Category Archives: Housing Market

But We Were Told “It’s Different This Time”

“U.S. Officials Meet in Secret Over Junk-Loan Frenzy as Recession Alarms Flash”

U.S. Treasury Secretary Steven Mnuchin on Thursday led a secret meeting of top U.S. financial regulators on the risks to global markets from the recent surge in corporate borrowing…”No details were provided on the gist of the discussion, though according to the statement the panel heard an ‘update from Craig Phillips, a counselor to Mnuchin, on recent market developments involving corporate credit and leveraged lending'”. – Article link

Something(s) is(are) starting to melt-down “behind the scenes” in the global financial system.  The meeting referenced above is the “tell.”  Craig Phillips, “counselor to Mnuchin,” was formerly a managing director and member of the Global Operating Committee of BlackRock.   It’s quite likely that Phillips’ former colleagues have put Phillips on high alert about problems developing in the credit markets, both domestically and globally.

Even more interesting is that fact that Fed Chairman, Jerome Powell, gave a speech recently in which he denied that credits risks are mounting in the system:  “Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.”

Powell’s assertion eerily echoes a similar comment made by then-Fed Head, Helicopter Ben Bernanke in mid-2007 about subprime mortgage risk being “contained.”  But Powells’ statement followed by a meeting convened by Treasury Secretary Mnuchin under the advisement of a former BlackRock hatchet-man is the silent scream of insiders who see the probability of another financial system tsunami forming…

Of course, the yield curve has been sending these warnings for about a year.  But they keep telling us it’s different this time…

The Economy Continues To Deteriorate

Trump’s trade advisor, Peter Navarro, was on CNBC today asserting that the economy was expanding at an unprecedented rate.  Either Navarro is tragically ignorant or an egregious liar. Either way he looks like an idiot to those us who study the real numbers and understand the truth.

The Global Manufacturing PMI (Purchasing Managers Index) dropped to 50.4 – the lowest since July 2016. It’s been falling almost nonstop since mid-2017. The current period of decline is the longest in the 20-year history of the index. The index includes the purchase of inputs for the manufacturing of consumer goods, investment goods (capex material) and intermediate goods (semi-finished goods used as inputs for final goods).

The pace of decline for auto sales in China, Europe and the U.S. is the fastest in at least three decades excluding the great financial crisis time period. Visible evidence of the contracting global/domestic economy is Ford’s announcement that it’s cutting 10% of salaried (white collar) workforce, about 7,000 jobs, by the end of August.

The trade war is not the cause of U.S. economic weakness. If anything, it’s nothing more than an effort by the Trump Government to manufacture a scapegoat for the inevitably severe economic recession engulfing  the system. China’s exports to the U.S. were 5% of its GDP in 1995. By 2005 exports to the U.S. had risen to 9% of China’s GDP. Currently exports to the U.S. represent just 3% of China’s GDP.  These numbers show that the trade war between the U.S. and China is not the cause of global economic weakness.

Rather, the cause is the massive misapplication of capital from 10 years of over $21 trillion in money printing and debt issuance. This artificially over-stimulated economic activity. Now that the stimulus has worn off, the major economies – especially the U.S. and China – face the problem of servicing their debt load and the consequences of a decade of misallocated capital.

Bond guru, Jeffrey Gundlach, recently asserted in a webcast that “nominal GDP growth over the past five years would have been negative is U.S. public debt had not increased.” He went on to state that analysts and financial journalists “seem to not understand that the growth in the GDP it looks pretty good on the screen but is really based exclusively on debt – Government debt, also corporate debt and mortgage debt.” I have been saying this for quite some time because it’s pretty obvious to anyone who looks more deeply into the numbers beyond reciting the headline reports.

The Fed released Q1 household debt numbers two weeks ago. It showed that total household debt grew by $124 billion in the first quarter of 2019, boosted by increases in mortgage, auto and student loan balances. That increase in debt is not translating into economic growth. Part of the reason for the increase in mortgage debt balances is the proliferation of cash-out refinancings, which are now back to 2006-2008 levels (chart sourced from bubblesbottoms.blogspot.com):

Much of this cash-out refinancing is being used to pay off large credit card balances, which does not help stimulate economic spending but it does result in larger mortgage balances per household and lets the consumer “reset” its credit balance for more debt-based consumption. Again, this is similar to what the financial landscape looked like prior to the great financial crisis except it’s worse now.

The above commentary is an excerpt from last week’s Short Seller’s Journal.  In each issue I undress the economic propaganda and provide short ideas, including options plays.  This week I’m featuring a retail-based “unicorn” stock which burns more cash every quarter.  You can learn more about this newsletter here:    Short Seller’s Journal information

Horrifying Comments From A Freddie Mac Phd Economist

The housing market continues show contracting sales volume. April existing home sales fell 0.4% (SAAR – Seasonally Adjusted Annualized Rate) from March and 4.4% from last April. Existing home sales have dropped year-over-year 14 months in a row. This is the worst run since the housing crisis.

Obviously from a seasonal standpoint, if the market were healthy, home sales should be increasing month-to-month notwithstanding questionable statistical “adjustments” imposed on the data by the NAR. Furthermore, existing home sales are based on closings, which mean the report measures contracts that were signed in late February to late March/early April. during this period the 10yr Treasury rate fell from 2.8% to as low as 2.35%. But lower rates are not stimulating home sales in spite of rapidly rising inventory.

This is because the much of the remaining “pool” of potential home buyers can not afford the all-in cost of home ownership in spite of lower financing costs. Almost 30% of all mortgages that Fannie and Freddie underwrote and packed into bonds last year were for home buyers whose total debt payments were in excess of 43% of their gross (pre-tax) income. This metric – the borrower’s DTI – has nearly doubled since 2015. The mortgage/housing market is headed for a repeat of 2008.

New home sales also showed a drop from March. But the March number was curiously revised significantly higher – an upward revision to 723k SAAR. The number is so much higher than any number reported for any month in the last 12 months that it looks comical in the data series. John Williams (Shadowstats.com) referred to the report as “regular nonsense monthly volatility and lack of statistical significance.”   In fact, the jump in new home sales tabulated by the Government does not remotely correlate with mortgage purchase application data released by the Mortgage Bankers Association, which shows a decline in purchase applications that would correspond to April’s new home sales data

NOTE:  new home sales are based on contracts signed.  90% of all new homebuyers use a mortgage. Therefore declining purchase apps would translate into decline new home contract signings.  New homebuilders, for the most part, have been reporting declining new home orders (see Toll Brother’s latest earnings release from last Monday, for instance).

This brings me to an exchange between Texas real estate professional, Aaron Layman, and the deputy chief economist at Freddie Mac – Lawrence Kiefer. It seems that this Freddie Mac executive could not understand by lower interest rates were not translating into higher home sales. This economics Einstein was puzzled that the large pool of millennials were renting rather than buying. It’s pretty clear that this ivory tower dork is clueless about the amount of student debt held by the millennial demographic.  Kiefer suggested to Aaron that higher student debt levels could possibly be net positive for the housing market if it leads to higher incomes. The Twitter exchange between Aaron and Mr. Kiefer has left me speechless. You can read more here: Aaronlayman.com

Perhaps studying this chart might help Freddie Mac’s Mr. Kiefer better understand the basic problem:

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

April Retail Sales Soiled The Bed Sheets

Perhaps the perma-bullish Wall Street analysts should contribute to retail sales by stocking up on Depends – like the Merrill Lynch analyst who forecast retail sales to climb 0.7% ex-autos. Retail sales, preliminarily, were said to have declined 0.2% from March.   The “core” retail sales group – retail sales not including autos and gasoline – were flat. Wall Street’s finest expected a consensus 0.4% gain.

I say “preliminarily” above because, if you scan the Census Bureau’s report you’ll note “asterisks” in several major line items.

This means that “advance” numbers were not available for those retail sales categories.  Thus, the CB guesstimates the number based on past numbers for that category.  It also means the Census Bureau can overestimate that category for headline purposes with the intent to revise lower in future reports.

Retail sales numbers are reported on a nominal basis.  If they were to be adjusted by a real rate of inflation, the month to month decline from April likely would have approached at least one half of one percent.

Funny thing about the guesstimate for new car dealer sales.  The OEM’s report actual deliveries to new dealers every month.  I would have to believe that new car dealers have highly automated sales tracking software. It would seem that the Census Bureau should be able to have a fairly accurate data sample and estimate for April new car dealer sales well before the middle of the following month. But using the (*) enables the Government to manipulate the number into a favorable outcome for the “advance” report.

We know that the average household – i.e the 80-90% of all households – are struggling under the weight of record monthly debt service requirements on a record amount of consumer debt. This plight is made worse by the fact that real wages are declining.  Not to judge Wall Street analysts harshly (said sarcastically), but it should be obvious that retail sales were going to show a decline in April.  Imagine how bad the actual number must be if the Government has to release a guesstimated report showing a nominal decline.

In my weekly Short Seller’s Journal, I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Global Synchronized Depression: Buy Gold And Silver Not Copper

It’s not “different this time.” The steep, prolonged yield curve inversion reflects the onset of a deep global economic contraction which is now being confirmed by leading indicators such as semiconductor and auto sales.  At some point the Fed is going to be forced by the market to cut the Fed Funds rate, as the 1yr Treasury is now yielding less than the Fed  Funds target rate. In addition, the yield curve is inverted from 1yr out to 7yrs, with a steep inversion between the 1yr and 3yr Treasurys.  It won’t take much flinching from the Fed to ignite a rally in the metals.  In addition, the investor sentiment as measured by MarketVane is about as low as I’ve seen it in a long time (34% bullish for both gold and silver).

We are headed into a severe global recession with or w/out a trade agreement. To be sure, over the next 10-20 years, it’s likely the price of copper will move higher. But if my view plays out, a severe recession will cause a sharp drop in the demand for copper and other base metals relative to the demand over the last 10-15 years. This in turn will push out the current supply/demand forecasts for copper by several years and drive the price of copper lower.

Trevor Hall and I discuss the global economy, the intense western Central Bank gold price manipulation activity and the factors that will drive the price of real money – gold and silver – higher and commodities like copper lower in our latest Mining Stock Daily podcast – click here or on the graphic below:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Actual Home Sales Are Tanking – Here’s Proof

The National Association of Realtors (NAR – existing home sales reports) and the Census Bureau (new home sales reports) report monthly sales on a “seasonally adjusted annualized rate” basis (SAAR). Notwithstanding the reliability – or lack thereof – of the “seasonal adjustments,” it would seem absurd to report monthly home sales on an annualized rate basis.

To the extent the NAR and Census Bureau’s data sausage-grinder is fed inaccurate data and thereby vomits a bad monthly “adjusted” number, annualizing that result magnifies the error. As it turns out, when sales are declining, the regression models used to “seasonally adjust” the data collected overstates actual sales (year over year monthly existing home sales have declined 13 months in a row).

A better measure of real homes sales is to look at actual numbers from companies in the business of pimping used homes or building and selling new homes. Realogy (RLGY) is the perfect laboratory rat for existing home sales. Realogy is the leading provider of real estate services in the U.S. under the brand names of Coldwell Banker, ERA, Sotheby’s, and a few others. Its shares plunged 15% on Thursday as losses from Q4 accelerated in Q1. Revenue declined 9% year-over-year vs a 6.2% in drop in Q4. The culprit was a 4% drop in transaction volume. The actual “same store sales” decline was likely larger because RLGY’s Q1 numbers are skewed by the acquisition and franchising of Corcoran, making the this quarter’s year/year comps irrelevant.

If any business reflects the true condition of the housing market, it’s RLGY. Existing home sales represent 90% of total home sales and RLGY is the largest real estate brokerage concern in the country. Yes, some select areas may still be showing “red embers” of activity. But most of the country is headed into what will ultimately be a severe housing recession. RLGY was down another 8.7% on Friday. It’s now down 33% since reporting its numbers last week.

RLGY may still be worth shorting here. It’s bleeding cash. It lost $135 million on an earnings before taxes basis (the income statement did not show operating income as line item). Its operations burned $103 million. The Company added an additional $100mm in debt, which now stands at $3.3 billion. The bond issue which it floated in Q4 had a coupon of 9.375% – a triple-C rated yield. Triple-c rated companies typically have a high probability of eventually going bankrupt. The tangible book value of the company – i.e. subtracting goodwill – is negative $1.6 billion. I wouldn’t touch RLGY’s bonds any more than I would touch TSLA’s or NFLX’s bonds. RLGY is on track to run out of cash by the end of September.

In the new home sales arena, Beazer (BZH) stock has plunged 18.4% since reporting its latest quarterly numbers on Friday. BZH’s closings were down over 10%, revenue down 4.6% and its gross margin plummeted (sales incentives to move inventory). Even adding back the write-down of California inventory, BZH’s net income was nearly cut in half and new orders were down close to 8% in the first 6 months vs 2018.

Note: it looks like homebuilders will begin the inventory write-down cycle again. It starts slowly and snowballs into an avalanche. So much for the “tight inventory” narrative that shoved down our gullet the NAR’s little con-artist, Larry Yun.

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Massive Asset Bubbles And Cheap Gold And Silver

Notwithstanding today’s absurdly phony and propagandistic employment report, it’s becoming more apparent by the week that the Fed and the U.S. Government are once again preparing to print more money. I don’t know when the Fed will revert to more QE but I would argue that the intense effort by the banks to use the Comex as a conduit to control the price of gold is a probable signal – just like in 2008 from March to October. Several FOMC officials have already hinted at the possibility of employing “radical” policy measures to keep the system from falling apart.

Silver Liberties invited on its podcast to discuss the extreme overvaluation of financial “assets” and the extreme undervaluation of real money – gold and silver – and the related derivative of real money – mining stocks.

The Historical Stock Bubble And Undervalued Gold And Silver

When the hedge fund algos inevitably turn the other way and unload stocks, a meaningful amount of the capital that leaves the stock market will likely rush into gold and silver.  The record hedge fund net short position on the Comex will add fuel to the move in gold/silver.

James Anderson of Silver Doctors/SD Bullion invited me to discuss the largest stock bubble in U.S. history and why gold is extremely undervalued relative to the U.S. dollar.  (Note:  at the 20:44 mark I reference China’s foreign reserves to be $1.2 trillion. This is the dollar amount of China’s reserves; China’s total foreign reserve is $3 trillion).

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Divergence Between Stocks And Reality Is Insane

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

This is the nastiest bear market rally that I have seen in my over 34 years of experience as a  financial markets professional. It would be a mistake to make the assumption that there has  not been some official intervention to help the stock market recover from the December sell-off.

Rob Kientz of goldsilverpros.com – a relatively new website that focuses on gold and silver market news and research – and I had a conversation about the extreme negative divergence between the economy and the stock market. And, of course, we discussed gold, silver and mining stocks:

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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.