Tag Archives: mortgages

The Size Of The Financial Avalanche Coming Grows Larger

Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $50 in late June and Redfin (RDFN) at $28 in late September.  ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

The Mortgage Purchase Index Plunges – Again

The lack of movement for the purchase index underscores the lack of traffic and lack of demand in the housing sector.  – Bloomberg News

Once again the Mortgage Bankers Association purchase applications index fell 5% week to week and 9% year over year (LINK).  Mortgage rates have fallen 30 basis points over the past month and 10 points over the past week. This is stimulating refinancings but not buying.

Cash/investment buyers disappearing – cash buyers were 24% of new home sales in September this year compared to 33% in September 2013.  If the number of buyers who require a mortgage are falling and cash buyers are fading, who is going to buy homes?  This situation is exacerbated for new homebuilders, as 93% of a newly built homebuyers use a mortgage.

I wrote an analysis of yesterday’s existing home sales report which goes into detail as to why the reality is much different than the headline reports you may have seen:   Existing Home Sales Drop Yr/Yr For the Eleventh Month In A Row.

The homebuilder stocks have bounced back up to a level which is ripe for shorting.  My three latest homebuilder reports explain why these homebuilders are particularly good short-sell candidates, especially my latest one:   Homebuilder Short-Sell Reports.

These homebuilders are riddled with misleading accounting, excessive inventory and debt levels and declining unit deliveries.  They are more overvalued in relation to their underlying business fundamentals than they were at the peak of the housing bubble.  My reports go into detail on all of those issues.  In short, homebuilders are insanely overvalued.

At the very least, any money manger who is long these stocks has a fiduciary duty to look through my work and reassess their investment strategy with regard to this sector.  If you happen to be invested in mutual funds with exposure to this sector, get out now.

More Bearish News For Homebuilders – The Death Cross

The Mortgage Bankers Association mortgage purchase applications index dropped again last week.  It fell 3% week to week (seasonally adjusted), it fell 14% unadjusted and it plunged 12% year over year.   This has been the pattern almost every week this year.

This is particularly bad news for the new homebuilder companies because 93% of all new homebuyers use a mortgage to make their purchase.  If purchase applications are not being filed, new homes are not being sold.  There’s no room for spin in that.  The numbers are the numbers.   In my latest research report, the company I feature specifically had to disclose that its contract signings are dropping.  Hovnanian reported just this morning that contract signings dropped 9.2% year over year.  This is going to turn into a bloodbath.

My latest research report idea is my best work yet.  I go into very specific areas in which this company engages in borderline accounting fraud.  I have never seen another publicly available research report which delves into the misleading accounting like this.  It is a unique report and it makes a compelling argument for why shorting this homebuilder stock now, with careful position management, offers the potential to make $20,000 for every 1000 shares shorted over the  next 18-24 months.  A 70% ROR.

The homebuilder sector is the biggest no-brainer short-sell opportunity I’ve seen since the internet bubble.  No one is looking at this sector.  The industry organizations continue to distort the truth and promote a “recovery” that is not happening.

The Dow Jones Home Construction Index did that nefarious “death cross” a few days ago.  This is when the 50 day moving average crosses below the 200 day moving average (click on graph to enlarge):


Whenever gold does the “death cross,” it’s all you hear about on CNBC, Bloomberg and Fox.   None of those entities have mentioned a peep about this for the homebuilder stocks.

All of the indicators are aligned for another leg down in price.  The technicals are supported by deteriorating fundamentals.

You can access my report here:    Short This Homebuilder Now

At some point institutional investors and hedge funds are going to get ahold of my report and start selling their position in this company (mutual funds, etc) and shorting the crap out of the stock (hedge funds).  You want to get in ahead of that.