Category Archives: U.S. Economy

Subprime Mortgages Come Roaring Back…

…Only this time around they are sponsored by the U.S. Government and guaranteed explicitly  by the Taxpayers.  I say “explicitly” because Government agency-issued mortgages are directly guaranteed.  In 2008, the Government bailed out the banks who had issued subprime mortgages and related derivatives, but the Taxpayer never signed up for the multi-trillion dollar bailout, which largely transferred wealth from the middle class taxpayer to the Too Big To Fail bank executives.

In an attempt to off-set the falling velocity in the housing market, taxpayer-backed Fannie Mae and Freddie Mac have reduced their credit standards on guaranteed conventional mortgages several times over the last 3 years. In 2015 they reduced the down payment requirement to 3% from 5%. In addition, they reduced the amount mortgage insurance required on mortgages with less than 10% down. Then they allowed “soft dollar” contributions to count as part of the 3% down payment, like seller concessions or realtor commission concessions. They also allowed homebuyers to use loans from other sources to fund the down payment. In this manner, a homebuyer could prospectively buy a home with a taxpayer-guaranteed mortgage using no cash out pocket.

Then last June (2017) Fannie and Freddie raised the Debt To Income (DTI) ratio from 45% to 50%. DTI is the ratio of monthly debt payments (all forms of household debt payments) to the borrower’s monthly gross income. A borrower with a DTI of 50%, including the new mortgage, is using 50% of monthly net income to make debt payments (mortgage, credit cart, auto, student loans, personal loans).

The chart on the right shows the spike-up in the number of conventional mortgages issued by Fannie and Freddie once the DTI was raised (source: Corelogic w/my edits). As you can see, before the DTI was raised the number of mortgages issued with a DTI over 45% was one in twenty. After the change, the one in five new mortgages backed by the taxpayer were issued to homebuyers with a DTI over 45%. This is, by far, the highest level of high-DTI mortgages since the financial crisis.

But the story gets worse. The Urban Institute conducted a study of high DTI mortgages and discovered that 25% of all Fannie Mae mortgages issued to borrowers with a credit score below 700 had a DTI over 45% in just the first two months of 2018. This is up from 19% a year earlier. This is after Fannie Mae reported a $6.5 billion loss in Q4 2017 that the taxpayers will cover. The Government raised the DTI in order to stimulate home sales by inducing households, who could otherwise not afford the monthly cost of home ownership, into taking on even more debt to purchase a home. The majority of these home “buyers” will ultimately default and the taxpayer will get the privilege of eating the loss.

Zillow Group Is Now Flipping Homes? – Zillow Group stock plunged as much as 11% on Friday after it announced that it would be adding home flipping to its home-listing services. Clearly the market was spooked by this announcement – and for good reason. The plan will significantly raise ZG’s risk profile and will require the assumption of $10’s of millions in debt, depending on the number of homes ZG holds on its balance sheet any given time. It’s plan now forecasts holding up to 1,000 homes by year-end.

ZG stock is extraordinarily overvalued.   The Company released its Q4 and full-year 2017 earnings on February 8th and the numbers had little affect on ZG’s stock. ZG continues to generate operating and net losses. It incurred a $174 million intangibles write-down in Q4 2017 that was related to its 2015 acquisition of Trulia. While the Company and Wall St. analysts will remove this write-down as “non-recurring, non-cash,” it is indeed a write-down that occurred to an asset for which Zillow overpaid by at least $174 million. As the housing market fades, ZG will likely incur bigger write-downs of its “intangibles and goodwill,” which represents 85% of ZG’s book value.

The move into home-flipping signals, at least in my view, that ZG has determined that its current business model will never be profitable. The decision to test  home flipping in Phoenix and Vegas can be seen as desperate attempt to generate income. Ironically, in the last housing bubble, flippers in those two markets were decimated. I don’t see how this will end well for ZG, especially now that Congress is exploring rules changes to Fannie and Freddie that will raise the cost of conventional mortgages. The conventional mortgage user is the prime market for home flippers and now the average conventional mortgage applicant has de facto sub-prime credit.

By the way, just for the record, on average and in general, home prices are coming down quickly in most markets.  Case Shiller is severely lagged data and it emphasizes price gains from flips.  Robert Shiller used to admit to these facts publicly. Now he’s a bubble cheerleader like everyone else who sold out.

Taxpayer:  Get ready to eat more losses on the housing and mortgage market.

The commenetary above is from my latest Short Seller’s Journal. For the past several issues I have been focusing on both short-term and long-term homebuilder short ideas. Several of my subscribers have told me they are making double-digit percentage gains on the ideas presented. You can learn more about this unique newsletter here:  Short Seller’s Journal information.

“LEN! Bagged another 30% on April $60 puts.  Of course took some profits and added more to other ideas” – subscriber email last week

Tesla (TSLA): “It’s Not A Lie If You Believe It”

TSLA stock has levitated on statements from Elon Musk that TSL A would be cash flow positive by Q3, an announcement that TSLA would roll out a Model Y “crossover” SUV by November 2019 and the reiteration of ambitious Model 3 production milestones. All three will never happen.

Elon Musk’s attorneys must be giving Elon the same advise given to Jerry Seinfeld by George just before Jerry took a polygraph test: “Elon, just remember, it’s not a lie if you believe it it.”

It looks like reality is catching up to TSLA and TSLA is going into a death spiral.  An amended complaint to an existing class-action suit against the Company, Musk and the CFO was filed. The suit accuses Musk and the CFO of knowingly making false and misleading public statements with regard to production and quality targets for all of TSLA’s models. The amended complaint includes testimony from several former employees.  The amended allegations give the lawsuit far sharper teeth than the original court filing. When I find the time, I’m going to read the entire court filing.

In addition, recently a judge denied Elon Musk’s request to dismiss a class-action suit stemming from TSLA’s acquistion of Solar CIty (which is turning into a disaster) against Musk and TSLA’s board

As for TSLA generating positive cash flow by Q3 and avoiding the need to raise more money, I found an analysis of TSLA’s current liabilities which shows TSLA’s current cash position is worse than it appears.

At the end of 2017, TSLA showed a cash balance of $3.3 billion. Of that, 25% or $840 million is refundable customer deposits. Another $1.3 billion is current payables which are due over the next few months. This includes $753 million owed for equipment, $378 million in payroll and $185 million in taxes payable. Netting out customer deposits and the accrued payables, TSLA’s net cash position at the end of 2017 was $1.3 billion.

TSLA’s current assets minus current liabilities showed a working capital deficit of $1.1 billion at year-end. TSLA generates a cash loss on every vehicle sold. It’s highly likely that TSLA’s cash net of current cash payable obligations is now well under $1 billion. Elon Musk must have taken LSD before he made the announcement that TSLA would be operating cash flow positive and would not need to raise money in 2018.

Although nothing would surprise anymore in this market, I just don’t see how TSLA breaks higher from the current chart formation. Lawsuits are piling up. Last week the NTSB kicked TSLA out of its participation in the NTSB’s investigation of that fatal accident involving a Tesla in California. The NTSB stated that TSLA violated agency protocols. Consumer Union, the consumer advocacy division of Consumer Reports, issued a report last week which stated that Tesla needs to improve the safety of its autopilot. On top of all of this, I’m convinced that Elon Musk, based on his erratic and volatile behavior, is certifiably insane.

Syria: What Just Happened?

This essay on the ramifications of the United States’ Deep State missile attack on Syria.  The OPCW – Organization for the Prohibition of Chemical Weapons – is an independent organization formed to implement the provisions of the Chemical Weapons Convention.  There’s 192 member states, including the U.S. and Russia.

Russia sponsored a resolution in the U.N. for the U.N. to endorse the OPCW’s investigation of the alleged chemical attack in Syria.  Not surprisingly, the U.S. blocked the U.N. from endorsing the mission, which will still proceed as planned.  I would have  thought the U.S. would have led call for an independent investigation…

Eric Zeusse of the Strategic Culture Foundation writes:

So: what is at stake here from the OPCW investigation is not only the international legitimacy of Syria’s Government, but the international legitimacy of the Governments that invaded it on April 13th. These are extremely high stakes, even if no court in the world will possess the authority to adjudicate the guilt — either if the US and its allies lied, or if the Syrian Government lied.

The entire article is worth a perusal: Syria: What Just Happened?

As for the U.S. Government’s Deep State: Oh what a tangled web we weave, when first we practice to deceive. – Sir Walter Scott

Insane Valuations On Top Of Insane Leverage

The recent stock market volatility reflects the beginning of a massive down-side revaluation in stocks. In fact, it will precipitate a shocking revaluation of all assets, especially those like housing in which the price is driven by an unchecked ability to use debt to make the “investment.” This unfettered and unprecedented asset inflation is resting precariously on a stool that is about to have its legs kicked out from under it.

The primary reason the U.S. is now holding a losing hand at the global economic and geopolitical “poker table” is that this country has been committing too many sins for too long for there not to be a price to be paid. With bankrupt Governments (State and Federal), a bankrupt pension system, a broken healthcare system, all-time high corporate and household debt levels and a broken political and legal system, the U.S. is slowly collapsing. This is the “perfect storm” for which you want to own plenty of gold, silver and related stocks.

Eric Dubin and I are producing a new podcast called, “WTF Just Happened?” The inaugural show discusses the topics mentioned above:

“WTF Just Happened?” w/ Dave Kranzer and Eric Dubin is produced in association with Wall Street For Main Street       –       Follow  Eric here: http://www.facebook.com/EricDubin

Is War By Proxy With Russia Inevitable?

The U.K. refuses to release for independent examination any of the evidence that would link the Skirpal poisoning to Russia.  As such, we can only assume that Russia was meant to be the scapegoat.  Same deal with the chemical attack in Syria.   There’s a complete lack of evidence that would connect the incident to any specific perpetrator.  But the U.S. seems satisfied that a case built on no-evidence hear-say and western media headlines proves the allegations.

Amazingly, some of neo-cons at Fox News are now questioning the legitimacy and motives for U.S. belligerence toward Russia using Syria as the “host.” Tucker Carlson went nuts on the idea, which is surprising because Fox typically is pro-war against anyone and anything without bona fide cause and for any reason:

Perhaps of more concern is the analysis presented by Paul Craig Roberts, who has a little more experience in DC politics and Government policy advisement than anyone in the cable media:

No sign this morning of Washington coming to its senses. Zero Hedge reports that Trump is canceling his trip to Peru’s Summit of the Americas in order to oversee the US attack on Syria. If the attack is real and not merely a hit at an unimportant target for PR effect, war could be upon us…”War With Russia Approaching” and “On The Threshold Of War.”

Let’s hope saner minds somehow prevail in DC, though I’m not sure where those brain cells might reside. With a debt-riddled and a larger “explosion” than the one that hit in 2008 percolating throughout the U.S. financial system, it seems that Washington’s policy alternative of choice is, “when all else fails, start a war.”

The insane intra-day and inter-day volatility in the stock market is the primary signal that the system is spinning out of control.  The “trade war” narrative is strictly cosmetic.  The market turmoil reflects the conflict between the extreme inert overvaluation of financial assets and the money sloshing around in the hands of perma-bullish traders who never experienced a market collapse.  The drum-beat of war – trade and military – is meant to deflect the public’s attention from the underlying economic reality.

I would suggest that this is why gold is moving higher despite the overt effort by the Fed/banks to suppress the price and  the overwhelming negative investor sentiment toward gold.

Why Trump Won: People Vote Their Wallets

This commentary is emphatically not an endorsement of Trump as President.  I have not voted since 1992 because, when the system gives the public a Hobson’s Choice, voting is pointless.

An  age-old adage states that “people vote with their wallets.”  The chart below suggests that this adage held true in 2016:

The graphic above (sourced from Northman Trader) was prepared by Deutsche Bank and the data is from the Fed. It shows that, since 2007 through 2016, U.S. median household net worth declined between 2007 and 2016 for all income groups except the top 10%.

Given that a Democrat occupied the Oval Office between 2008-2016, and given that the economic condition of 90% of all households declined during that period, it follows logically that empty promises of a Republican sounded better to the general population of voters than the empty promises of a Democrat.

In other words, the “deplorables” didn’t vote for Trump because they wanted a wall between the U.S. and Mexico or they wanted to nuke North Korea off the map, they voted for a Republican because the previous Democrat took money from their savings account.

The rest of the propaganda and rhetoric  connected to the 2016 election, which was elevated to previously unforeseen levels of absurdity, was little more than unholy entertainment that served to agitate the masses.  These two graphs explain a lot about the outcome of the 2016 “election.”

The Housing Market Is Heading South

A subscriber from Canada emailed me last night about the Canadian housing market: “Toronto and Vancouver sales down 40% and 30% YoY respectively. Prices are still up in Vancouver but down 14% in Toronto. I don’t know how prices stay up if the volume continues to trend down. Canadians are even more levered than Americans I believe. This is going to get ugly before it’s all over.”

The only part I disagree is Canadians being more levered than Americans. The average first time buyer in the U.S. can buy a Fannie/Freddie guaranteed mortgage financed home with zero down as long as the credit score is north of 570. “Zero down?” you ask. Yes zero down. Now included in the down payment is any amount of concessions tossed in by the seller. Soft dollars. Fannie and Freddie are already asking for “bail out” money from the Government after posting big losses. Fannie posted a $6.5 billion loss in Q4. How is that possible if the housing market is healthy? It’s the sign that the average homebuyer is overleveraged.

Now I’m hearing ads all-day long (sports radio) for 100% cash-out refis, home equity loans, purchase and refi mortgages for buyers who don’t even have FICO ratings. “Past bankruptcy” is okay. “Simon Black” (his nom de plume) wrote a piece the other day accusing the bankers of being idiots for letting the subprime debt issuance get out of control again. He’s wrong. It’s the Taxpayers who are idiots for rolling over every time the Government bails out the bankers. Quite frankly, if I lacked morals and ethics, I’d rather be on the bankers’ side of this trade. They make massive bonuses underwriting all of the nuclear waste and then pay themselves even bigger bonuses when the debt blows up and the Taxpayers bail them out. Who’s the “dumb-ass,” Simon?

Homebuilder stocks are a low-risk shorting proposition.
A subscriber asked me about the 10yr Treasury yield, which for now appears to be headed lower, and if a significant drop in the 10yr yield would stimulate home sales.

That’s a great question. Mortgage rates are a function, generally, of the 10yr Treasury yield and risk premium. As the risk of repayment increases, mortgage spreads increase. The LIBOR-OIS spread reflects the market’s rising fear of repayment risk.  I just noticed that the 30-yr mortgage rate at Wells Fargo – 2nd largest mortgage lender – has not changed much in the last few weeks despite the decline in the 10yr yield.

Part of my argument is that the general credit quality, and ability to make any down payment, in the remaining pool of potential first time buyers is dwindling. In other words a large portion of under 35’s, who make up most of the 1st time buyer cohort and who are in the “pool” of potential homebuyers, do not have the ability financially to support home ownership. In the last 2 months, the percentage of 1st time buyers in the NAR’s existing home sales report has started to decline.

New homes on average are more expensive than existing home resales. This fact makes my argument even more compelling. We saw this in KBH’s FY Q1 2018 numbers, which showed flat home deliveries vs Q1 2017. Homebuilders are also getting squeezed by commodity inflation (lumber and other materials), which lowers gross margins.

I saw a study that showed the annual rate of change in real wages, where “real wages” is calculated using a “real” inflation rate, is declining. Furthermore, most of the nominal wage gains are concentrated in the upper 20% of the workforce. The lower 80% of wage-earners are experiencing year over year declining wage growth.

The conclusion here is that a majority of those in the labor that would like to buy a home can not afford to make the purchase. In fact, a study by ATTOM (a leading housing market data aggregator) showed that the average worker can not afford the median-priced home in 70% of U.S. counties. The relative cost of mortgage interest is only part of this equation, which means lower mortgage rates based on a falling 10yr yield would likely not stimulate home buying at this point.

I think the only factors that can possibly stimulate home sales would be if the Government takes the FNM/FRE down payment requirement to zero and directly subsidizes the interest rate paid. I’d be surprised if either of those two events occur.

P.S. – just for the record, Lennar’s real earnings yesterday were substantially worse than the headline GAAP-manipulated EPS that ignited the rally in the homebuilder sector. I’ll be reviewing LEN’s numbers in Sunday’s Short Seller’s Journal and showing why the reported GAAP numbers were highly deceptive. I’ll also suggest ideas to take advantage of this knowledge.

Economic, Financial And Political Fundamentals Continue To Deteriorate

I’ve been writing about the rising consumer debt delinquency and default rates for a few months.  The “officially tabulated” mainstream b.s. reports are not picking up the numbers, but the large credit card issuers (like Capital One) and auto debt issuers (like Santander Consumer USA) have been showing a dramatic rise in troubled credit card and auto debt loans for several quarters, especially in the sub-prime segment which is now, arguably the majority of consumer debt issuance at the margin.  The rate of mortgage payment delinquencies is also beginning to tick up.

Silver Doctor’s Elijah Johnson invited me onto his podcast show to discuss the factors that are contributing to the deteriorating fundamentals in the economy and financial system, which is translating into rising instability in the stock market:

If you are interested in learning more about my subscription services, please follow these link: Mining Stock Journal / Short Seller’s Journal. The next Mining Stock Journal will be released tomorrow evening and I’ll be presenting a junior mining stock that has taken down over 57% since late January and why I believe, after chatting with the CEO, this stock could easily triple before the end of the year.

“Thanks so much. It was a pleasure dealing with you. Service is excellent” – recent subscriber feedback.

Short Sell Ideas: Will Overstock.com End Up At Zero?

Overstock’s attempt to capitalize on “blockchain mania” appears to have fallen flat. The SEC is investigating it ICO fund-raising scheme and a class-action lawsuit has been filed in connection with the deal. OSTK finally announced today that it was pulling its attempt to unload 4 million shares on the public. This is after a failed effort to sell its e-commerce business. Meanwhile, OSTK’s operating losses are mounting, including a big loss in Q4, a period in which retailers can put on a blind-fold and make money.

I believe OSTK can be profitably shorted at its current price of $33 if you are willing to endure periods in which the stock might respond to highly promotional announcements from the Company that would cause the stock to spike up temporarily. My ultimate price target is below $10.

As I write this (Thursday, March 29th), CNBC is reporting that Overstock has canceled its 4 million share offering, though the Company has not issued a formal press release to that effect. The reason given is “market conditions.” If this is true, in my view, it means that a lack of demand at the current stock price – $37 – would have necessitated pricing the deal significantly lower in order to place the shares. I would suggest that this indicates that OSTK stock is headed lower anyway.

Seeking Alpha published my anlysis on OSTK, you can read the rest of here: Overstock.com: An Epic Short Opportunity

You can learn about short ideas in the Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.

2008 Redux-Cubed (at least cubed)?

There is plenty of dysfunction in plain sight to suggest that the financial markets can’t bear the strain of unreality anymore. Between the burgeoning trade wars and the adoption in congress this week of a fiscally suicidal spending bill, you’d want to put your fingers in your ears to not be deafened by the roar of markets tumbling – James Kuntsler, “The Unspooling

Many of you have likely seen discussions in the media about the LIBOR-OIS spread. This spread is a measure of banking system health. It was one of Alan Greenspan’s favorite benchmark indicators of systemic liquidity. LIBOR is the London Inter-Bank Offer Rate, which is the benchmark interest rate at which banks lend to other banks. The most common intervals are 1-month and 3-month. LIBOR is the most widely used reference rate globally and is commonly used as the benchmark from which bank loans, bonds and interest rate derivatives are priced. “OIS” is an the “overnight indexed swap” rate. This is an overnight inter-bank lending benchmark index – most simply, it’s the global overnight inter-bank lending rate.

The current 1-month LIBOR-OIS spread has spiked up from 10 basis points at the beginning of 2018 to nearly 60 basis points (0.60%). Many Wall Street Einsteins are rationalizing that the LIBOR-OIS spread blow-out is a result of U.S. companies repatriating off-shore cash back to the U.S. But it doesn’t matter. That particular pool of cash was there only to avoid repatriation taxes. The cash being removed from the European banking system by U.S corporations will not be replaced. The large pool of dollar liquidity being removed was simply masking underlying problems – problems rising to the surface now that the dollar liquidity is drying up.

Keep in mind that the effect of potential financial crisis trigger events as reflected by the LIBOR-OIS spread since 2009 has been hugely muted by trillions in QE, which have kept the banking system liquefied artificially. Think of this massive liquidity as having the effect of acting like a “pain killer” on systemic problems percolating like a cancer beneath the surface. The global banking system is addicted to these financial “opioids” and now these opioids are no longer working.

Before the 2008 crisis, the spread began to rise in August 2007, when it jumped from 10 basis points to 100 basis points by the end of September. From there it bounced around between 50-100 basis points until early September 2008, when it shot straight up to 350 basis points. Note that whatever caused the spread to widen in August 2007 was signaling a systemic financial problem well in advance of the actual trigger events. That also corresponds with the time period in which the stock market peaked in 2007.

What hidden financial bombs are lurking behind the curtain? There’s no way to know the answer to this until the event actually occurs. But the market action in the banks – and in Deutsche Bank specifically – could be an indicator that some ugly event is percolating in the banking system, not that this should surprise anyone.

The likely culprit causing the LIBOR-OIS spread is leveraged lending. Bank loans to companies that are rated by Moody’s/S&P 500 to be mid-investment grade to junk use banks loans that are tied to LIBOR. The rise in LIBOR since May 2017 has imposed increasing financial stress on the ability of leveraged companies to make debt payments.

But also keep in mind that there are derivatives – interest rate swaps and credit default swaps – that based on these leveraged loans. These “weapons of mass financial destruction” (Warren Buffet) are issued in notional amounts that are several multiples of the outstanding amount of underlying debt. It’s a giant casino game in which banks and hedge funds place bets on whether or not leveraged companies eventually default.

I believe this is a key “hidden” factor that is forcing the LIBOR-OIS spread to widen. This theory is manifest in the performance of Deutsche Bank’s stock:

DB’s stock price has plunged 33.8% since the beginning of January 2018. It’s dropped 11.3% in just the last three trading days (thru March 23rd). There’s a big problem behind the “curtain” at Deutsche Bank. I have the advantage of informational tidbits gleaned by a close friend of mine from our Bankers Trust days who keeps in touch with insiders at DB. DB is a mess.

DB, ever since closing its acquisition of Bankers Trust in the spring of 2000, has become the leading and, by far, the most aggressive player in the global derivatives market. During the run-up in the alternative energy mania, DB was aggressively underwriting exotic derivatives based on the massive debt being issued by energy companies. It also has been one of the most aggressive players in underwriting credit default swaps on the catastrophically leveraged EU countries like Italy and Spain.

DB is desperate to raise liquidity. Perhaps its only reliable income-generating asset is its asset management division. In order to raise needed funds, DB was forced to sell 22.3% of it to the public in a stock deal that raised US$8 billion. It was originally trying to price the deal to raise US$10 billion. But the market smells blood and DB is becoming radioactive. The deal was floated Thursday (March 22nd) and DB stock still dropped 7% on Thursday and Friday.

Several U.S. banks are not far behind in the spectrum of financial stress. Citigroup’s stock has declined 15.1% since January 29th, including a 7.5% loss Thursday/Friday. Morgan Stanley has lost 11.8% since March 12th, including an 8.8% dive Thursday/Friday. Goldman Sachs’ stock has dumped 11% since March 12th, including a 6.3% drop on Thursday/Friday. JP Morgan dumped 6.7% the last two trading days this past week (thru March 23rd).

If Deutsche Bank collapses, it will set off a catastrophic chain reaction of counter-party defaults. This would be similar to what occurred in 2008 when AIG defaulted on counter-party derivative liabilities in which Goldman Sachs was the counter-party. While it’s impossible to prove without access to the inside books at DB and at the ECB, I believe the primary driver behind the LIBOR-OIS rate spread reflects a growing reluctance by banks to lend to other banks for a duration longer than overnight. This reluctance is derived from growing fear of DB’s deteriorating financial condition, as reflected by its stock price.

The commentary above is from last week’s issue of the Short Seller’s Journal. In addition to well-researched insight into the financial system, the SSJ presents short-sell ideas each week, including ideas for using options. This week’s issue, just published, discusses why Tesla is going to zero and how to take advantage of that melt-down. You can find out more about this service here: Short Seller’s Journal information.