire budget deficit in FY 2014.

Finally, the Deutsche Bank report showed two graphics showing the “current conditions” index for buying cars and homes for the top 33% of households by income. The index measures the intent to make a purchase. The current conditions index for car purchases was at its lowest since 2012. For home buying, the intent to purchase index was at its lowest since 2008.

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The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information

Trump’s Trade War Tweets, Buybacks And A Short-Squeeze

Someone last week suggested that Trump sees the stock market as the barometer measuring the success of his Presidency. I think his behavior, tweets, press comments, etc with respect to the stock market validates that assertion.

The Dow trended lower all week last after Monday’s close. Whenever the stock market faded from an early run-up or began a rapid sell-off, a Trump tweet or press statement would pop up proclaiming that the trade war negotiations were “progressing.” It seems, though, this manipulation tonic is starting to lose strength. The index of stocks with large buyback programs actually finished the week lower. But the “most shorted” stock index closed higher on the week again. This is why the SPX, Naz and Russell outperformed the Dow this past week.

Market tops are a process – While I’m getting impatient for this market to rollover, market tops are a process. This chart certainly provides something to contemplate:

The chart above overlays the SPX from April 2018 to present on top of a chart of the SPX over a similar period in 1936-1937. The correlation is surprisingly high up to this point. No one can predict if the SPX will follow the same path for the rest of 2019 that it took in 1937, but the two periods of time have many economic, financial and geopolitical similarities. There’s certainly a case to be made that the current stock market might unfold in a manner that “rhymes” with the large decline that occurred in 1937.

Another interesting indicator is the AAII Sentiment Survey. The AAII is the American Association of Individual Investors. The weekly survey measures the relative bullishness and bearishness of individual investors. Retail investor sentiment is considered a fairly reliable contrary indicator. Currently the bullishness is now over the 40% level and the bearish level is 20% (the rest are “neutral”) – a level of bullishness that has signaled a market top in the past. In contrast, a bullish level of 20% and a bearish level of 49% on December 13th was registered nine days before the stock market bottomed.

The highest the bullish sentiment level has reached in the last 5 months was 45% in the first week of October (25% bearish). The stock market entered a big decline on October 3rd. In isolation, this indicator may or may not be reliable. But given the number of other indicators associated with a market top, now would be a good time to take profits on any long positions you might have put on in the last 2 months. Given the deteriorating fundamentals of the economic and financial system, the probability that the market will rise a meaningful amount from here is quite low.

The “US Macro” index measures the difference between consensus expectation vs the actual number reported for a wide array of economic reports. As you can see, the stock market has dislocated from economic reality by a substantial margin. At some point, unless the economic reports begin to improve, the stock market will “catch down” to reality. How long it will take for this to occur is anyone’s guess, but it is likely that the “adjustment” will be abrupt.

Many indicators are reflecting a sharp fall-off in consumer demand. Wholesale inventories are soaring and the inventory to sales ratio is significantly higher than a year ago. The CEO of a logistics warehouse in California remarked in reference to the inventory stored in company warehouses, “in 30 years I’ve never seen anything like this.” This includes inventories of durables and non-durables targeted for domestic distribution.

Confirming the pile-up in manufactured goods relative to demand, the Cass Freight index has declined on a year-over-year basis two months in a row. The index had been rising each on month on an annual comparison basis since Trump took office.

Consumer sentiment is also falling. The latest U of Michigan consumer sentiment survey fell well below the Wall St consensus expectation, with some components falling to their lowest level since the 2016 election (recall that hope soared after the election). Apologists are blaming the trade war and the Government shutdown. However, historically there’s a near-100% correlation between the directional movement of the stock market and consumer sentiment. Any negative effect from the shutdown should have been offset by the sharp rally in the stock market. Contrary to the obligatory positive spin put on the data, the sentiment index likely reflects the fact that the average household has largely tapped out its ability to take on more debt in order to keep spending on anything above non-discretionary items.

Insider selling during February has accelerated. Insiders sold more shares in the first half of February relative to shares purchased than at any time in the last 10 years. The size and volume of insider stock sales the last three days of February – per SEC filings – was described by one analyst as “off the charts.” The Financial Times had an article discussing the fact that America’s CEOs are leaving their posts at the highest rate since 2008. It’s likely the departures reflect a bearish outlook by insiders both for business conditions and the stock market.

Homebuilders, despite the small rise in homebuilder optimism, must be sensing the fall-off in the economy and a decline the pool of potential new homebuyers. Housing starts in December dropped 11.2% from November. The decline would have been worse but November’s number was revised lower. The number reported for December was 14.4% below the consensus estimate. The numbers are SAAR (seasonally adjusted annualized rate) in case you were wondering about seasonality between November and December. But just to confirm, the December 2018 number was 11% below December 2017. Also, the Census Bureau releases the “unadjusted” monthly numbers, which showed a 12% drop in starts year-over-year.

Over the next several weeks there will be a lot of excuses for the deteriorating economic fundamentals:  trade war, Government shut-down, cold weather in January and February, low inventory in low-price homes, the dog ate my homework.

But the truth is that the average household in the U.S. is running up against debt limitations – the ability to take on and service additional debt.  Just one indicator of this is rising credit card and auto loan delinquencies.  The U.S. economy for the last 8 years has been primed and pump with printed money and debt.  Debt at every level of the system is at all time higher – both nominally and as a percentage of GDP.

The next round of QE, regardless of the scale, will do nothing to re-stimulate economic activity unless the money is used to re-set (i.e. pay-off) creditors on behalf of the debtors. This was how the last reset was engineered after the financial crisis but this time it will have to be a bailout in size that is multiples of the last one.

The stock market is beginning to rollover again, as the gravity of economic fundamentals begins to exert its “pull.”  I’m sure it won’t take long before we start to hear complaints about the hedge fund computer algos again.  But the best advice is to take your money off the table and get out of the way.

The Stock Market Is Back In Idiot-Mode Again

I don’t know if it was the intent of the Fed, but Jerome Powell has managed to trigger a rush into stocks more frenzied than the one that engulfed the last days of the dot.com/techbubble. The vertical ascent since Christmas in the Dow/SPX is unprecedented on a percentage basis over an 8-week period of time. All sense of logic, sound analysis and fear of risk has disappeared. I don’t know how much longer this move will last, but it will likely be followed by a spectacular reversal.

What I can say with 100% certainty is that the stock market continues to dislocate from economic reality. This is a situation that will be corrected sooner or later, with the stock market re-pricing significantly lower to a level that better reflects the deterioration in both the global and U.S. economy.

A perfect example of this is housing starts, which were released today for December and showed an 11.2% drop from November. The better comparison is the 11% plunge from December 2017, as “seasonal [statistical] adjustments” are used to obfuscate the real data trends month to month. The year/year comp is somewhat “cleansed” from “seasonal” manipulation adjustments.

The mainstream media is already putting a positive spin the starts number by explaining that permits rose. A permit is not indicative of a future start. Homebuilders have been loading up on land, as tends to happen at the end of housing cycles. A permit is a cheap “option” to initiate a start if the market picks up. In fact, starts should be increasing right now. It takes 3-5 months to build the average priced new home. If homebuilders truly thought that the market was going to improve, housing starts should be increasing in November/December in anticipation of peak selling season in June.

Funny thing about the housing starts commentary.  Most homebuilders are sitting on a record level of inventory.  An example is LGI Homes, which just reported this morning.  LGI’s  year-end inventory soared 34% from year-end 2017.  The Company financed most of this with debt.  Home closings for 2018 were up 11% but decelerated during the year and new orders were down in January 2019 vs 2018.  Given the big jump in existing home inventory during the 2nd half of 2018, it’s safe to say that most homebuilders will likely try to work off existing inventory before starting new homes in excess of what is sold.

The housing market and all the related economic activity connected to building, selling, and financing home sales represents  20-25% of the GDP.  Inflating the money supply and dropping interest rates is not a valid method of stimulating economic activity when most households are over-burdened with debt, living paycheck to paycheck and depleting savings just to remain on the gerbil wheel.

Notwithstanding the propaganda coming from policy makers, Wall Street and the hand-puppet mainstream media, the economy is sinking.  The current spike in the stock market is nothing more than a rabid bear market rally of historic proportions. The stock market is not trading higher on fundamentals or hedge funds plowing investment capital back into the market (away from algo-based momentum trading).

According to data tracked by Goldman Sachs, hedge fund exposure to the stock market is well below levels registered during the last 18 months. As it turns out, corporate stock buybacks and short-covering are driving stocks higher. Buybacks YTD are tracking 91% higher than the same period last year. Short interest in the S&P 500 is now at the lowest level since 2007. The stocks that have performed the best since Christmas are the most heavily shorted stocks.

We’re not hearing anymore whining about the hedge fund computers dictating the direction of the market as was commonplace during the December sell-off. But when this market rolls over and rips in reverse, the Leon Cooperman’s of the world will be spilling tears all over the Wall Street Journal and CNBC complaining about hedge fund algos driving stocks lower. Funny thing, that…

The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information.

Just How Indebted Is Elon Musk?

Tesla continues to head south since hitting its post-earnings high of $321. It’s down nearly $100 from the $380 post “funding secured” tweet all-time high close on August 7th. The stock has diverged negatively from the SPX since mid-January. By all accounts the order-rate and delivery rate of Tesla’s 3 models is dropping quickly. While there may be a brief boost in sales from  Model 3 deliveries into Europe and China in Q1, it looks like Model 3 orders and deliveries in North America have slowed to a trickle. Complaints about the poor quality of the Model and poor service from Tesla are already populating European automobile forums.

There have been wide-spread reports from people who are having trouble getting canceled $1,000 reservation deposits on Model 3’s refunded. Several have reported receiving the refund only to have the check bounce after it’s deposited. Consumer Reports removed its highly sought recommendation rating from the Model 3 after citing poor quality control and reliabity. This past Wednesday Tesla’s General Counsel, who left his Washington, DC law practice and took the job two months ago, announced he was leaving the Company. The stream of high-level c-suite departures has been nearly continuous over the last year.

Tesla is staring at the $920 million convertible bond maturity due next Friday (March 1st). I have no idea how Tesla will address this, as it seems by many indicators that the $3.9 billion in cash Tesla posted on its year-end balance sheet may not be accurate, in addition to showing negative working capital of $1.7 billion. That said, I would not bet that Tesla will default this soon on its debt.

On Friday it was reported that Elon Musk took out $61 million in mortgages on his five California mansions, $50 million of which was new funding and $11 million was refinancing (note:  rumor of this deal was in the market a week earlier). Morgan Stanley underwrote the mortgages. I would suggest that Musk possibly needed the money to meet margin calls on his stock-holdings, against which Musk has borrowed heavily. Otherwise it makes no sense to me why an alleged billionaire would need to trifle with $61 million in mortgages. Morgan Stanley is one of Musk’s primary stock custodians. In that regard, I’m wondering if Morgan Stanley forced the issue.  It’s a good bet that Musk has pledged and hypothecated most of his assets as collateral against indebtedness. I have no doubt that when Tesla hits the wall, Musk’s wealth will largely vanish.

A Financial System Headed For A Collision With Debt

The retail sales report for December – delayed because of the Government shut-down – was released this morning. It showed the largest monthly drop since September 2009. Online sales plunged 3.9%, the steepest drop since November 2008. Not surprisingly, sporting goods/hobby/musical instruments/books plunged 4.9%. This is evidence that the average household has been forced to cut back discretionary spending to pay for food, shelter and debt service (mortgage, auto, credit card, student loans).

I had to laugh when Trump’s Cocaine Cowboy – masquerading as the Administration’s flagship “economist” – attributed the plunge in retail sales to a “glitch.” Yes, the “glitch” is that 7 million people are delinquent to seriously delinquent on their auto loan payments. I’d have to hazard a wild guess that these folks aren’t are not spending money on the latest i-Phone or a pair of high-end yoga pants.

Here’s the “glitch” to which Larry must be referring:

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century. The middle class spending capacity is predicated on disposable income, savings, and borrowing capacity. Disposable income is shrinking, the savings rate is near an all-time low and many households are running out of capacity to support more household debt.

I found another “glitch” in the private sector sourced data, which is infinitely more reliable than the manipulated, propaganda-laced garbage spit out by Government agencies. The Conference Board’s measurement of consumer confidence plunged to 120.2 from 126.6 in January (December’s number was revised lower). Both the current and future expectations sub-indices plunged. Bond guru, Jeff Gundlach, commented that consumer future expectations relative to current conditions is a recessionary signal and this was one of the worst readings ever in that ratio.

This was the third straight month the index has declined after hitting 137.9 (an 18-yr high) in October. The 17.7 cumulative (12.8%) decline is the worst string of losses since October 2011 (back then the Fed was just finishing QE2 and prepping for QE3). The expectation for jobs was the largest contributor to the plunge in consumer confidence. Just 14.7% of the respondents are expecting more jobs in the next 6 months vs 22.7% in November. The 2-month drop in the Conference Board’s index was the steepest 2-month drop since 1968.

This report reflects a tapped-out consumer. It’s a great leading economic indicator because historically downturns in this report either coincide with a recession or occur a few months prior.

Further supporting my “glitch” thesis, mortgage purchase applications have dropped four weeks in row after a brief increase to start 2019. Last week purchase applications tanked 6% from the previous week. The previous week dropped 5% after two consecutive weeks of 2% drops. This plunge in mortgage purchase apps occurred as the 10yr Treasury rate – the benchmark rate for mortgage rates – fell to its lowest level in a year.

Previously we have been fed the fairy tale that housing sales were tanking because mortgage rates had climbed over the past year or that inventory was too low. Well, mortgage rates just dropped considerably since November and home sales are still declining. The inventory of existing and new homes is as high as it’s been in over a year. Why? Because of the rapidity with which number of households that can afford the cost of home ownership has diminished. The glitch is the record level of consumer debt.

The parabolic rise in stock prices since Christmas is nothing more than a bear market, short-covering squeeze triggered by direct official intervention in the markets in an attempt to prevent the stock market from collapsing. This is why Powell has reversed the Fed’s monetary policy stance more quickly than cock roaches scatter when the kitchen light is turned on. But when 7 million people are delinquent on their car loan and retail sales go straight off the cliff, we’re at the point at which stopping QT re-upping QE won’t work. The stock market will soon seek lower ground to catch down to reality. This “adjustment” in the stock market could occur more abruptly most expect.

As The Fed Reflates The Stock Bubble The Economy Crumbles

I get a kick out of these billionaires and centimillionaires, like Kyle Bass yesterday, who appear on financial television to look the viewer in the eye and tell them that economy is booming.  Kyle Bass doesn’t expect a mild recession until mid-2020. Hmmm – explain that rationale to the 78%+ households who are living paycheck to paycheck, bloated with a record level of debt and barely enough savings to cover a small emergency.

After dining on a lunch fit for Elizabethan royalty with Trump, Jerome Powell decided it was a good idea to make an attempt at reflating the stock bubble. After going vertical starting December 26th, the Dow had been moving sideways since January 18th, possibly getting ready to tip over. The FOMC took care of that with its policy directive on January 30th, two hours before the stock market closed. Notwithstanding the Fed’s efforts to reflate the stock bubble – or at least an attempt to prevent the stock market from succumbing to the gravity of deteriorating fundamentals – at some point the stock market is going to head south abruptly again. That might be the move that precipitates the renewal of money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

For me, this graphic conveys the economic reality as well as any economic report:

The chart above shows the Wall Street analyst consensus earnings growth rate for each quarter in 2019. Over the last three months, the analyst consensus EPS forecast has been reduced 8% to almost no earnings growth expected in Q1 2019. Keep in mind that analyst forecasts are based on management “guidance.” The nearest next quarter always has the sharpest pencil applied to projections because corporate CFO’s have most of the numbers that go into “guidance.” As you can see, earnings growth rate projections have deteriorated precipitously for all four quarters. The little “U” turn in Q4 is the obligatory “hockey stick” of optimism forecast.

Perhaps one of the best “grass roots” fundamental indicators is the mood of small businesses, considered the back-bone of the U.S. economy. After hitting a peak reading of 120 in 2018, the Small Business Confidence Index fell of a cliff in January to 95. The index is compiled by Vistage Worldwide, which compiles a monthly survey of 765 small businesses. Just 14% expect the economy to improve this year and 36% expect it to get worse. For the first time since the 2016 election, small businesses were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment.

The Vistage measure of small business “confidence” was reinforced by the National Federation of Independent Businesses confidence index which plunged to its lowest level since Trump elected. It seems the “hope” that was infused into the American psyche and which drove the stock market to nose-bleed valuation levels starting in November 2016 has leaked out of the bubble. The Fed will not be able to replace that hot air with money printing.

I would argue that small businesses are a reflection of the sentiment and financial condition of the average household, as these businesses are typically locally-based service and retail businesses. The sharp drop in confidence in small businesses correlates with the sharp drop in the Conference Board’s consumer confidence numbers.

The negative economic data flowing from the private sector thus reflects a much different reality than is represented by the sharp rally in the stock market since Christmas and the general level of the stock market. At some point, the stock market will “catch down” to reality. This move will likely occur just as abruptly and quickly as the rally of the last 6 weeks.

Why Housing Won’t Bounce With Lower Rates

“Our advice is to own as little exposure U.S. equity exposure as your career risk allows.” – Martin Tarlie, member of portfolio allocation at Grantham, Mayo, Van Otterloo investment management

The following is an excerpt from the latest Short Seller’s Journal:

Economy is worse than policy makers admit publicly – Less than four months ago, the FOMC issued a policy statement that anticipated four rate hikes in 2019 with no mention of altering the balance sheet reduction program that was laid out at the beginning of the QT initiative. It seems incredible then that, after this past week’s FOMC meeting, that the Fed held interest rates unchanged, removed any expectation for any rate hikes in 2019, and stated that it might reduce its QT program if needed. After reducing its balance sheet less than 10%, the Fed left open the possibility of reversing course and increasing the size of the balance sheet – i.e. re-implementing “QE” money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

Housing market – As I suggested might happen after a bounce in the first three weeks of January, the weekly purchase mortgage index declined three weeks in a row, including a 5% gap-down in the latest week (data is lagged by 1 week).  This is despite a decline in the 10-yr Treasury rate to the lowest rate for the mortgage benchmark Treasury rate since January 2018.

Not surprisingly, the NAR’s pending home sales index – released last Wednesday mid-morning for December – was down 2.2% vs November and tanked nearly 10% vs. December 2017. Pending sales are for existing home sales are based on contracts signed. This was the 12th straight month of year-over-year declines. Remarkably, the NAR chief “economist” would not attribute the decline to either China or the Government shutdown. He didn’t mention inventory either, which has soared in most major metro areas over the past couple of months.

For me, the explanation is pretty simple: The average household’s cost to service debt has reached a point at which it will become more difficult to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA):

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century.  Fannie Mae raised the maximum DTI (debt-to-income ratio – percentage of monthly gross income that can be used for interest payments) to 50% in mid-2017 to qualify for a mortgage. This temporarily boosted home sales. That stimulus has now faded. And despite falling interest rates, the housing market continues to contract.

That said, the Census Bureau finally released new home sales for November. It purports that new homes on a seasonally adjusted, annualized rate basis rose a whopping 16.9% from October. I just laughed when I saw the number. The calculus does not correlate either with home sales data reported by new homebuilders or with mortgage purchase applications during that time period (new home sales are based on contract signings). 90% of all new home buyers use a mortgage.

The November number was a 7.7% decline from the November 2017 SAAR. According to the Census Bureau, the months’ supply of new homes is at 6, down from October’s 7 but up from November 2017’s 4.9. A perusal of homebuilder balance sheets would show inventories near all-time highs (homebuilders do not always list finished homes on MLS right away if a community already has plenty of inventory). The average sales price of a new home dropped to 8.4% from $395,000 in October to $362,000 in November. Anyone who purchased a new home with a less than 9% down payment mortgage during or prior to October is now underwater on the mortgage.

Absent more direct Government subsidy and Fed stimulus, the housing market is going to continue contracting, with prices falling. Anyone who bought a home with less than a 10% down payment mortgage over the last 3-5 years will find themselves underwater on their mortgage.  I expect home equity mortgage delinquencies and default to begin rising rapidly in the 2nd half of 2019.

In the last issue of the Short Seller’s Journal, I presented my favorite homebuilder shorts along with put option and short selling call option ideas. You can learn more about this newsletter here:   Short Seller’s Journal information

 

The Stock Market Would Crash Without Central Bank Support

The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long. Saxo Bank, “Beware The Global Policy Panic”

“Mis-pricing of money and credit” refers to the ability of the Fed to control interest rates and money supply.  Humans with character flaws and conflicting motivations performing a role that is best left to a free market.   After the market’s attempt in December to re-introduce two-way price discovery to the stock stock market, the Fed appears ready to fold on its “interest rate and balance sheet normalization” policy, whatever “normalization is supposed to mean.

Tesla is the perfect example of terribly misallocated capital enabling the transitory survival of a defective business model. Access to cheap, easy capital has enabled Elon Musk to defer the eventual fate of the Company for several years. But as the equity and credit markets become considerably less tolerant, companies with extreme financial and operational flaws are exposed, followed by a stock price price that plummets.

The Stock Market Would Crash Without Central Bank Support – A few weeks after Fed head, Jerome Powell, hinted that the Fed may hold off on more rate hikes, an article in the Wall St. Journal suggested that the Fed was considering halting its “Quantitative Tightening” program far sooner than expected, leaving the Fed’s balance sheet significantly a significantly higher level it’s original “normalization” plan.

But “normalization” in the context of leaving the Fed’s balance sheet significantly larger than its size when the financial crisis hit – $800 billion – simply means leaving a substantial amount of the money printed from “QE” in the financial system. This is a subtle acknowledgment by the Einsteins at the Fed that the U.S. economic and financial system would seize up without massive support by the Fed in the form of money printing.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession and I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications about the true condition of the economy. But the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike. Ultimately the market will sell-off when comes to understand that the last remaining prop in the stock market is the Fed.”

Little did I realize when I wrote that two weeks ago that the Fed would hint at halting QT less than two weeks later.

When this fails to re-stimulate economic activity, the Fed will eventually resume printing money. Assuming the report in the Wall Street Journal on Friday is true, this is a continuation of the “mis-pricing” of money credit alluded to above by Saxo Bank. Moreover, it reflects a Central Bank in panic mode in response to the recent attempt by the stock market to re-price significantly lower to a level that reflected economic reality.

The Deflating Stock Bubble Will Fuel A Bull Move Mining Stocks

“The economic and financial condition of the U.S. and global economy is similar to that of 2008, although I think now it’s a lot worse than it was back then…the ‘gravity’ of true fundamentals has finally gotten ahold of stocks…”

Fundamentals ultimately drive value.  In terms of the fundamentals, financial assets – stocks, bonds, real estate – are extremely overvalued.  The precious metals sector right now is extremely cheap relative to fundamentals.

Don’t be fooled into thinking that the stock market bounce that started the day after Christmas was the end of the “bear market,” as Jim Cramer is asserting.  Bear markets last a lot longer than four weeks.  A bear market in financial assets is just getting started.  At the same time, the bull market cycle in gold, silver and mining stocks that began in late 2015 with a 250% run-up in GDX over the next 8 months  is ready to resume after using just over 2 years to effect a 38% pullback from the sharp in 2016.

Elijah Johnson invited me to discuss the economy, stock market and precious metals sector on his Silver Doctor’s podcast:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

Stock Market Volatility Reflects Systemic Instability

The post-Christmas stock rally extended through Wednesday as the small-cap and tech stocks led the way, with the Russell 2000 up 14.3% and the Nasdaq up 12.5%. The SPX and Dow are up 10.4% and 10.1% respectively. During the stretch between December 26th and January 17th, the Russell 2000 index experienced only two down days.

Make no mistake, this is primarily a vicious short-covering and hedge fund algo momentum-chasing rally. It’s a classic bear market move with the most risky and most heavily shorted stocks experiencing the greatest percentage gains. But the rally has also been accompanied by declining volume. When abrupt rallies or sell-offs occur with declining volume, it’s a trait the conveys lack of buyer/seller-conviction. It also indicates a high probability that the move will soon reverse direction.

As you can see in the chart of the Nasdaq above, volume has been declining while the index has been going nearly vertical since January 3rd. This is not a healthy, sustainable move. The Nasdaq appears to have stalled at the 50 dma (yellow line). The three previous bounces all halted and reverse at key moving averages.

The global economy – this includes the U.S. economy – is slipping into what will turn out to be a worse economic contraction than the one that occurred between 2008-2011. As it turns out, during the past few weeks Central Banks  globally have increased the size their balance sheet collectively. This is the primary reason the U.S. stock market is pushing higher.

Official actions belie official propaganda – If the economy is doing well, the labor market is at “full employment” and the inflation rate is low, how come the Treasury Secretary convened the Plunge Protection team during the Christmas break plus Jerome Powell and other Fed officials have been softening their stance on monetary policy? Despite assurances that all is well, the behavior of policy-makers at the Fed and the White House reflects the onset of fear. Without question, the timing of the PPT meeting, the Powell speech and the highly rigged employment report was orchestrated with precision and with the intent to halt the sell-off and jawbone the market higher.

In truth, the economy is headed toward a severe recession and I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. Ultimately the market will figure out that it’s highly negative that the only “impulse” holding up the stock market is the Fed. For now the perma-bulls keep their head in the sand and pretend “to see” truth in the narrative that “the economy is booming.”

Both the economy and the stock market are in big trouble if the Fed has to do its best to “talk” the stock market higher. The extreme daily swings are symptomatic of a completely dysfunctional stock market. It’s a stock market struggling to find two-way price discovery in the face of constant attempts by those implementing monetary and fiscal policy to prevent the stock market from reflecting the truth.

The Fed and Trump are playing a dangerous game that is seducing investors, especially unsophisticated retail investors, to make tragic investing decisions. As an example, investors funneled nearly $2 billion into IEF, the iShares 7-10 year Treasury bond ETF, between Christmas and January 3rd. This was a “flight to safety” movement of capital triggered by the drop in stocks during December. Over the next three days, the ETF lost 1.3% of its value as January 4th was the largest 1-day percentage price decline in the ETF since November 2016 (when investors moved billions from bond funds to stock funds after Trump was elected).

No one knows for sure when the stock market will roll-over and head south again. But rest assured that it will. Cramer was on CNBC declaring that the “bear market” ended on Christmas Eve. It was not clear to me that anyone had declared a “bear market” in the stock market in the first place. But anyone who allocates their investment funds based on Cramer recommendations deserves the huge losses they suffer over time. Don’t forget – although the truth gets blurred in the smoke blown over time – those of us who were around back in the early 2000’s know the truth: Cramer blew up his hedge fund when the tech bubble popped. That’s how he ended up on CNBC. So consider the source…

The “bears” may be in brief hibernation, but will soon emerge from their den – While the market is still perversely infused with perma-bullishness, this latest rally is setting up an epic short-sell opportunity. I have my favorite names, which I share with my Short Seller’s Journal subscribers, and I try to dig up new ideas as often as possible. My latest home run was Vail Resorts (MTN), on which I bought puts and recommended shorting (including put ideas) in the December 2nd issue of my newsletter. MTN closed yesterday at $185, down 33.6% from my short-sell recommendation. To learn more about this newsletter, please click here:  Short Seller’s Journal information.