Tag Archives: auto sales

The Economy Is Tanking

Financial Markets, Housing Market, U.S. Economy, , , ,

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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As The Stock Market Levitates, Economic Activity Deteriorates

Financial Markets, Housing Market, Market Manipulation, U.S. Economy, , , , ,

In my latest issue of the Short Seller’s Journal, I predicted a weak showing for July auto sales.  Both GM and Ford missed Wall Street’s forecast.  With the magic of seasonal adjustments, the industry data overall was presented to show a .7% increase in overall sales vs. June.  GM sales dropped 2% and Ford’s sales fell 3%.  Again, any overall industry gains can be attributed to mysterious “seasonal adjustments.”  June auto sales dropped 3.4% from May.

When Ford reported its Q2 earnings, Ford’s auto finance division reported a decline in profits that reflected lower values realized at auction on cars returned after the lease expired.  Auto market weakness typically shows up first in the resale/used market (I traded the auto supply sector junk bonds when I traded on Wall Street in the 1990’s, which is why I’m familiar with auto cycle dynamics).  In addition, Ford Credit reported higher than expected credit losses.

My point here is that the auto industry, after being hyper-stimulated by the Fed with $100’s of billions of subprime quality car loans and leases, is going  to head south – probably rather quickly.   Our financial system is about to feel a huge shock from delinquent and defaulted car financing extended to people who could never really afford the payments.   Ford is already feeling it.   Carmax also reported bigger than expected losses in its car loan portfolio.

Housing is the other economic sector that has been hyper-stimulated by the Fed and the Government with artificially low interest rates and taxpayer-sponsored low to no-down payment mortgages.  Housing is going to head south quickly as well.  This was evident with yesterday’s construction spending report:   June private construction spending fell .6% from May, non-residential construction dropped its most since December, April construction spending was revised to down 2.9% from down 2%.

Not only is construction spending declining, previously reported construction spending is being revised to show that it was weaker than originally reported.

The housing market data reported by the National Association of Realtors is tragically corrupted.  Recently the NAR has been reporting an increase in first-time buyers.  Yet, the Census Bureau-measured rate of home ownership continues to decline.   Last week the CB reported the rate had dropped 62.9%, a 51-year low (click to enlarge):

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What this means is that real first time buyers are not showing up as buyers, contrary to the NAR’s manipulated data.  The chart to the left is from the National Association of Homebuilders.  It shows the breakdown of home ownership by age demographic for Q2 2015 vs Q2 2016.  As you can see the first-time homebuyer age demographic has declined.  This graph undermines the data being reported by Larry Yun and the NAR.

My educated bet is that a large percentage of existing home buyers over the last couple years has been speculators – either quick-flippers or “investors” who buy a home with the intent to fix it up and re-sell it six to twelve months later.   There will be a lot of “second” home owners who end up stuck with their “investment.”

I have been theorizing for quite some time that the housing market would get “squashed” from the top.    The first-time buyer is the key component in the housing market sales activity cycle.  If a move-up buyer can’t sell its home to a first-time buyer, the owner with the “move-up” home – the upper price-range home – for sale can’t sell. It leads to a glut at the high end – something that is being reported all over the country.

As I’ve noted several times recently, high-end inventory has been building up across the country for well over a year.  Long-time housing market analyst and consultant, Mark Hanson, said in his latest blog post:

I am getting reports from sources in mid-to-high end regions all over the nation that after a strong June, July sales were down between 15% and 50% with Pendings down as much as 60% from a year ago. One large West Coast brokers with whom I talk said they are recommending to clients with mid-to-high end properties on the market over 30-days with no offers to cut list prices aggressively in order to get in front of the market versus the process of small, frequent price cuts that look bad optically and keep sellers constantly behind the market.  LINK:  Big Trouble Ahead

In other words, the inventory clog at the high end of the market is starting to spill over into the upper-middle price range.  I received a price-change alert yesterday about a $1-million+ home which was taken down over 14% in price.   The “new price” competition is heating up.  I’m seeing “new price” signs in the mid-priced homes now all around Denver.

The point here is that the two primary drivers of economic activity – albeit artificially stimulated economic activity – auto and housing – are heading south.  I believe the U.S. economic system will be engulfed by drop off in economic activity that will shock even those who can see through the economic propaganda being reported by the Government, Fed and industry associations.

In my last couple of Short Seller’s Journals, I have been recommending shorts in the housing and auto sectors.   These are two high-beta sectors that will sell-off more than the overall market once the market heads south again, something which may already be happening.

As you can see from the following 11-year weekly graph of the Dow Jones Home Construction index, the homebuilders and related home construction companies have been trending sideways since April 2013 (click to enlarge):

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The index is down 6.8% since hitting 610 intra-day last Wednesday.  The S&P 500 is down just .7% in that same time-frame.  But this illustrates my point about the downside potential for the housing stocks if the S&P trends lower.

My Short Seller Journal presents facts about economic data not reported by the media and analysis not generally found on most, if any, blogs.  It’s a weekly report in which I also offer ideas for using options to short the market plus trading and capital management strategies.

It’s clear that the Fed is doing what it can to keep the broad market indices from selling off,NewSSJ Graphic but underneath the marquee lights there’s a whole world of stocks that are collapsing in price.  In the next issue I’ll be presenting what I believe is an energy sector debt-induced Ponzi scheme that could drop from $20 to at least $5.  You can access the my short-sell ideas using this link:   Short Seller’s Journal.

30-yr Treasury Yield: “The Economy Is Collapsing”

Financial Markets, U.S. Economy, , , , ,

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We know that inflation is running a lot higher this year – true inflation, that is, and not the phony Government CPI.  Thus, low inflation would not explain the 80 basis point drop in long bond yields since January 1st.   “Flight to safety” would flow either into the very short end of the yield curve or into gold or under the mattress.   Therefore, it is apparent to me that the Treasury bond market is starting to price in economic armegeddon.   This will mean deflation of asset prices (stocks, homes, crappy Wall Street concoctions) but not necessarily deflation of necessities.

With retail sales, auto sales,  and home sales all collapsing, the only explanation left is that the Treasury bond market is pricing in a severe economic downturn.    This would explain also why high yield bond spreads have widened considerably over the past month.  The big drop in oil prices this week would further affirm this.

For anyone who is reading this and has invested in my Easy Trade Idea from the end of July, I used to today’s low volume pullback in the stock to add to our position in the fund by shorting slightly in the money puts that expire tomorrow.  If the price closes below the strike tomorrow, we will take delivery of more shares with a cost-basis reduced by the amount of put premium we collected today.