Tag Archives: Housing bubble

The Fed Successfully Destroyed The U.S. Housing Market

What concerns me is when people put their hard-earned money into housing or any other supposed store of value thinking that the sky is the limit. We are living in an age of epic distortions, misinformation and outright fraud. – Aaron Layman, Dallas-based Realtor, member of the Dallas and Houston MLS boards and a housing market analyst

The propaganda about a hot economy, “overheated” housing market and tight labor market is just one of several Big Lies being promoted by politicians and business leaders. The article below references a comment made by a money manager about the housing market “overheating.” But the housing market isn’t overheating. What’s overheating is the amount of “conforming” mortgage debt underwritten by the Federal Government on behalf of taxpayer. I’ll have more to say about this tomorrow.

The transformation of Fannie Mae, Freddie Mac, the FHA and the VHA into the new subprime debt provider has caused a shortage of homes under $500k, or under $600k in “high price” zones. But there’s an oversupply of homes north of $700k in most areas (the Silicon Valley area notwithstanding). But more on this tomorrow.

A colleague and email acquaintance, Aaron Layman, is a realtor in Houston who has been uniquely outspoken about the degree to which the current housing market is unhealthy and dysfunctional. I say “uniquely” because 99.9% of all realtors would sell a roach motel trap to cockroaches if they knew that they could get the cockroach qualified for a Taxpayer-backed mortgage to make that particular purchase (“hey man, this is a good value and prices are only going higher”).

Aaron has written a blog post which details the manner in which the Fed has destroyed the housing market and economy:

If you are out shopping for a home during this summer selling season and you are having a difficult time finding a good property at a reasonable price, be sure to thank the folks at the Fed for their fine work. Destroying a market takes some effort, particularly if you account for all of the PR necessary to cover your tracks. The Federal Reserve and their army of economists have created another fine mess in the U.S. housing market, destroying real price discovery and distorting the real value of a home which is end-user shelter.

Please use this link to read the entire essay – it’s worth your time:  The Fed Has Destroyed The Housing Market

Homebuilder Stocks: Overvalued, Over-Leveraged And Going Lower

I continue to believe that the “lowest hanging fruit” in shorting this stock market is the homebuilders and related stocks. History appears to be repeating, or at least “rhyming” in the housing sector:

Most investors do not realize this, because the majority of traders and “professional” money managers were still in college or b-school during the 2007-early 2009 stock market collapse, but the homebuilding sector actually peaked and began a waterfall decline in mid-2005 (see the chart above).

The propaganda narrative is that this time around the subprime mortgage issuance has been contained by regulation.  This is patently false.  The subprime mortgage game shifted from largely private underwriters to the Federal Government, starting in 2008.  Because the Government is involved, it has been well disguised in a “conforming” mortgage costume based on Federal Housing Finance Agency “requirments.”  Well, more like “guidelines” than requirements.

The FHA began offering 3.5% down payment Federally guaranteed mortgages in 2008.  Its underwriting market share went from 2% to 20%.  Not to be outdone, Fannie and Freddie began to offer 3% down payment, reduced PMI mortgages a few years later.  Not to be outdone by themselves, and after Fannie reported a $6 billion Q4 loss and required  a $3.7 billion cash infusion from the Taxpayers, Fannie and Freddie raised the DTI limit on conforming mortgages to 50%.  If the housing market is healthy, why is Fannie Mae receiving cash infusions?  A 50% DTI means that the mortgage applicant requires 50% of its gross monthly income to service its monthly debt payments (mortgage, credit car, auto, etc).

A 3% down payment, 50% DTI mortgage is subprime garbage.  It also implies that the FICO score is a farce.  Some who requires a 3% (in many cases less) downpayment with a 50% DTI  does not have prime credit rating.   After the DTI ceiling was raised in December, new  mortgages with DTI’s in excess of 45% jumped from 5% to 20%  of all mortgage issuance in January and February.  This subprime mania in its essence – though not name – and will lead to another massive Fannie/Freddie/FHA/VHA bailout.

All of the signs of the top of the last bubble are re-emerging. Home equity “cash out” loans are soaring again at what is likely peak home prices. According to Freddie Mac, cash-out “refis” are at their highest level since 2008.

We saw how this movie ended the last time around. If you forgot, rent “The Big Short.”  A private investment management company in California, Carrington Holding Company, has a mortgage lending facility that will now underwrite and fund mortgages to borrowers with credit scores as low as 500. Carrington will do loans up $1.5 million on homes/condos and home equity cash outs up to $500k. Recent credit events like foreclosure, bankruptcy or a history of late payments are acceptable. This business plan will not end well.

I recently saw a “for sale” in an upper-middle class neighborhood in Denver which advertised, “no money down, lender on site.” If the market is “hot,” why is this house being marketed as “no money down” and why is a lender at the open house? Is this a Volkswagon “sign and drive” transaction or this is a several $100k  home “purchase”  at what is likely the market peak?

This is in an area in which the average home sells for over $600k, which means unless the buyer puts down at least $70k, it can’t be backed by one of the Government mortgage agencies (the max loan limit for a conventional mortgage in Denver County $530k – in most areas of the country, the maximum loan size for a conventional Govt mortgage is $453k – Denver County is considered a “high price” area and thus the Government will underwrite a larger mortgage – “guidelines,” not “rules”).

This is the type of home borrowing that occurred in the last couple years of the mid-2000’s housing bubble. That “open house” sign also tells me that the market for homes that can’t be funded without Government assistance is deteriorating.

This housing market is unfolding in an eerily similar manner as the mid-2000’s bubble. Sales volume, prices and rental rates are starting to literally crash in New York City, as I’ve detailed in the last couple of issues. I read an article that said, based on the current sales rate, Miami has a built up a 6-year supply of condominiums. Again, the last time around the bubble began to pop first in NYC and south Florida. Phoenix and Vegas followed those two cities. As I presented last week, the move by Zillow Group to get into house-flipping is the signal for me that those two cities have peaked.

The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information

 

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

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

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.

But, What About The Housing Market?

A colleague of mine pointed out that Trump has not been tweeting his flatulence about the economy recently.  This thankful hiatus is after he just passed a tax cuts and a spending budget that is supposed to be stimulative.  As it  turns out, the economy is hitting the headwinds of marginally higher interest rates and a consumer that is bulging from the eyeballs with debt.   Windfall tax rebates to large corporations will not fix this nor will rampant Government deficit spending.

This leads us to the housing market. Mortgage originations were down 5.6% in Q4 from Q3. This is not a result of seasonal bias. Q4 mortgage originations in 2017 were down 26.7% from Q4 2016. One caveat is that the Fed does not breakout the numbers between purchase mortgages and refinancing. But higher rates are starting to affect all mortgage applications. According to the latest data from the Mortgage Bankers Association, mortgage purchase applications dropped 6% two weeks in the row. Declines in purchase apps should not happen moving from January to February, as February is statistically a seasonally stronger month for home sales than January.

Moreover, existing home sales for January were released this morning. To the extent that we can trust the National Association or Realtor’s Seasonally Adjusted Annualized Rate statistical Cuisinart, existing home sales plunged 3.2% in January from December and nearly 5% from January 2018. Decembers headline report was revised lower. I’m sure the King of Spin, Larry Yun, will blame it on “low inventory.”  But this is simply not true:

If Yun’s thesis were true, the chart above would be inverted. Instead, going back to j1998, there is a definitive inverse correlation between inventory and home sales.  Curiously, when attempted to run the numbers to the present, I discovered that the Fed removed the data series I had used to create the chart in in 2015.  Mere coincidence, I’m sure…

The mortgage rate for a 30-yr fixed rate conventional mortgage at Wells Fargo, the  country’s second largest mortgage originator, is now 4.5% with an APR of 4.58%. As recently as September, the rate for a 30yr mortgage was 3.87%. At current rates, the monthly payment for a home purchase with a $400,000 mortgage has increased $187. It may not sound like much, but for many first-time buyers that small jump in monthly payment can mean the difference between buying and not buying.

Since the Fed began printing money and the Government knocked the down payment requirement to 3% on a Government-backed mortgage, homebuyers have based the amount they are willing to pay for a home on determining the highest possible monthly payment the mortgage underwriter will allow. In the example above, the monthly payment on a $400k mortgage at 3.78% is $1,857. At 4.58%, the same payment only “buys” a $363,000 mortgage. This is nearly a 10% decline.

The same math applies to flippers/investment buyers, who pay an even higher rate for an investment purchase. One of the SSJ subscribers is a real estate professional here in Denver. She emailed to tell me that, “it doesn’t take much for interest rates to change Investors ideas.” She has a client who wants to buy an investment home for around $350000. Since investor rate loans are at least a quarter of a point higher than an owner-occupied mortgage, the client’s purchase with 20% down goes up $161 a month from the from the recent jump in mortgage rates. This means he now needs the rent to go up by that much to work on the purchase-decision formula he is using.” I believe that a lot of flippers are going to be stuck with homes they can’t re-sell at the price they paid.

The average price the average-income homebuyer can afford has declined nearly 10% as a result of just a 75 basis point rise in mortgage rates. What happens when rates go up another 50-75 basis points? This fact has not been reflected in the home price data that is released every month from Case-Shiller and from the Government. This is because those surveys have a 3-6 month lag built into the methodology of calculating their respective home price indices.

As it becomes obvious that the price the average potential homebuyer can pay has been reduced from $400k to $363k, it will trigger a price decline cycle similar to 2007-2009. Flippers will be the first to fold just like during the mid-2000’s housing bubble. That housing market crash was triggered by the collapse of subprime lenders, which removed a key source of funding used by flipper and for end-user home purchases from flippers. This time around it will be triggered by a lack of buyers who are able to pay the same price now that they could have paid in September when rates were 80 basis points lower. Soon rates will be 180 basis points higher than in September and home values will be crushed.

The analysis on the housing market above is an excerpt from the latest 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.

The Fed’s “Catch 22”

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.

Hidden In Plain View / Eyes Wide Shut

The impending economic collapse is hidden from most. People only see a rising stock market, not the negative underlying factors that will cause the whole system to crash. – Peter Schiff

The average middle class household is getting squeezed by an income that is not keeping up with the cost of living. Unfortunately, a major portion of the cost of living has become debt service. Most car buyers assume an almost insane amount of debt to buy a new car. Credit card debt is being used to make ends meet. Low-to-no down payment mortgages have funded most of the homes sold over the last few years. The problem, however, is that the financial system enables this behavior. One has to wonder if this was not intentional…

The quote above is from a recent Peter Schiff podcast. He goes on to say the it’s unclear how quickly the financial system will unravel but “it is close” to happening. I wanted to use that quote because one of the goals of the Short Seller’s Journal is to present hard evidence that brings to your attention the “negative underlying factors” which contradict the “official” narrative about the economy and financial system.

A subscriber of mine sent an article to me in which the Wall Street economist, Joe LaVorgna, was forecasting today’s GDP report to surprise everyone by coming in at 5%. I literally laughed out loud. LaVorgna is a hack who has spent his career on Wall Street preaching fairytales about the economy as a means of assisting the snakeoil salesmen at his bank in their efforts to stuff as much high-commission junk into investor accounts as possible. People like LaVorgna would sell their mother for a small commission. I know this because everyone who was above me in the food-chain in the securities division of Bankers Trust in the 1990’s was like that.

Ultimately the truth will prevail but by then it will be too late. In the meantime, here’s a tell-tale indicator that criminals on Wall Street and at the Fed can’t hide:

The chart above shows the rate of return comparison between the S&P 500 and junk bonds (HYG). Historically going back at least to the 1990’s, stocks tend to move in the same direction as junk bonds on a lagged basis. That lag when I was trading junk bonds was usually anywhere from a couple weeks to a couple months. The massive Central Bank intervention has largely removed the ability of the stock market to perceive fundamental problems developing in the financial and economic system. But the junk bond market is starting to smell problems.

Morgan Stanley’s wealth management division announced right after New Year’s that it was taking its recommended portfolio allocation in junk bonds down to zero. The rationale was that, while tax cut euphoria might inject fresh momentum into “high-flying stocks, the boost may be short-lived and will mask balance sheet weaknesses” – i.e. developing credit problems. The Morgan Stanley report further explained that “credit markets figure this out before equities” and that they are preparing “for a deterioration in lower-quality earnings in the U.S. led by lower operating margins.”

I nearly fell off my chair when I saw this commentary from Morgan Stanley. In my 32 years of active participation in the financial markets I can not recall any brokerage firm ever issuing a stark warning like this about any sector of the financial markets.

At some point the fundamental problems will become too obvious for stocks to ignore and there will be abrupt sell-offs. The 360 point drop from top to bottom last Tuesday was a hint of what’s to come. Eventually the Central Banks will be unable to intervene and manipulate the type of bounce that was engineered at Tuesday’s bottom and that followed-through on Wednesday and beyond.

All of this is going on in plain view. But the sheeple are too worried about whether or not they can take out enough debt to buy the cars and homes required to keep up with everyone else. But “everyone else” is doing the same thing. Default rates are starting to soar on credit card and auto loan debt. This will soon spill over into mortgages. My thesis on the housing market was confirmed by an industry-insider – a point which I will detail for my subscribers this weekend. We’re already seeing signs that the economy hit a wall in December. It will only get worse.

My subscribers who shorted my homebuilder stock idea two weeks ago are now up 17.7%. That’s if they shorted the shares. They are up even more if they used puts. If you are interested in learning how to take advantage of the coming stock market crash, you learn more about the Short Seller’s Journal here:   Short Seller’s Journal information.

Housing Market Supply And Demand: Just The Facts

“Housing – people are insane if they think housing isn’t going to get crushed with rising rates. As you outline often, it’s already happening in ( NY, Den, etc. ) I live in LA and most of my friends/ coworkers are telling me how dumb I am to not jump in. I know to just stay quiet, but I think they are about to walk into a buzz saw (again).” – email from a subscriber

The National Association of Realtors reports that December  existing home sales fell more than the NAR led its Wall Street lap-dogs to believe they would decline.   Larry Yun, the NAR’s market elf, has been blaming phlegmatic housing sales over the last two years on low inventory. There’s only one problem with this assertion: it’s not true based on historical data:

The chart above is drawn from data that the Fed, for some inexplicable reason, purged from its FRED database.  It illustrates the inverse relationship – generally – that exists between inventory and sales.   The bigger factor driving the economics of the housing market right now is the deteriorating financial condition of any household that might want to buy a house.  The Fed and Government have largely exhausted the population of would-be mortgagees that can make a 0-3% down payment on a conventional mortgage plus carry the monthly burden of servicing that mortgage.  The tax advantage from deducting real estate taxes was stripped from the equation.

I suspect the Fed is getting worried about the housing market. The Fed’s QE holdings rose $5 billion last week. The entire increase is attributable to an increase in mortgage holdings. Not only is the Fed not reducing its balance sheet, it felt compelled to inject capital into the mortgage market.

One thing to keep in mind. A large percentage of homes purchased and financed with 0-3% down payment mortgages in the last couple of years are underwater. When a buyer puts almost nothing down on a mortgage-financed home, the transaction costs all-in are about 10% of the value of the home. These homes are underwater at closing. Except in certain bubble areas, homes have not appreciated in value enough to make up for the amount that low down payment buyers are underwater when they closed. When the stock market eventually tanks, it will take home values down at least 30-40%, and possibly more.

Just like any market bubble, I believe the housing market is reaching the point of exhaustion. As households continue to get squeezed financially, there will be a lot of homes put on the market hoping for last year’s price. As I’ve mentioned before, when home prices are rising quickly, there’s an oversupply of buyers. When home prices start to drop, the buyers disappear. When prices are rising continuously, it’s very easy to sell a home. When prices begin to fall, it becomes difficult to sell a home. It’s been very easy to sell a home for the last 5+ years. I believe it’s going to start to become difficult to sell a home at current general price levels. The smartest sellers will price their home to move. This will begin the process of “re-pricing” the market lower, which in turn could trigger a flood of flipper homes to hit the market – just like 2007/2008.

Greenwich, Connecticut housing values are down 20%. Greenwich would be the “poster child” for the high-end housing market. NYC values are starting to get hammered. For taxpayers who itemize, the new tax law limits the deduction for State, local, sales and property taxes to $10,000. This will hammer the high-end market, which in turn will put downward pressure on everything below it.

The commentary above is an excerpt from the latest weekly Short Seller’s Journal.  If you are interested in learning how to make money from the most overvalued stock market in U.S. history, visit this link for more information:  Short Seller’s Journal subscription information.

Who’s Going To Stop The Madness?

Every month consumer debt in aggregate hits a new record. Auto loans and student loans have been hitting monthly record highs for quite some time. In November credit card debt hit a record high in total and increased a record monthly amount for any one month. Mathematically this can’t go on forever. In fact, there are signs – indicators not reported widely by the financial media and, predictably, completely disregarded by Wall Street – that indicate the debt party is coming to an end. Events that follow the end of the party will be less than pleasant for the majority of U.S. households.

Every week in the Short Seller’s Journal I present data which reflects the deteriorating condition of middle class America. For definitional purposes, “middle class” is defined as any household that is unable to afford their own politician, which means 99.5% of all households.

As an example, buried in Wells Fargo’s Q4 earnings presentation was data that showed charge-offs in WFC’s credit card loan portfolio in Q4 soared 21% vs. Q3. The charge-off rate as a percent of average loans outstanding increased to 3.66% in Q4 from 3.08% in Q3. This is a 19% increase in the charge-off rate. While this might seem like a low number outright, not only is it headed in the wrong direction, it’s not too far below the nationwide bank credit card charge-off rate in 2007 of 4.15%. Again, this fits my thesis that the financial condition of the average household is deteriorating.

In addition, the dollar volume of auto loan originations at WFC declined 33% and home mortgage originations fell 26%. in Q4 2017 vs 2016. WFC’s mortgage applications in Q4 dropped 16% in dollar volume from Q4 2016. And its application pipeline (applications submitted and waiting for the purchase to close) declined 23% for the quarter vs Q4 2016.

WFC is the second largest mortgage originator after Quicken Loans. It is also a major player in auto loan underwriting. If auto and mortgage loan origination statistics are declining at a double-digit rate at WFC, it’s a good bet that this is a secular trend across the industry. Simply put, middle America – the 99.5%’ers – are running out of capacity to assume even more debt. This in turn will translate into a unexpectedly precipitous drop in consumer spending, especially on large-ticket items like cars, furniture and homes.

I stumbled on a blog a couple weeks ago called  A Cold War Relic. The proprietor works at an auto dealership and presents valuable insight on the factors that will drive auto sales into the ground and send auto loan defaults soaring. His latest post, “What’s Going To Stop Me,” is well worth reading:

This dark momentum could strangle the industry, but everyone refuses to stop it. Every time a customer accepts a $500 monthly payment on another overpriced compact crossover, they are feeding that momentum. When dealers structure deals for far more than the car is worth, they are feeding that momentum. The problem is: who is going to actually tell anybody “no?” Customers want their cars and refuse [do not have the funds] to put money down to get them. A large number of dealerships are fighting to attain sales numbers the market can’t currently support.

I get cursed out every month when our store misses the targets set for us by the manufacturer, even though I’m fighting against larger stores offering deeper discounts on new cars. On top of that, it’s not just your credit criminal customer that isn’t reading what they’ve signed anymore. When you have consumers with 700+ FICO scores rolling over portions of debt they already couldn’t handle on top of new debt and financing the whole thing over increasingly long terms at interest rates they arguably no longer deserve. The problem is that prime credit customers are slowly becoming credit criminals.

You can read the rest of this here (highly recommended):   Auto Loan Crack-Up Boom Coming

In the latest issue of the Short Seller’s Journal, I present a no-brainer homebuilder short idea plus I illustrate the mechanics of shorting a stock for those who only use put options.  In addition I review the Company’s fundamentals.  This is probably the only homebuilder for which unit sales are dropping – in this case falling at a double-digit percentage rate. I believe shorting this stock is good – at the very least – for a 30% ROR by the end of the year, if not sooner. You can find out more details about the Short Seller’s Journal here: Subscription Information.