Tag Archives: Housing bubble

A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th.   30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:

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The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index.  I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:

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The data is through December 2nd, as mortgage application data lags by a week.  As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows.  This is not unexpected.  Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing.  Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.  Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor”   that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials.   Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept.  On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%.  – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt.  In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage.   This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago.  If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file.  I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the most widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports).  The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable.   But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index.  I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication.  I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites.  I also present short-sell ideas, including recommendations for using options.   Despite the run-up in the broad market indices, there’s stocks everyday that blow-up.  Last Restoration Hardware plunged 18% after reporting its earnings.   You can subscribe to the Short Seller’s Journal by clicking on this link:  SSJ Subscription.   It’s monthly recurring and there is not a minimum number of months required.

The Housing Market Is Unraveling

You wouldn’t know it from the housing industry organizations, Wall Street or the media propaganda, but the housing market is starting to unravel. It does not matter which person or political party occupies the White House and Capitol Hill. The debt orgy that followed the Fed’s QE program is now showing visible signs of unintended but inevitable consequences and it’s beginning smell a lot like 2008.

Per RealtyTrac, U.S. foreclosure activity increased 27% from September to October. Foreclose starts posted the biggest monthly increase since…December 2008.  Scheduled foreclosure auctions posted the biggest monthly increase since 2006.  The data is even more startling in certain States.  Foreclosures in Colorado jumped 64% in October from September and foreclosure starts soared 71%.   Colorado tends to be an economic and demographic bellweather State.  In the housing bubble 1.0, foreclosure activity in Colorado began to accelerate before it hit all the other major MSAs.

Just in time for foreclose activity to ramp up, the Obama Government rolled new Fannie and Freddie mortgage programs which removed or reduced required mortgage insurance. Once again the Taxpayers will be left holding the bag and monetizing a mortgage collapse from which the bankers, real estate and mortgage industry collected $100’s of millions in fee money.

Per this analysis posted by Wolf Richter, the Miami condo market is in a freefall:  LINK. Mortgage rates have spiked up considerably in the last week.  This will extinguish a significant amount of home sales and cash-out refi’s  – note – the following is an excerpt from the latest issue of my  Short Seller’s Journal :

untitledI continue to see with my own eyeballs, which I trust a lot more than the manipulated b.s. reported by the National Association of Realtors and the Government’s Census Bureau, a stunning number of “for sale” and “for rent” signs all around central Denver. Note that Colorado has 11,000 people per month moving here, so if inventory in both homes for sale and rentals are visibly increasing here it means they are increasing everywhere.

I’ve heard horror stories about the south Florida market from several sources. A colleague who runs a real estate brokerage firm in Houston published a report last week on a growing glut in luxury apartments in Houston:  LINK.

I bought Toll Brothers (TOL) December $28-strike puts on Thursday for 64 cents. The stock at the time was $29.40. It closed Friday at $28.25. I also bought Pulte Home (PHM) January $18-strike puts for 72 cents. The stock at the time was $18.65. It closed Friday at $18.32.

I did this after chatting with the friend of mine mentioned earlier who is a mortgage broker. We are working on a refi for my significant other, which is why he called me on Thursday to see if I wanted to rate-lock her loan after informing me that the mortgage market was getting “funky” and spreads were widening.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year.

DR Horton (DHI) reported earnings on Tuesday. It missed both revenues and earnings. The stock was hit 5.4% that day and closed even lower by Friday. Any stock that sold off on Thursday and Friday while the stock market was going orbital has real problems. DHI reported the slowest order growth rate in three years. More troubling from my perspective is that, with the market obviously slowing down, DHI’s inventories continue to balloon, increasing by $537 million to $8.3 billion vs $7.8 billion at the end of September 2015. The Company’s cancellation rate jumped to 28% from 23% last year. Again, this smells exactly like 2008…perhaps this part of the reason the Dow Jones Home Construction index looks so ugly:

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The graph above shows the Dow Jones Home Construction index vs the S&P 500 for the past year. Since hitting 601 on July 26, the index is down 14%. It’s down 16.5% from its 52 week high of 618 on December 1, 2015. As you can see, the index is below both its 50 and 200 dma’s (yellow line and red line, respectively). The 50 dma is about to cross below the 200 dma, another potentially highly bearish techincal indicator. Perhaps first and foremost is the fact that the homebuilders were extremely weak relative to the buying frenzy that gripped the market Wed thru Friday.

In my opinion, it’s safe to put a fork in the housing market. And this is the primary reason that it smells to me a lot like 2008.

You can access  the Short Seller’s Journal with this LINK or by clicking on the graphic to the right.  Almost all of the ideas I have presented since NewSSJ Graphicearly August have been working, some have been yielding tremendous returns.   It’s a weekly report for $20/month with no minimum subscription requirement.  I provide options trading ideas as well as disclose all of my trading activity from the short-side.

A Bear Market In Stocks Began In May 2015

Technically, the move in the stock market that began in March 2009, when the stock market bottomed after the 2008 financial market de facto collapse, should not be termed a “bull market” because it required several trillions of Central Bank and Government intervention to move the stock market.   Definitionally the stock market is no longer a “market” – rather it’s an intervention.

Having said that, with the entire financial world – especially Wall Street analysts and financial  media boobs – focused on the S&P 500 and the Dow, the NYSE Composite, which covers every stock traded on the NYSE, has begun what is likely a bear market that started from its record high of 11,254 on May 21, 2015:

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As the graph above illustrates, the NYSE Composite index – every stock that trades on NYSE – is down close to 6% since May 2015.  The NYSE Comp is more representative of the stock and more reflective of the deteriorating conditions in the economy than are the SPX and Dow, which are used as propaganda tools by the financial market and political elitists.

In fact, as has been demonstrated in several places in the alternative media, as it turns out just a handful of the largest cap stocks are keeping the SPX and Dow in what appears to be a “bull market.”    This graph below sourced from Zerohedge shows the performance of the SPX with and without the infamous “FANG” stocks (FB, AMZN, NFLX, GOOG):

As you can see if you strip out the FANG stocks from the calculation of the SPX index, the index is flat going back to the beginning of 2015. Yet, the SPX hit an all-time high in August 2015. Qu’est-ce que c’est?  As explained in the ZH article:   The FANGS “have gained $570 billion of market cap or nearly 80% during the previous 19 months” [Jan 2015 – Aug 2016]…”if you subtract the FANGs from the S&P 500 market cap total, there had been virtually no gain in value at all.”

I wrote to my Short Seller Journal subscribers this past weekend:

NYA began diverging from the SPX and the Dow back then. It points to broad overall weakness in the stock market relative to the biggest stocks by market cap. This pattern in the broader stock market is also more reflective of the economic reality of a deteriorating economy. Small and mid-sized companies are experiencing deteriorating fundamentals which is translating into deteriorating market caps.  SSJ for October 16, 2016

The point here is that economic reality is diverging from the propaganda infused message that the Fed, Wall Street and politicians want us to buy into.  The housing market illustrates this perfectly.  I have been detailing in my blog the methodology by which the Government manipulates the new home sales statistics.  This morning it was reported that housing starts for September plunged 9% from August.  Of course the media puts its propaganda spin on this. For instance, Bloomberg attributes the drop to multifamily starts. But multifamily starts is the metric that gave the housing starts report any “legs” to begin with.  Marketwatch references a “durable recovery.”  But does this look like a durable recovery?

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New single family home sales – despite the trillions of dollars infused into the housing market by the Federal Reserve and Government – never got any higher than where they were in 2008 after the housing bubble popped and sales had already dropped by 66%. Before that, the last time single family home sales were at Marketwatch’s “durable recovery” level was in 1995!

And in truth the methodology used by the Government to present new  home sales (Seasonally adjusted annualized rate based on highly questionable Census Bureau data collecting) grossly overstates the true level of new home sales at any given time.  The same can be said for the NAR’s existing home sales.  Like everything else in our system, the housing market activity is primarily a product of the propaganda and not real economic activity.

The point here is that underlying economy is far weaker than the propaganda coming from the elitists would have us believe.  They can stimulate fraud and deception all they want but ultimately they can not force a shrinking middle class with rapidly shrinking disposable income from spending money.

More important, you can make money from this insight because most stocks in the stock market have been going lower since mid-2015.  This pattern in the broader stock market is also more reflective of the economic reality of a deteriorating economy. Small and mid-sized companies are experiencing deteriorating fundamentals which is translating into deteriorating deteriorating market caps (from the latest Short Sellers Journal)

Every week I provide proprietary insight into the economy and markets in the Short Seller’s Journal.  I also highlight at least two or three short-sell ideas.   Most of these ideas have been working now since early August (late Fed to late July was rough).  As an example, in the September 18th issue I presented Credit Acceptance Corp, a subprime auto loan finance company with a balance sheet that is a ticking time bomb, with the stock at $198.60.   It’s trading today at $183 – down 7.8% in less than 4 weeks – despite a largely flat SPX in that timeframe.  CACC will eventually be cut in half from here, at least.

SSJ is a monthly subscription that is published weekly.  I also provide some ideas for using puts if you are not comfortable shorting stocks and I also disclose when I participate in the ideas in my own account.  You can cancel at any time – there is no minimum commitment. You can access more information on the subscription here:  Short Seller’s Journal.

Here’s another example of the insight and analysis provided in the SSJ:

Another interesting report out last was China’s exports for September, which were down 10% year over year in September vs. -3.3 expected. The US and Europe are China’s largest export markets. If China’s overall exports dropped 10%, it’s mathematically probable that US and EU imports from China were down more than 10% in September. It also implies and reinforces the thesis that US consumer spending is contracting (of course, if this drop in exports from China translates into a narrowed trade deficit for the US, that will be spun as a positive by the financial media!)

IRD On Kennedy Financial: Janet Yellen Is A Complete Embarrassment

Predictably, the FOMC once again fell flat on its face with regard to its continuous threats over the last month to hike rates. Despite the politically motivated rhetoric about the strengthening economy and tight labor market flowing from Yellen’s pie-hole, the fact that the Fed is afraid to raise rates just one-quarter of one percent tells us all we need to know about the true condition of the economy.

If I didn’t despise the fact that Yellen has been an incompetent political hack originally inserted into the Federal Reserve system as a political tool since her first tenure as an economist at the Fed in 1978, I would almost feel sorry for her. But the fact that she can stand in front of the public and read off of a sheet of paper scripted with lies about the state of the economy forces me to despise her as much as I despise the entirety of Washington, DC

This analysis of Yellen underscores my view that Yellen is either tragically corrupt or catastrophically stupid:  How Yellen Rationalizes Financial Bubbles

Phil and John Kennedy invited onto their podcast show to discuss the FOMC, Yellen, Gold, Deutsche Bank and some other timely topics:

mining-stock-journal-bannerNewSSJ Graphic

The Economy: It’s Worse Than I Thought

I got an email from a colleague today that said, among other things:  “The economy is tanking and, while you may be the most pessimistic around, you may not be pessimistic enough.”

To that I would say that I’m significantly more bearish than is reflected in my public analysis.  I spoke to a couple people today who offered anecdotal stories about their particular business niches – businesses in which new orders are somewhat tied to discretionary spending – and they both said that new business activity is unusually slow and that the last time they experienced new order flow this slow this was in 2008.

I’ve been suggesting for most of this year that retail sales were slowing and would fall off a cliff heading into fall.  I presented RL as a short idea in my Short Seller’s Journal on August 14th at $108 after visiting the Ralph Lauren store in Aspen.  I was the only person in the entire store and I was being hounded by the salesperson to the point of being uncomfortable.  RL is at $100.80 as I write this, which is a 7.2% ROR in 4 weeks for anyone who shorted the stock.  Based on the point of last trade and where I recommended them, the January 2017 $85-strike puts are up 35% – so far.  But the bigger gains will be made holding RL short when it drops to $40, where it was in early 2009 before the Fed’s money printing stimulated credit-induced retail spending.

My outlook on retail is supported by the BAC credit card spending report posted in Zerohedge today.  Based on BAC “aggregate card data,” retail sales ex-autos declined .1% in August from July and .3% in July from June.  The 3-month average (Jun-Aug) is down .2%. These numbers are “seasonally adjusted,” which means the actuals are probably worse.   BAC’s data for department store sales show that they’re down 4.6% year over year in August.  Autopart sales are in a downtrend and beginning to comp negatively.  Auto parts sales are highly correlated with  vehicle unit sales, which are entering a downturn based on July and August numbers, especially if you strip out Chrysler’s fraudulent sales numbers LINK.

The week retail sales reflect the deteriorating income and financial status of the average American household.  And so do restaurant sales.  Restaurant industry sales tracked by Black Box Intelligence show a .6% decline in August in same store sales were down .6% but same store traffic was down 2.7%. This was the third consecutive month same-store sales declined, with monthly sequential declines in 6 out of 8 months this year.

It’s expected that Q3 corporate earnings will once again decline from Q2.  This will be six quarters in a row that earnings drop.  But it’s even worse than that because the changes to accounting standards (GAAP) have enabled companies to manipulate their earnings reports to the upside.  Despite those accounting gimmicks, earnings continue to drop.

The stimulative effects of the Fed’s money printing program have faded.  The subprime debt default crisis that plagued the housing market in 2008 has been replaced by a general reflation of subprime credit issuance that includes housing, autos, student loans and personal loans.  Synchrony, formerly GE Capital Retail Bank, is advertising a  high yield savings account that pays 1.1% interest, or 8x the national average.  That’s because Synchrony is using depositor money to fund a plethora of high interest rate consumer lending platforms which primarily appeal to subprime borrowers.   I would strongly advise avoiding this savings account because, even with alleged FDIC coverage, you might not see your money when Synchrony impales itself on the toxic loans it makes.  Look for Synchrony to blow up sometime in the next 24 months.  Same with Capitol One,  Ally Financial and Credit Acceptance Corporation, among others.

The Fed will not  only not raise rates this year – or anytime in the foreseeable future for that matter – but watch for signs that another big dose of “QE” is being tee’d up.  Otherwise our financial system and economy is headed into that same abyss into which it stared in 2008.

The Economy Is Tanking

The FOMC can raise interest rates any time it desires, without prior approval from anyone outside the Fed. Accordingly, the ncreased hype primarily has to be aimed at manipulating the various markets, such as propping the U.S. dollar. Separately, it remains highly unusual, and it is not politic, for the FederalReserve to change monetary policy immediately before a presidential election. – John Williams, Shadowstats.com

The March non-farm employment report originally reported that 215,000 jobs were created (ignore the number of workers who left the labor force).  But five months later the BLS released “benchmark” revisions which took that original number down by 150,000.  However, the BLS reports a 74,000 upward revision to Government payrolls, which means that non-Government payrolls were down 240,000 in March.  So much for the strong jobs recovery…

A report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out two weeks ago that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.   Heavy trucking is one of the “heart monitors” of economic activity.

Another datapoint that you might not have seen because it was not reported in the mainstream financial media: the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the 5th month in a row in July. The rise attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

Again, I believe that evidence supporting the view that housing and autos are starting to tank is overwhelming. Last week Zerohedge featured an article with data that showed that prices in NYC’s lower price tiers are starting to fall, following the same path as the high-end market there LINK. I want to reiterate that I’m seeing the exact same occurrence in Denver in the mid/upper-mid price segment. Furthermore, I’m seeing “for sale” and “for rent” signs pile up all over Denver proper and I’m seeing “for sale” signs in suburban areas where, up until July, homes were sold as soon as a broker got the listing. NYC, Denver and some other hot areas in the last bubble began to fall ahead of the rest of the country.  I don’t care what the National Association of Realtors claims about the level of existing home inventory, their numbers are highly flawed and the inventory of homes on the market is ballooning – quickly.

I like to describe housing as “chunky,” low liquidity assets. It takes a lot of “energy” to get directional momentum started. Once it starts, it eventually turns into a “runaway freight train.” We saw the upside of this dynamic culminate over the last 6-9 months. But now that freight train is slowly cresting and will soon be headed “downhill.” I don’t think this dynamic can be reversed without extraordinary interventionary measures, even larger than 2008, from the Fed and the Government.

As for autos, I detailed the case that auto sales are heading south in previous blog posts. However, Ford disclosed in its 10-Q filing that charges for credit losses on its loan portfolio increased 34% in the first half of 2016 vs. 2015. GM’s credit loss allowances increased 14% vs. 2015. As credit losses pile up in auto-lender portfolios and in auto loan-backed securities, lenders will begin to constrict their auto sales lending activities. It will be an ugly downward spiral that will send negative shock-waves throughout the entire economy.

I find it highly improbable that the stock market will not continue lower unless the Fed steps in to prevent it.  The Fed is playing “good cop/bad cap” with its rate hike theatrics.  As John Williams points out, it does not require a formal FOMC meeting for the Fed to raise or lower interest rates.  In fact, there’s precedence for inter-FOMC pow wow interest rate changes.   This entire Kabuki theater is designed to support the dollar ahead of yet another meeting in which Fed stands still on rates.   Honestly, even a quarter point hike could act like dynamite on the financial weapons of mass destruction hidden on and off bank balance sheets.  The fraud at Wells Fargo is just the tip of the ice-berg.

The short-sell ideas I present in IRD’s Short Seller’s Journal have worked out of the gate four weeks in a row.  The last time SSJ had a streak like this was during the early 2016 sell-off.  Although my ideas are meant to be long-term fundamental shorts based on flawed business models and deteriorating business conditions, a couple of those ideas are down over 10% in less than a month.  I’m also sharing my strategies with the homebuilders, all of which will be trading under $10 within the next 18-24 months (except maybe NVR.

You can access the Short Seller’s Journal here:   SSJ Subscription.  This is a weekly report in which I present my view of the markets, supported with economic data and analysis you might not find readily in the alternative media and never in the mainstream media.  It’s a monthly recurring subscription you can cancel anytime.   Subscribers can access IRD’s Mining Stock Journal for half-price.

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The Stock Market Veers Further From Economic Reality Each Day

Actual Monthly Change in August Payrolls Likely Was a Contraction – Though Bloated by Seasonal-Factor Distortions and Add-Factors, Annual Payroll Growth Effectively Held at a 30-Month Low – Second-Quarter Real Merchandise Trade Deficit Remained Worst Since 2007.  – John Williams, Shadowstats.com

The negative economic news continues to spill out, with most economic reports reflecting an economy that is already in contraction (recession). The most interesting report out last week was auto sales for July, which showed a 5.5% drop from June overall and a 6.2% drop for domestic vehicles. These comps are based on seasonally “adjusted” annualized rates. I would bet anything that the actual number of cars sold in July vs. June were a lot lower. Ford reported an 8.4% drop in sales. Ford admitted that the market was soft and that retail price incentives are at historical highs. In short, the overall auto sales report was a disaster and it’s going to get worse going forward.

With regard to the transports index, a report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out last week that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.

One last datapoint that you might not have seen because it was not reported in the mainstream financial media, or even Zerohedge:  the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the the 5th month in a row in July. The rise was attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

The housing market is going to crash again.  Vancouver home sales crashed 23% in one month – LINK.   Think this can’t happen in the U.S.?  Think again because, as I detailed in a previous post,  home sales in Aspen and the Hamptons have crashed 50% this summer. In this post – LINK  – I presented data from Redfin which showed home sales in July fell 46% in Vegas, 24% in Miami, 21% in Portland, 20% in Oakland and 11% in Denver.

The entities that report housing and auto sales can hide the truth about monthly sales volume using seasonally adjusted annualized rate metrics, but they can’t simulate actual economic activity with fake data.  Eventually reality catches up.  Go drive around areas where you live that use to be “hot” housing  markets.  I bet  you’ll see a lot of “for sale,” “for rent” and “price reduced” signs.  I am seeing that all over Denver and I’m starting to see it in the formerly “hot” suburban areas.

I have no problem betting on housing with my own capital.  My homebuilder short positions are the highest they’ve been since 2008.  Unless the Government starts pushing 0% down payment mortgages in general, vs. through programs sponsored by the USDA and VHA, the housing market is hitting a stiff wall in Q4.

The stock market is going to have to break one way or another.  Below is 60-minute, intra-day chart of the S&P 500 that I have been posting in my weekly Short Seller’s Journal (click to enlarge):

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I just don’t think the S&P 500 can continue in this “holding” pattern much longer. Some think the Fed is holding up the market until after the election. I don’t know if that’s true or even possible. It’s my view that, unless the Fed engages in another massive round of money printing, at some point it’s going to lose its ability to keep the market from turning south violently.  By the way, because of what you see in the graphic above, puts on most stocks, especially homebuilder stocks, are very cheap right now.  Buy cheap and sell dear.

Even though the Fed is obviously propping up the S&P 500 and Dow, several sub-sectors of the market are heading lower.   Housing, retail, transports and financials are just a few. Interestingly, the last four short ideas presented in my Short Seller’s Journal have worked right out of the gate.  This type of winning streak has not occurred since late December. Regardless of whether my ideas work immediately or take a few months to develop, most of them will work better than shorting the SPX over the next several months/years.  You can access the Short Seller’s Journal this link:  SSJ Subscription.

Enjoy This Labor Day – The Next One Might Be Unpleasant

I hope everyone enjoys this Labor Day with a few beers, family, friends and the U.S. Open Tennis Championships.  Most Americans do not realize that they are living in the shadows cast by the setting of the American Empire’s sun.  The U.S. political and economic system has morphed into a Banana Republic of the sort at which we used to laugh in high school history courses.

While the Government attempts to brainwash the population into slavish adulation of the military as the Deep State prepares for a global war, consider that the true patriots in this country are people like Paul Craig Roberts who have the balls to expose the truth about what is transpiring  beyond the veil of propaganda that has fallen between the American public and the wealthy elitists:

Workers understood that labor was the backbone of the economy, not Wall Street moguls or bankers in their fine offices. Workers wanted a holiday that recognized labor, thus elevating labor in public policy to a standing with capital. Some states created labor day holidays, but it wasn’t until 1894 that Labor Day was made a federal holiday.

The labor movement, which gave us Labor Day, is no longer with us. The American labor movement died about ten years after the death of its most famous leader, George Meany of the AFL-CIO. Meany, born in 1894, died in 1980.

Looking at last Friday’s BLS payroll report, the jobs are in the lowly paid, part-time service sector. The goods producing sector of the economy lost 24,000 jobs. The jobs are in retail trade, health care and social assistance, waitresses and bartenders, and government which is tax supported employment.

Whether Washington policymakers realize it or not, the American work force smells like India’s of a half century ago. Whatever deranged Hillary and her neoconservatives claim, there is no evidence in the composition of the US labor force that the US is a superpower. Indeed, what the employment statistics show is that the United States is a third world country, a country whose leaders are so out of their minds that they are picking fights with first world countries—Russia and China.  LINK

Dr. Roberts is a colleague and a friend with whom I’ve debated several issues and ideas. Unfortunately I do not have a realistic counter-argument to his sordid conclusion:  “The United States of America is on its last legs. As there is no willingness to recognize this, nothing can be done about it. America’s last function is to cause World War 3 in which all of us will expire.”

The Housing Bubble Is Popping

The Seasonally Adjusted Annualized Rate (SAAR) economic numbers are now manipulated beyond the definitional meaning of the word “absurd.”  This is especially true with the housing market and auto sales reports.  – Investment Research Dynamics

Today the NAR released its “pending home sales” index.  On a “seasonally adjusted annualized rate” basis, it showed 1.3% gain over June.  June’s original report was revised lower from +.8% to -.2%.  Mathematically, this downward revision enabled the National Association of Realtors to report a gain from June to July.  Keep in mind this is on a “seasonally adjusted” and “annualized rate” basis.

Now for the real story – at least as real as the reliability of the NAR’s data sampling  Untitledtechniques.   In the same report the NAR shows the “not seasonal adjusted” numbers. (click on image to enlarge) On a year over year basis for July, pending home sales were down 2.2%.  They were down 13% from June.   This is  significant for two reasons.  Using a year to year comparison for July removes seasonality and it removes the “seasonal adjustments.”   Just as important, if you look at historical data for existing home sales by month, “seasonality” between June and July is non-existent – i.e. in some years June sales exceed July and in other years July exceeds June.

The not seasonally adjusted data series is much more reflective  of the real trend in the housing market that has developed this summer than is the manipulated SAAR number vomited by the NAR’s data manipulators.  The 13% from June to July should shock the hell out of housing market perma-bulls.

FURTHERMORE, the not seasonally adjusted numbers are consistent with the highly correlated mortgage purchase applications data.   “Pending” sales are based contracts signed.  Concomitantly with signing a contract – the NAR reported that 80% of all existing home buyers in July used a mortgage – the buyer needs to file a purchase application.  But the Mortgage Bankers Association reported that mortgage purchase applications hit a 6-month low in July.    The mortgage applications data contradicts the NAR’s pending home sales report on a SAAR basis but is entirely consistent with the pattern in the not seasonally adjusted data.

The not seasonally adjusted data are pointing to a rapidly developing housing market implosion – 13% drop in contracts signed from June to July in a two-month period that has little if any seasonality and with 30-yr fixed mortgage rates hitting all-time lows.
Just like the big bubble which finally exploded in 2007-2008, I was early in my call on Housing Bubble 2.0  (HB 2.0).   Because it takes a lot of capital and “inertia” to move the housing market, directional movements take time to develop and they become fast-moving trains with no brakes – until they either hit a wall or hit the ground.  But change in direction happens suddenly.

When prices are moving up, the market becomes very illiquid on the “offered’ side and buyers become ravenous.  This occurred because the Fed dedicated $2 trillion of it’s QE to the mortgage market and the Government made Government-guaranteed mortgages much easier for buyers by taking the down payment requirement down to 3% and in some cases 0%.   But when the market rolls over, supply quickly builds and demand disappears and the market becomes very illiquid on the “bid” side.  The market is about to become very illiquid on the buyer side of the equation.

I made this call in my latest Short Seller’s Journal this past week:

The housing market is heading south now as well. It’s been my view, and I’ve supported this view with detailed analysis of new and existing home sales on my blog, that both the Government (new home sales report) and the National Association of Realtors (existing home sales report) are using their mysteriously calculated “seasonal adjustments” to inflate the true level of homes being sold on a monthly basis. MOREOVER, and this point is crucial to understand, to the extent that there are flaws in the “seasonal adjustments,” the “annualized rate” calculation compounds these flaws by a factor of 12.

As an example, last week’s new home sales report, which showed an unexpected and absurd 72,000 (SAAR) new homes sold in July vs expectations and 154,000 more homes sold vs. July 2015. However, the report also shows the “not seasonally adjusted, not annualized number for July, which never makes its way into the media reports. In that section it shows only 16,000 more homes vs the 154k SAAR headline sold year over for July AND a decline in sales from June to July of 6,000 homes. In other words, the sensationalized headline reports were manufactured out of thin air from the “seasonal adjustments” applied to the monthly numbers and then converted into an annualized rate

As you can see, the Government’s new home sales report is utterly unbelievable. In fact, the Mortgage Bankers Association has reported that mortgage applications to purchase homes hit a 6-month low in July. New home sales are based on contracts signed. With 93% of all new home buyers using a mortgage, if mortgage applications are not being filed, contracts are not being signed. It’s really that simple.

The NAR’s existing home sales report was well below consensus expectations and showed a 3.2% drop in existing home sales from June and a 1.6% drop from July 2015. These numbers are based on closings. Again, if mortgage purchase applications dropped in June and July, we can expect (or at least should expect )that existing home sales reports for at least the next two months will show further declines. Furthermore, the NAR uses the same statistical “adjustment” model as the Government. To the extent that the NAR’s SAAR numbers showed a decline, the true decline is likely much greater.

After the employment, GDP and inflation reports, the home sales reports from both the Government and the National Association of Realtors are among the most highly manipulated economic data reports.  The data is heavily modeled and massaged via the “seasonal adjustments.”

The truth from the ground, based on the extensive footwork due diligence I conduct plus emails from readers around the country reporting similar observations, is that the inventory of home listings of soaring (the published inventory reports by design have 2-3 month lag), prices are dropping quickly, the time it takes to sell a home is increasing significantly and, most important, the potential pool of middle class home buyers no longer have an income level that will support the size of mortgage it takes to “buy” a home.

Short-sell ideas are starting to work again.   The short-sell selections in my Short Seller’s Journal have now worked four weeks in a row.   My pick from 3 weeks ago is down 6%.  At one point it was down 10%.  The pick from two weeks ago gave subscribers a quick 13% drop after it reported earnings and it’s still down 10%.   My pick from last week is down nearly $2  (2.3%)  after 2 1/2 days of trading  but the puts are up 42%.  I am also making several homebuilder short recommendations now each week.

You can subscribe to the Short Seller’s Journal by using this link:   SSJ subscription.

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As Housing Crashes, Gold Will Soar

The precious metals market is at the end of its typical mid-July to last August “breather.” This is the time of the year when the eastern hempisphere physical buyers are somewhat dormant.  Over the last several years, China’s emergence as the world’s largest gold importer has somewhat reduced the late summer seasonal sell-off.  But it’s the period of the year when it’s the easiest for the paper manipulators to push the price of gold lower.

Quite frankly, gold is up 25% since mid-December and 10% since early June.  Notwithstanding the fact that, if left alone to trade freely, gold would go parabolic for at least $700-$1000, it’s been one of the best performing asset classes YTD and can use “technical breather.”  But India is starting to flex its muscle as it heads into its biggest seasonal gold buying period of the year from right around now to mid-December.

On the other hand, the housing market is getting ready to rollover. Its already crashing in some areas (Hampton, Aspen, Miami), as noted by Investment Research Dynamic’s Short Seller’s Journal two weeks ago.   The higher end of the price spectrum is loaded with inventory in most major MSAs  and inventories in the middle and upper-middle price segments are building quickly.   July was negative month for existing home sales and mortgage applications.   The only area homes were being “sold” was in the Government’s highly manipulated new home sales report.

The Shadow of Truth discusses gold and housing  and the direction in which each is headed in its late episode:

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